Real Estate comes in many forms – multi-family, shopping centers, storage Units, industrial office buildings, residential housing – all of which come with different sizes and price tags.
There are lots of financing and management strategies. This unique melting pot of options means that anyone can get started with a little bit of wisdom and a lot of out of the box thinking no matter their financial planning.
For this guide we are going to focus on residential single family homes and how to buy rental property in this category.
While we’re focusing on single family homes, with some minor adjustments, this plan could work for many other types of rental property.
7 Smart Moves for Getting Started as a Landlord
Being a landlord isn’t for everybody, but in today’s rental market, it can be a smart way to grow your wealth.
That’s because demand for rental units continues to be strong — driven by the failure of wages to keep up with the rising cost of housing.
In fact, the number of renters has risen steadily since 2007, when the housing market collapsed, while the number of homeowners has fallen.
Meanwhile, although home prices have rebounded in much of the U.S., they’re only expected to climb about 3% this year. By shopping carefully, the overall picture remains favorable for investing in rental real estate.
“You can still buy rental property and actually make income on it,” says Mark Kniffing, Kniffing Land and Homes, who also owns several rentals.
It should not, however, be mistaken for a way to get rich quick. This is a long-term investment that needs to be approached carefully.
If you’re still itching to tap your inner real estate baron, here are 7 smart moves to help you get started as a landlord:
Smart move 1. Recognize that being a landlord is a business.
Being a landlord is different than being a private homeowner. It’s a business, and you need to treat it like one. “Where I see a lot of people make mistakes is, they don’t have a good business plan,” Mark says. “This type of investment is not hands-off. It’s not just a passive revenue stream. It requires involvement. It requires your time. It requires certain skills.”
Renting in America
Source: Rental Protection Agency, Zillow
- Number of renters 110.1 million
- Number of landlords 22.6 million
- New renters per day 2,654
- New landlords per day 544
- Average monthly rent $1,382
- Year-over-year change Up 2.4%
Any property you buy has to make sense from a business perspective, not because it’s a house you’d like to live in.
That means it should be a reasonably priced home likely to appeal to the kind of tenants you’re looking for.
You’ll also need to be able to qualify for a loan. Lending requirements for personal mortgages have relaxed in recent years, but Fred Holsman of Bay Equity Mortgage in San Diego says the requirements for rental property largely have remained the same.
If you’re borrowing money for your first rental house, you’re going to need at least a 20% down payment.
And if it’s your first rental property, your current income is going to have to be enough to handle the mortgages for both your residence and your new property. However, Holsman says, “Once we can show that someone has two years of successfully managing rental property, we can use that to offset the (income) requirement.”
Smart move 2. Start small.
Mark suggests starting with a single house or smaller multiple-dwelling unit, perhaps with a partner, to see if the business really suits you.
“Single-family residences are the easiest properties to buy when you’re looking for investment property,” Mark says.
Condominiums usually require a larger down payment and monthly association fees. Starting with a single home will allow you to get a feel for the maintenance, bookkeeping and other work required.
Mark and Fred both recommend choosing an initial property without high-maintenance features such as elaborate landscaping.
Smart move 3. Don’t invest somewhere you don’t know.
An old joke is that the three keys to a successful business are “location, location, location.”
That’s especially true for rental property.
A home that seems to be a steal might be priced lower because it’s in a neighborhood most people wouldn’t want to live in — with higher crime or poor schools, for example.
For that reason, investing in out-of- state property is a gamble. Buying in neighborhoods you know well or have carefully researched is the smart move.
Smart move 4. Figure out the right rent.
Rents differ widely around the United States. Craigslist and local real estate agents can give you an idea of what they are where you’re buying. Then you need to determine if that rent will be enough to cover your costs.
Too often, people take a look at their loan and think if they cover that, they’re doing fine. But you’ll need to pay property taxes and insurance.
Mark also assigns 5% of gross rental income to regular maintenance and another 5% to pay for the downtime and repairs that come with vacancies.
Not budgeting enough for maintenance is a common mistake. Things break. You’re going to need money in a bank account to deal with those expenses.
You’ll also want to know the rate of return you’re getting on your investment. There are formulas, such as the “capitalization rate,” to help with this, but you might want to turn to a professional. A good accountant can make sure the purchase makes sense.
Median Rental Rates for 11 Major Cities
Source: U.S. Department of Housing and Urban Development.
San Diego is the 9th most expensive rental market in the U.S., 103% above the national average.
Metro Area 1 bed 2 beds 3 beds San Diego $1327 $1634 $1,887 Atlanta $873 $1010 $1,334 Boston $1,370 $1,703 $2,113 Chicago $1001 $1,176 $1,394 Dallas $796 $986 $1,337 Houston $830 $1,018 $1,386 Los Angeles $1,250 $1,614 $2,176 New York $1,493 $1,728 $2,223 Philadelphia $1,003 $1,210 $1,502 San Francisco $2,003 $2,527 $3,297 Washington, D.C. $1,402 $1,623 $2,144
Smart move 5. Be ready to get your hands dirty.
If starting with a single home, you’ll find it to your financial advantage if you can manage the property yourself.
That requires those “certain skills” Mark mentioned.
The better you are with tools, the easier it is to maintain rental property without having to call in costly plumbers or electricians every time something breaks.
If you’re the kind of person who has put off fixing your own leaky faucet for a month, this probably isn’t the business for you.
Likewise, if you’re uncomfortable at the thought of calling tenants to ask where their rent check is, you need to look elsewhere or hire a property management company, which will add to your expenses.
Smart move 6. Get professional help when you need it.
If you decide to manage your property, you’ll probably want to consult a real estate lawyer to get a solid lease and learn the rights of tenants. You may want an accountant, and you’ll need to know some good plumbers, electricians and other tradespeople.
Turning to a property management company is another approach, although it will take a bite out of your earnings.
Once you have more than two or three addresses, it may make sense to hire a property manager. A property management company typically charges between 7% and 10% of the rental income to manage a rental. Vetting and dealing with tenants is one of the most valuable services a good management company provides.
“It’s a very different dynamic when a tenant is dealing directly with the owner,” Mark says. “There’s a tendency for the tenant to think they’re your friend, and that can complicate things, with a manager, it’s clear it’s a business.” It’s important to get references and check properties when choosing a management company. But even with a good firm, Mark notes, the final responsibility for taking care of a rental is the owner’s. “You’re going to want to inspect the property regularly, he says. “You want the property manager to take those late-night calls, but you want to keep a good eye on things.”
Smart move 7. Keep your tenants happy.
“Of all the costs associated with being a landlord, the biggest one is vacancy,” Mark says.
“Every time a tenant moves out, you’re going to spend money, probably quite a bit of it.”
That means finding and keeping good tenants is the heart of successfully investing long-term in real estate.
“Happy tenants are critically important. They’re your customers,” Mark says. “And the way you keep them happy is by keeping the property in good shape and treating them with respect.”
Do that, and you’ll be building wealth with an investment you can feel good about.