So you want to be a landlord?
Do you have visions of owing a stable of rental properties that generate a positive cash flow every month and attract the nicest and cutest tenants? As wonderful as this sounds, sometimes a vision is really just a dream and not always a good one.
A couple of weeks ago, I wrote about an increase of households converting to renters rather than owners in spite of very advantageous home affordability. In light of this monthly rents are increasing rapidly and were up 2.5 percent during the third quarter of last year, which is convincing many investors to get out of the stock market and buy rental properties.
On the face of it converting part of your portfolio to real estate looks good and is for savvy investors with a fair amount of cash reserves. But the average investor needs to contend with potential and prolonged vacancies, unexpected costs, deadbeat tenants and in general overestimating the rental potential.
The key to purchasing rental income property is to figure out how much rental income can be generated. This isn't as easy as it may sound and is dependent on the local market as well as the rate of unemployment in that market.
Closing costs to purchase, which generally run between 3 percent and 6 percent, have to be added to the general maintenance expenses like taxes and insurance. But it's the unexpected expenses like major repairs and other unplanned expenses that can quickly drive up carrying costs and make investors wish they were still in the stock market.
All of these issues, however, pale in comparison to tenant problems. Don't assume you will always be able to keep your investment rental occupied. If you get a great deal in a neighborhood with a lot of foreclosures, there is a good possibility that potential tenants also could have a problem with the area. Also screening and evicting tenants could really turn your dream into a nightmare. If you don't screen properly, you could end up with the preverbal deadbeat tenant that you can't evict for months.
Another good rule is to purchase properties that are within an hour of your primary residence, unless you're purchasing a vacation rental property. Certainly, here on Anna Maria, we have an abundance of short term rental properties, too many by some Islander resodents' estimations. The advantage of purchasing either a home, a standard condo or a vacation condo is that the property goes into a rental pool and is managed by a rental agent. This does not, however, inoculate you from special assessments or repairs to the property, but it does give you the eyes and ears that you may not otherwise have. In addition, a real estate company is motivated to rent the premises.
Renting is becoming so popular that even the federal government is considering getting involved in the rental market. Government officials have been soliciting ideas for how to convert some of the foreclosed homes owned by Fannie Mae and Freddie Mac into rentals in order to reduce some of their losses.
Before you take the rental property plunge, consider the reality of your dream of becoming a mini Donald Trump. The Donald has the best of unlimited assets and assistance behind his rental organization, even if he doesn't have the best hair.