Is Becoming a Landlord Worth It?
Real estate investment is one of the most profitable sources of generating wealth, but it also requires a lot more than just investing. The first thing about being a landlord that one should understand that it’s a full-time responsibility and in order to charge a profitable rent, you will need to put in a good investment not just by acquiring the property, but also making it habitable by repairing damages or revamping it.
The financial aspects of real estate are quite complex by themselves. Still, it is often the simplest thing people fail at, which is putting in enough time, effort, and money to make the property a proper place to reside in or, if the tenant asks for repairs, looking into it immediately. Then there’s rental property mortgage that you may need to apply for, and of course, insuring the property. Real estate closing companies like 24 Hour Title and Real estate closing attorneys like Harry Marsh Law cater to an all-around and seamless service to assist in the technicalities involving real estate investment and buying.
There are a few other things that you need to do in order to become a landlord:
1. Clear Up Your Personal Debt, If Any
There’s no law against investing in real estate while being in debt, but ideally, you should not. A simple reason for this is, if you’re paying off a huge sum of money you owe while also investing in real estate, you might not see profits for a long time or be able to break even. If you have car loan debt, student debts, or basically anything that won’t go up in value or make you money through sales (like a business debt), it should be paid off before you start something new and invest in real estate.
2. Start Saving Up for A Down Payment
Needless to say, that investing in real estatecan require a relatively large down payment. Even if you start with one property and plan to expand later, you need to spend an initial lump sum on it. A down payment done well can very well guarantee you long-term financial freedom, so start saving up for the down payment for property acquisition. Discipline your expenses to make sure you are able to put away some money into savings from your regular earnings. The more you pay as a down payment, the lesser rate of interest you will get for your debt repayment.
3. Find The Ideal Location
This is probably one of the most important aspects of real estate investments. A good location does wonders even to mediocre properties. There are a number of things you must consider while deciding on a location- good transport connectivity, distance from good hospitals and schools, other amenities like availability of clean drinking water, crimes rates of the place and lastly, distance from your place of residence. Other than that, you should also consider factors like the general pleasantness of the surroundings. A combination of these factors will not only attract more tenants but also help you optimize your rent however you like.
4. Buying Property in Cash VS Financing: Which Should You Opt for?
While most professionals who deal in real estate will tell you that buying with cash is the best option, financing a property isn’t a bad option either; both have their advantages. If you opt for cash, then you eliminate the risk of the property falling underwater, which is when the property becomes worth less than the loan amount to be repaid. With cash, you will incur no extra interest or lender fees for settlement. You will also not have to pay a monthly amount which will be better for your overall cash flow.
Financing, too, has some perks, such as liquid assets in your hand. When you finance a property, you don’t lock up a bulk amount with it and still own it. Also, when financing, inflation can allow you to earn greater profits because you can increase the rent in that case.
5. Keep Interest Rates in Mind If You Choose to Finance Your Investment
Interest rates for a mortgage on an investment property are higher than rates offered for residential properties. But the question is, how much more? Well, you can easily expect the interest rates on your investment property mortgage to be 0.50% to 0.75% higher than regular residential property mortgage interest rates. Real estate investment is, in a way, a business venture, and all businesses involve risks. This risk factor is why loan lenders charge this extra interest rate to minimize the chance of their loss should the venture fall apart.
6. Ensure A 10% Return on The Investment Amount
ROI or Return on Investment measures the profitability of a property. This is a very important factor that you should keep in mind because your end goal is to accumulate wealth, which happens only if the ROI of a property is good. The return on investment is calculated by dividing the total profit on investment by the original cost. This is, of course, if you buy the property with cash. In case you’re financing it, you need to consider the down payment and debt repayment too.
The ROI amount can be affected by other expenses like repairs and maintenance of the property. Keeping all this in mind, you should aim for at least 10% returns on your investment. That will guarantee the profitability of the property. Calculating the ROI can also help you compare between different properties for a sound investment plan.
7. Insure Your Property with The Right Plans
Insuring your property or real estate is one of the first things you need to do to safeguard your investment against any future turmoil. But choosing the right insurance plan often becomes difficult as there are many to choose from. To choose a policy, you need to look at their clauses like if they cover loss of use, what their replacement cost is, their coverage, how many properties they can insure within one policy, etc.
8. Be Prepared for Unexpected Costs
As mentioned before, being a good landlord means that you have to prepare in advance for the extra added cost that comes with rental real estate. There could be sudden needs for repairs or maintenance, which could cost more than you may expect. On top of that, there are other hidden costs such as tax, insurance cost, etc.; both interest rates and insurance costs on rental properties really a bit higher than residential properties. This is because the risk involved in a rental property is quite a lot, while residential properties don’t pose as much of a risk.
