Are You Ready to be a Landlord?

That place next door just went up for sale. Your neighbors have lived there since the fifties, and they’re moving to Florida to be closer to the grandkids.

They paid off their mortgage years ago, and they’re selling for a song because they don’t want to wait too long for a buyer. (Those grandkids aren’t getting any younger!) It would be so easy, you think, to buy it and rent it out. You could pick your own neighbors! And have an investment property that, you hope, will appreciate in value over the years. The sale of that property and your own home may even finance your own future move to Florida (or New York...or Paris...or Bali…). But are you ready to be a landlord?

Do I have a good property in mind?

You may love the place, but will it be attractive to renters?

• Will the home need improvements? (And it may if they’ve been living there since 1953.) Estimate the cost, and factor that into your decision. Remember that not all improvements are strictly aesthetic. Avoid surprise expenses; make sure your property is thoroughly reviewed by a qualified home inspector.

• What are typical rent prices in your area? Are there many vacant places? Know the rental market in your area, and how likely you are to find a tenant.

• Is it close to home? Overseeing a rental property can be time-consuming enough, without adding in travel time.

• Would you rent the home? Walkthrough and imagine yourself as a potential tenant. What do you see?

  

Can I afford for the property to be vacant?

As a real estate investor, you can’t let your optimism cloud your vision. While it’s tempting to think that you’ll have a flock of applicants eagerly lining up to rent your new investment property, the cold reality is that most investors experience prolonged vacancies at some point in their careers.

Take the case of John Interdonato, a fledgling real estate investor profiled by the Wall Street Journal:

“It felt like I was staring down the barrel of a shotgun,” he says.

Interdonato wishes he had foreseen the dry spell he would suffer after buying an investment property in Cape Coral, Fla., for $280,000 in 2005. The electrical engineer planned to rent it out for enough to cover the $2,200 mortgage payments. But after the property sat empty for more than a year, starting in 2009, Mr. Interdonato fell behind.

By the end of 2010, after having sunk 50 percent of his savings into the property, he was forced to sell.

You should have at least 3-6 months of expected rent in reserve, if not more, to cover unforeseen vacancies. Wait to invest until you can be sure that a dearth of tenants won’t put you out of business. The last thing you want is to be dealing with a foreclosure.

Do I have the time or money to handle unexpected repairs?

An empty property isn’t the only thing that can break your real estate investment bank. Unplanned repairs can be costly! As a landlord, it’s on you to make repairs at the request of your tenants. And unlike you, they aren’t willing to wait until your next paycheck. Failing to respond in a timely manner can lead to negative press for your landlord services, making it even more difficult to rent out your investment properties in the future.

Whether you handle repairs on your own or by hiring an external contractor is up to you, but you’ll need time, money, or a combination of both, to hold up your end of the bargain. If you work a full-time job in addition to your real estate investment endeavors, you’ll need extra money on hand to bring on qualified repair workers, as well as a list of those that are reliable.  If you have more time than cash, it’s up to you to ensure that your DIY skills are good enough to handle any problems that arise.

Do I have the time or money to manage the property?

The question of “time versus money” is one that will come up repeatedly throughout the decision-making process you’ll undertake before becoming a landlord. Repairs are only part of the picture. Other responsibilities include qualifying tenants, giving property tours, collecting rent checks, managing your financial records, handling evictions, and more. If you’re already swamped, you may not be prepared to be a landlord.

You also have the option of delegating these tasks to a property management company, but be aware that doing so can be costly. Property management firms typically charge 8-10 percent of your monthly rent, on top of additional expenses for “one-off” services. Depending on the terms of your agreement with the company, this might be feasible, but it will cut into your profits.

Can I afford my investment property without refinancing?

Refinancing your primary residence is often a great option. To reduce your monthly payments, you may secure a mortgage for a longer term or, if you’re lucky, a lower interest rate. But buying a real estate investment property is a different story; you’ve really only got one chance to get the deal right, as lenders are much less likely to help investors refinance their properties.

This is because real estate investors represent a much riskier scenario to lenders. Homeowners who live in their primary residences have quite a bit more at stake when it comes to walking away from their homes.  Investors, on the other hand, have fewer ties to their properties, making them a flight risk for potential lenders. If the idea of not being able to secure a refinance on your rental property when you need it sounds scary, that’s good, because it shows that you’re realistic. Becoming a landlord isn’t as simple as buying a property and waiting for the rent checks to roll in.

How about it? Are you ready? And to the current investors out there, would you add anything to this list?