No way I want someone calling me at 3am to unclog their toilet or fix their leaky faucet.
These are often the first comments I hear when I bring up the subject of investing in rental properties, and I understand. I agree it is not for everyone, but you’d be surprised how easy it is to prevent or limit those things from ever happening in the first place. Think of it like this: how would like to buy a home where someone else pays the mortgage, property taxes and insurance for you each month, and there’s a little left over to put in your pocket. And you are still the owner. Pretty neat, huh? What I described is my layman’s definition of passive income, a fancy term you might hear from financial advisors. It means something you own that is earning income with little financial involvement after the initial purchase.
The financial benefits are plentiful here, but know that you’re playing the long game. By that I mean, the younger you are when you start acquiring rentals, the better. If you can finance them for 10 or 15 years vs. 30 then you’ll be in even better shape.
Here is an overview on a few key items to see if investing in rental properties is for you:
- Financing: The interest rates for investment properties run a little higher than owner-occupied (that’s the phrasing lenders use). If you are really flexible, moving in to the property while you get it ready to rent lets you get those lower interest rates. Either way, with today’s low rates it is not much of a difference. You can go with single family homes, duplexes, triplexes and fourplexes but four is your limit. Beyond four you are considered commercial and that’s a whole other ball of wax. We have a team of lenders that can guide you through the financing waters with ease, so worry not.
- Finding Good Tenants: This is probably the biggest concern of new rental property owners. I recommend contacting a licensed agent that does this as a regular part of their real estate business. While there are tenant screening services that will do background checks and run credit reports, until you have a couple under your belt, I do not recommend this DIY route.The upside to going with an agent is that you’ll be listing your rental the same way you would list your home for sale, except that it falls under the For Lease section of the MLS. This gets you worldwide exposure, which includes relocation services. The relocation business is a large part of real estate. Companies who are transferring employees use these services to partner with agents in the destination city. And it means they have a job with a paycheck.
Going with a leasing agent also makes sure that you’re not leaving money on the table. Part of the lease listing process (say that three times really fast) is checking other leased homes in the area to make sure your price is comparable.
The agent will handle the lease applications, screening process and be able to give you the benefit of their experience on what findings are important. After a lease application is approved, they will also handle the lease agreement and particulars of that.
- Property Management: So you’ve found your tenant, received your security deposit and first month’s rent check and life is good. Next you’ll need to decide if you will manage the property on your own or higher a property manager. If you took my advice above and hired an agent, they will most likely have covered this with you because it will often be part of their services. Having someone manage the property for you means you have control over whether you receive those calls about a leaky faucet or not. On my first rental, I used a property management company for the added assistance in my new endeavors. Costs and fees will vary from one to another, but on average they charge 10% of the monthly lease rate for their services.
These services include:
- Electronic Payments: This was one of my must-haves. I wanted the convenience for my tenants to have access to online payments. The service would deduct their fee and send the balance to my bank account via direct deposit. At the time, this service cost $60/yr. That is a bargain when you calculate the fees of something like PayPal.
- Maintenance Options: You can be as hands-on or hands-off as you want to be. I could designate a dollar amount, and if it stayed within that amount, they would schedule a repair, pay the fees and deduct the cost from the month’s lease payment. If it was over that amount, they would call to discuss what was needed.
- Legal Help: If for some reason the tenants didn’t pay, the property management would handle the collection process and any follow-up legal work surrounding that.
- Periodic In-Home Checks: This company would go in every few months to take photos and send them to me on a CD. This was written into the lease but they would also give the tenants a heads-up call or email to remind them. My biggest rookie mistake on an earlier rental I managed myself was not going in the property for almost three years. Yep, three years. That turned out to be very costly. I had a non-smoking policy in my lease, but once you entered the home, it was clear they were not only smoking inside, but doing a lot of it. All my light fixtures, baseboard trim and electrical plates had turned yellow. A large remodel ensued after they vacated the property. Had I ventured inside the home even a few times that first year, I could have nipped the smoking damage in the bud.
Alright already, if a property management company is such a great idea, where can I find a good one?
Still have questions on rental properties? No problem, give us a holler and we’ll be glad to respond.