By Vera Wilson
You’re facing a permanent change-of-station (PCS) move. You’ve always rented, but you’re thinking this move might be the one where you take the plunge and buy a home, with the intention of renting it out when you move again. Or maybe you own the house you’re currently living in and love it so much you’re thinking of retiring there one day and want to rent it out until you do. Perhaps you’re being lured by low interest rates and housing prices and want to turn the condo next door into a rental unit. But before you act, ask yourself whether investing in real estate a smart financial move for you. Do you have what is takes to be a competent landlord?
We’re talking real estate, so it’s no surprise to learn your first consideration when sizing up the rental potential of a property has to be location, location, and location. Would a family with children find good schools in the neighborhood? Would a young single person be close to the action? Avoid run-down areas with high foreclosure rates as low-rent tenants are riskier.
Call area rental agencies and peruse Craigslist to find the average monthly rent for a similar property and your potential rental income. For most of the country, rental occupancy is high and rent prices are rising, but your area could be one of the few exceptions.
Next, identify your goals for real estate investment. Does the rental income need to exceed expenses to provide you extra cash? Are you financially willing and able to break even or take a slight loss because your goal is to sell the property in five years at a hefty profit?
An important piece of this financial picture is the tax implication. The good news, generally speaking, is tax rules are viewed as favorable with respect to rentals. Almost all expenses can be deducted, and depreciation (which is accounting-speak for “nothing lasts forever”) allows you to postpone paying taxes until the property is either sold or no longer considered a rental. Be aware your overall income does play a role in how much you can deduct and when. Work closely and often with an accountant to determine how rental profits and losses will affect your tax-planning and how selling your property or converting it from rental to personal use will affect your tax bill. Get good advice on record keeping to take advantage of all possible deductions.
In real estate lingo, your “nut” is the total cost of keeping the place going, including mortgage payments, taxes, insurance, utilities, yard and home maintenance, and repairs and association fees as well as any professional services you might need from attorneys and accountants. Estimating these expenses can be tough, so let’s take a closer look at some of them.
Insurance for rental property is expensive. These policies are considered high-risk because the policyholder does not live at the property and at times home could be vacant and vulnerable to vandalism. Increased liability coverage to protect you from tenant mishaps also is recommended. Keep in mind, you aren’t responsible for insuring the tenant’s belongings, but you might want to insure your appliances.
As with your primary home, home repairs are unpredictable and therefore, hard to budget for, so make your best guesstimate based on repairs you’ve experienced in the past. Take into account the age of your house and related systems and appliances. One option for handling repairs is a comprehensive home warranty. We had one for an out-of-town rental property, and it made budgeting for repairs easier.
A good portion of your expense budget will be determined by whether you choose to manage your rental yourself or rely on professionals. If you’re not living within easy driving distance, your best bet is to hire a property-management firm. They usually charge 8 to 10 percent of your rent, but they will handle advertising, screening tenants, collecting rent, coordinating repairs, and dealing with most tenant issues, including eviction. They have knowledge of all pertinent regulations and will provide you with a standard lease agreement, thereby saving you money on simple legal matters. Even with a property-management firm, stay actively involved with all management decisions and insist the firm check the property on a regular basis to ensure compliance with the lease and confirm the home is in good condition. We lucked out when a proactive management firm notified us our tenants had a disallowed dog that literally ate many of our interior doors.
If you choose to manage the property yourself, countless books and Internet sites dedicated to rental real estate can help you navigate the jungle of landlord duties.
Be mindful you or someone you trust must be available 24/7 to handle any crisis or show prospective tenants the property. If you’re handy, save money by taking care of some repairs and maintenance yourself, and build a supporting cast of contractors for more complicated issues and emergencies.
Pay special care to screening tenants properly as this can avoid countless headaches down the road. Learn the tricks of the trade such as checking prospective tenants’ past two landlords — their current landlords might recommend them if they’re too eager to get rid of them.
A lawyer isn’t required, but tenant screenings, advertising, security deposits, lease agreements, and zoning all are governed by law. Learn what’s necessary to avoid legal hassles. Also ask yourself whether you’re comfortable chasing down rent payments or beginning eviction proceedings.
Finally, can you cover these costs even if no one has rented your house for several consecutive months or a new roof is a must-have? Most failed rental properties are the result of an owner being unable to cover lulls in rental income because of extended vacancies, eviction delays, or unpredictable expenses, so most experts recommend squirreling away six months’ worth of your nut.
Rental real estate can be an excellent investment. Take the time to evaluate your market, analyze your finances, and learn how to provide a safe, smoothly functioning home to carefully selected tenants and you’ll be successful.