There are two types of investment models for residential real estate. One of those is “buy and hold.” In this model you purchase a home of any type with the express intention of renting out the home to another person or family. As with all investments there are many things you need to consider before you buy and then work on as long as you own the property.
The first consideration is what type of home do I buy? There are no easy answers but you need to consider who you would prefer renting to, young families, individuals, seniors … I am not suggesting you practice housing discrimination but certain properties generally lend themselves to particular types of people. If you buy a studio or one bedroom condo chances are pretty good you are looking at having individuals apply to rent the home. You will not normally find a family of 4 looking for a studio condo. On the other hand certain communities have age restrictions so if the home you buy is in an age restricted community you will only be able to rent to people who meet those requirements. Houses are usually easier to rent than condos since most families prefer a house over a multi-family building however, houses usually mean yards and those require upkeep. Remember I said this wasn’t an easy decision but once you decide what audience you want to attract, then begin your search in those properties first.
Another consideration is how will I handle expenses? Now I am speaking of the normal day-to-day expenses of the home; things like utilities or landscaping, maybe even a pool. Different parts of the country, even different owners handle these types of expenses differently. You could consider including utilities in the price of the rent and then pay all of those utilities yourself, or you could pay for a gardener or pool service to come once a week/month so you know those items are kept up properly and then include those costs in your rent. You could have the tenants pay the utilities or even offer a discount on the rent if the tenant agrees to maintain the landscaping or pool. You should estimate how much each of these items could cost, worst case scenario, and decide which works best for you and your area.
How are you going to find good tenants and manage the property? There are usually two options in managing the property, handle it yourself or hire a property management company. Both options have their pluses and minuses. If you decide to manage the property yourself, then you need to learn how to advertise to find tenants and how to screen tenants for creditworthiness and reliability. You need to be prepared to make repairs or find professionals to make those repairs for you. You need to understand your legal rights and responsibilities as a landlord and how to enforce those rights. You need to know how to write a leasing or rental contract to make sure you protect yourself and the property. I manage my rentals myself and prefer the control I have with this arrangement but I won’t paint a rosy picture, my first eviction dispelled that picture quickly. I have spoken to potential landlords who foresee the future of just finding a tenant and collecting rents. Nothing could be closer to the reality but that is not to say you can’t manage a property yourself, just research before you begin so you aren’t blindsided.
The second option for managing your rentals is to sign up with a property management company. I would strongly encourage anyone who is not living in the immediate area of their rental property to use this option. It will make your life a lot easier. There are many property management companies in most major areas and most are very responsible and reputable companies. For a fee, usually a percentage of the rent, a property management company will find you a tenant that has been screened. The company will execute a lease or rental contract that offers the best protection for the landlord and meets the housing laws of the state/city/community of the property. The company will collect security deposits and rents which they can manage for you or send to you, less their fee, for you to manage. The company will respond to tenant requests for repairs and maintenance issues and negotiate costs on your behalf. You are still responsible to pay for the repairs as the owner of the property. Many landlords enlist the services of a property management company to avoid those late night calls about a broken faucet. While there are many pluses to this arrangement, one minus is that the property management company doesn’t have a vested interest in the property. My neighbor uses a management service because he lives on the other side of the country, but when our joint fence was falling down it took almost a year to get the property management company to respond and get my neighbor involved in sharing the costs of the necessary replacement of the fence. When his roof was leaking it took several months, and many tenant complaints, before the property management company got the owner involved in replacing the roof. Perhaps this is just this particular property management company, but I think you get the idea.
The last consideration I will mention is the issue of Return on Investment. As with all investments you need to get some kind of return on an investment property. Whether it is a tax write-off, an income from the rents or a possible future home for yourself, you need to determine what that return needs to be for yourself. If a second income source is your goal, then you need to run the figures carefully to decide of the costs of the property, mortgage payments, taxes, insurance, repairs/maintenance even management fees, and the amount of the rent you can reasonably charge provide you that needed income. These same calculations are needed if you intend to use the property as a tax write-off. When you talked with your tax advisor how much write-off were you eligible for each year. Does the property provide that amount or are the write-offs more than you can legally deduct each year? If you plan to use the home as a future residence, do the rents pay for the costs of the home or do you have to kick in some extra each month? Does that extra kick-in make financial sense for you?
Investing in real estate comes with many challenges but there can also be many rewards. You need to decide which side of the scale you wind up on.