10 things you need to know if you want to become a landlord in 2019
First, before we tell you how to become a landlord. You will need to ask yourself several questions?
Why do you want to become a landlord?
What are your goals financially for becoming a landlord?
Do you want to become a landlord for cash flow, equity, or both?
We’ve added a free investment calculator in this post which can help you project your potential income and expenses.
These are really important questions and things you need to consider before becoming a landlord.
It will help you identify your goals and define your objectives.
Buying a property for income will have a totally different set of buying guidelines than buying one for the long haul.
Where do you want to be a landlord?
We’ve all heard the saying real estate is about location, location, location. In part, it is. There are many other factors that can affect the valuation of your property over time. Location does play a big part in that.
You also want to consider things like:
- What school district the property will be in. (This is important to a lot of people with families and can increase your property more over time.)
- How close is the property to major employers?
- Is the property close to a major interstate or highway?
- How close is the property to dinning, shopping, and entertainment?
- What is the crime rate for that area?
While we just discussed location. In our opinion, there are another three words that can have a huge impact on your investment and those are price price price.
What you actually pay for a property can determine cash flow, the risk to reward, and return on your investment. If you want to be a successful landlord, buying a property at a good price can be just as equally important.
There are multiple ways to buy a piece of real estate. All cash, loans, and even with “no money down” are some of the ways which we have bought rental properties. One would even ask should I borrow against my 401k?
So, whichever you decide, you’re going to need to bring money to the table one way or another. That is a more complicated topic which we’ll save for another day.
There are multiple strategies for buying a property. From paying all cash to leveraging your money. Quick example. Say you have $100,000 sitting in your bank account.
A. You can buy one property for $100,000 cash and start generating income debt-free since the property is paid for.
B. You buy 10 properties through leveraging your money by putting 10% ( $10,000 down) and borrowing the remaining money needed to acquire the properties.
Again, this is a personal choice you need to consider and based on your own financial objectives. Leveraging, although you can buy more properties also includes more risk.
Use the free calculator to play with some numbers. Your cash flow will need to be greater than your expenses.
A general rule of thumb is to charge 1% of the home’s value for rent.
You will you need to determine if you personally want to manage the investment property yourself or hire a property management company or manager. This includes who you will rent to. Regular, traditional tenants, or Section 8 tenants.
Most property management companies charge 10% of the rent collected, handle all maintenance calls, marketing the property, leasing the property and handling all aspects of the rental property.
A good property management company are worth their weight in gold and something to consider. This decision may seem like a small one but again, can play a huge role in your success and add up to 10’s of thousands of dollars if not more over the course of years.
If you’re not familiar with the saying in real estate, it’s location, location, location. While part of that may be true. There are many other factors to consider before you become a landlord.
Becoming a landlord can be a great investment or personal decision. As with any investment, it carries certain risks which come with the territory.
You should always consult with a financial adviser or money coach before making any financial decisions.
Becoming a landlord, you will be responsible for transactions in the 100’s if not millions of dollars over the course of your life.
- Property damage
- Tenants failure to pay and evictions.
- Turn over and repair maintenance issues
- A bank calling the loan.
- Being sued.
- Economy crashing decreasing property value. ( Rare but it does happen.) Just look at what happened in 2008 in the mortgage crisis.
- You buy a money pit. A lot of properties are bought at auctions and even foreclosure sales. These, in our opinion, some of the riskiest properties you can buy. Yes, they are typically dirt cheap but there’s usually a good reason for that. Even if you were to buy a property through a real estate agent and even have a home inspection. Like anything built. There can and will be problems.
These are just a few examples and there are many more.
A lot of people becoming a landlord don’t take this one step as high of a priority enough. There will be maintenance on your property whether you want it or not so might as well and budget it.
This can range from a leaky toilet, an AC going out to having an entire roof replaced. Even “newer homes” built in the late ’90s and 2000s are approaching their 20 and 30-year shingle age and will need to be replaced under most circumstances.
Becoming a landlord has a lot of advantages. One of them is having tax right offs. You should be able to write off the interest if you take out a mortgage loan. Any repairs or improvements are typically tax-deductible also.
As we just mentioned maintenance Issues. All of those expenses are tax-deductible. So is any interest you pay if you use a mortgage loan to purchase the property.
Becoming a landlord has some disadvantages too when it comes to taxes. You’re going to have to pay real estate property tax. This shouldn’t be a problem if you’re working with a bank and they are putting money aside for this in escrow. If not, you will need to budget for this and set the money aside every month.
Landlord-tenant and Real Estate Laws
Before or after you become a landlord. You will certainly want to familiarize yourself with the landlord-tenant and real estate laws in your state or country.
Becoming a landlord is simple in theory. After 20 years in the field, however, it can be more complex than one would think. also finding a good real estate attorney is well-advised.
This even means if you use a property management company. Yes, they will handle most, if not all of the day to day operations. But at the end of the day, it’s your property and you are the owner. Which means you are liable.
For example, In Virginia, they have the Virginia landlord-tenant act, which is the Bible of what landlords can and can’t do. It can be absolutely mind-blowing to what can happen in a rental property. This is from over 20 years of experience being a landlord and dealing with a variety of situations.
In addition, real estate laws, are constantly evolving and becoming even more complex. In Virginia, there is the Virginia landlord-tenant act which is the Bible of landlord laws. Check your state for yours.
Fair Housing Laws
This could fall under the legal section. But every state has there own lease agreement laws, what is acceptable, and what is not.
Fair housing laws are the one exception which is nationwide. Those apply to buying, selling, or renting or your property and are extremely important. Be sure to become very familiar with those.
Looking back over the years and according to most financial experts. Having a minimum of at least 6 months of cash reserves in the bank for each property is advised. These funds can go towards anything from maintenance and repairs to a tenant non-performing.
Evicting a tenant can take up to 3 months at a minimum if not more if it isn’t filed properly. This can vary according to your state’s laws and local caseloads play a factor as well. if the tenant(s) fight or appeal the eviction. Also known as an unlawful detainer.
You could occur additional legal fees if you have to hire an attorney and more than likely you will still not be collecting rent from the property. Which, if you have a mortgage for you are still liable for payment.
The information contained in this article is for education purposes only. This is not legal, tax or financial advice. Always consult with an attorney or financial professional before making any decisions. All investments carry risk and have the potential of making or losing money.