Legal advice and professional help also cost money, so if you’re employing the assistance of professionals to guide you into a good investment plan and deal with all the paperwork, then it is going to cost some money. That’s not it; sometimes, you may get unlucky and have to deal with indecent tenants causing property damage; dealing with these things will be easier if you enter the arena fully expecting them.
9. Avoid A Fixer-Upper Estate If You're a First-Time Investor
The temptation to buy a property at a price lower than the market rates is very real. You will want to renovate it into something modern and beautiful and ask an appropriate rent for it. However, it is advisable that investors who have just stepped into the world of real estate investment should steer clear of buying fixer-upper rental properties. The price you will get it for will be almost 8% percent lower than the market rates, but there will be no prior estimate as to what other hidden costs you will have to incur.
Investing in such a property is too much baggage and hassle as a new investor. If you leave it as it is, then the rent you can ideally charge will not be profitable to you, and if you renovate it, it might add up to what it would have been if you were buying at the market rate.
10. Have An Estimate On The Operating Expenses
Some landlords end up losing a lot of money because they don’t calculate the operating costs beforehand, and end up in the negative. Therefore, it’s always necessary that you have a specific estimate on the operating expenses of the property you are planning to buy. If you already own another property in the same area, then you can just compare and estimate. However, if not, then there are few things you can do.
Asking local property managers is a good place to start with your research on the property operating expenses. Asking fellow investors could also give you valuable information. There are a few fixed operating costs that everyone has to account for, such as electricity, gas, heating, water, drainage, property taxes, insurance, legal advice, etc. Repairs and maintenance may or may not have to be done, so it isn’t mandatory to consider them as fixed expenses. However, keeping them in mind while planning the budget is always a good idea. Planning thoroughly can go on to save you from a lot of unnecessary expenses in the future.
11. Calculate Your Actual Return on The Investment Beforehand
We already know what ROI or Return on Investment is. When you’re investing in a property, make sure to always calculate the expected amount of return you are going to get from the money you spent to acquire the rental property. It not only helps you formulate a budget for future expenses but also gives you an idea about your whole financial situation regarding the investment you have made.
People dabble in real estate for money; some want to retire early, some want to save up and travel the world, or some just to provide a luxurious lifestyle to their family. The intent of highlighting this is, to be a good investor and landlord, you have to be smart about your money and spend it wisely. ROI determines the profitability of the property, so it is an important factor to help you formulate your investment plan.
12. Legal Obligations That You Need to Fulfill as A Landlord
Every state employs different landlord-tenant laws, but there are some general rules that both parties need to follow all over the country. The obligation of a landlord is, of course, more involved than that of a tenant:
- OBLIGATION TO DISCLOSE OWNER OF PROPERTY – Sometimes landlords act through agents and sometimes independently. The landlord must disclose their name, address, and contact information in a signed written format no matter the case. This must be done to allow the tenant contact regarding grievance redressal or legal issues.
- OBLIGATION TO MANAGE SECURITY DEPOSIT – The landlords can charge a security deposit from the tenants in case of damage to property or failure to pay the rent. However, there are regulations regarding the maximum amount that can be charged, and the landlord cannot violate that.
- OBLIGATION TO DELIVER THE TENANT THE DOCUMENT CERTIFYING THEIR POSSESSION OF THE PROPERTY – That the tenants can now legally occupy the property is notarized in a document called the possession letter. The landlord is legally obligated to deliver that to the tenant.
- OBLIGATION TO MAINTAIN THE PROPERTY – The landlord is legally obligated to pay for the maintenance of the property as well as repair the damages that were not brought about by the tenant.
13. Consider Hiring a Professional Property Management Company
Being a landlord can sometimes be quite a cumbersome process, and unless you have gradually eased into the role, it can be draining. There are many things that you have to keep in mind while you start with real estate property investment, and it isn’t uncommon to have occasional slips with so much to look out for. However, some of these slips can cost you dearly. Therefore, hiring a property management company is an easy way to deal with the hassle of paperwork while you can focus on maximizing profits.
If you happen to live a far distance from the rental property, then you have no choice but to hire a property manager who can tend to the immediate issues in your stead and communicate them to you; this can prevent frequent traveling to address issues at your rental property. If you don’t have the time that needs to be dedicated to this venture, then you should hire professional help.
To wrap up, it can be said that investing in real estate and becoming a landlord is a good way to earn a profit, especially in 2022, as many new people don’t want to commit to a house due to the ongoing financial crisis and would rather opt for a rental residence. Give us a call to consult with a professional about the best option for you.