If you have the capital or are qualified to take out a loan, buying and renting out houses can be a very good investment and source of income as well. It’s not a money-making venture that just everyone can get into, but if you do your homework and equip yourself with the right information and attitude, you can be successful in it.
Research is always the first and most important step. Talk to rental agents or real estate brokers. Check the Classified Ads for the most sought after types of properties and the going rental rates.
Know what your real intentions are. Are you in the rental property business for the long haul or do you plan to sell in a few years? If you plan to keep your property for the long-term, consider the maintenance and refurbishing cost (part of the property depreciation cost) it will entail at some point in time verses your projected income over time. Remember, a property in a “prime location” may have the value of its structure decline over time but not the value of the land.
If you don’t see it as a long-term investment, buy a property in a prime location such as condominiums – something you can easily dispose of as soon as its value raises high enough to cover your investment or mortgage and other expenses and give you a profit.
For small investors, the long-term makes more sense because they can ride out the “peaks and valleys” in the rental property market while having a steady income to supplement their revenue.
Be Financially Prepared
Banks are more inclined to deal with individuals who have excellent credit records especially when it comes to property investments. The reason is most people are likely to default on such loans rather than those taken out for their own homes. That is why lending institutions usually require larger down payments, higher interests and stronger finances.
It also pays to be liquid enough to cover maintenance expenses and cases of vacancies equivalent to at least one month’s rent.
Where and What to Buy
Buy property in an area where units are rented out or sold quickly. Find out what attracts investors to the place. Is it the affordability of the units, accessibility, its proximity to commercial centers, hospitals, banks, recreational facilities, or all of the above? Also, check the association’s documents to be sure rentals are allowed. Some associations limit or restrict the practice.
Consider the trend in the prices of properties in the area. Find out if these have increased or decreased over the past five years and weigh this against your intent. If you are buying as an investment, buy in an area where prices have been on the rise.
As much as possible, look for an area near your own home so that you can quickly attend to concerns of your future tenants. Some investors opt to purchase multiple units like a row of apartments and then live in one of them. The rent from the other units could cover your mortgage, allowing you to effectively live for free in one of the units of your own apartment. You can easily monitor the maintenance of the other units, and be just next door to attend to your tenants’ concerns.
Don’t Pay More than Your Expected Return
Buying low and selling high is a rule of thumb although it may not always apply to areas where “prestige” and strategic location usually price property higher than its “inherent” value. Still, your best bet is a location where the average rent is more than enough to cover all your expected monthly expenses, including mortgage, maintenance, insurance, taxes, and contingency for lost income due to vacancies (at least three months’ worth per unit). The more cash flow you have, the broader your options.
The Cost of Home Improvements and Repairs
Home improvements and repairs are treated differently for tax purposes. Repairing damaged portions of the structure such as painting a room or fixing a leaking pipe are deductible from your tax return for the year the repairs were made.
However, replacing a roof or a pipe, adding another water heater, and the more obvious addition of a room or central air conditioning are considered improvements and generally cannot be deducted during the period the improvement was made.
These are considered to add to the amenity and value of the house and are subsequently added to the value of the property to determine your tax basis (that is, the amount you will subtract from the sales price to determine your profit) when you sell. The higher the basis, the lower your taxable profit will be.
Another avenue for reducing your taxes on home improvements can come in the form of tax credits which are available for many types of improvements such as installing insulation, adding energy-efficient cooling and heating devices.
So keep a record and the receipts of all expenses related to home improvement. Consult your local IRS office even before making the actual improvements to learn about the guidelines on how a homeowner can claim a tax deduction for home improvements.
Choosing the Right Tenant
Equally important are the tenants you choose. Once they sign the contract and move in, it will be hard to get them to leave if they don’t turn out to be the kind you’d expect to occupy and care for your property.
Aside from the usual background and credit check, talk to them extensively. It’s during the free wheeling and face-to-face conversations that you can catch your tenant off guard and learn about their habits, attitudes and preferences. Those who are genuinely interested will also be very meticulous and will ask a host of questions once you show them around the unit. They also usually give you a reservation fee or advance payment without any hesitation.
Listen to their tone of voice and observe their body language. Are they friendly, pleasant and easy to talk to or do they tend to flaunt their accomplishments and resources?
Pay close attention to their grooming and dressing. Are they neat and presentable? People who don’t bother with the way they look will most likely not exert much effort to clean and maintain your unit. Finally, if your tenant has kids, there’s a lot you can tell by watching their children’s behaviour and how the parents handle them.
However, don’t be swayed by their appearance, anecdotes and congeniality alone. It’s still their financial capacity and your rational thinking that should serve as basis for your final decision.
Preparing the Contract
Once you’ve satisfied all the pre-requisites, you can prepare the House Rent Agreement, templates of which can be found on the web. Generally, the agreement should contain the name of the landlord and leasor, monthly rent and amount to be advanced, duration of the contract (usually 11 months as per the law), a clause regarding the option to renew the contract upon expiration, and other terms and conditions you want documented.
Once signed by you and the leasor, you need to have the Agreement notarized and registered with the Registrar Office. Make sure though that you are fully informed about the provisions of the Rent Act. These are different in each state or country.
Are you making money renting out houses or thinking about doing so? Be sure to share your comments, thoughts, ideas below…