Buying House To Rent

Buying a house to rent? Being a landlord can be rewarding if done properly.

Here are some things to consider when buying a house to rent:

  • Cashflow: Is the property a good investment? You can probably estimate your mortgage payment, insurance, and taxes fairly easily. Have you considered costs such as vacancy and maintenance? What is the range of rent for similar properties? This model can help analyze the key ratios.
  • Cash Reserves: Make sure you have appropriate cash reserves.. although the lender is likely to check this for you too. Owning a rental property doesn’t have to be expensive, but the expenses are usually “lumpy”. You may go six months without a single expense, but then a rain storm knocks a tree through the roof. Insurance can cover a lot of the extreme cases, but be prepared for big ticket expenses. Of course, some big ticket expenses like a new HVAC system can be paid in installments and there might be incentive programs to improve the property.
  • Bills: Will the tenant pay bills such as gas, electric, water, and trash? Make sure they can financially handle the rent and the bills. If bills remain in your name and are included in the rent, you are more likely to have tenants who do things like leave the A/C on really low temperatures during the summer or forget to turn water off.
  • Short Term Rentals: Some websites that match short term renters with property owners make buying a house to rent appear extremely lucrative. Have you netted out the commission these services charge? Before you build a business around acquiring property for short term rentals, make sure it’s legal.
  • Tenants: Do you inherit tenants with the property? If not, how long will it take you to find the right tenants? You can hire a service to market the property for you; I’ve seen quotes around 1 months rent as a finder’s fee.
  • Experience: Prior experience owning your own home can help. Have you handled a foundation problem? Know what a roof costs to replace? What’s the rate for a plumber on a Sunday night? How much does it cost to paint a room? Replace a door? Add a ceiling fan? Trim the trees? How long does an HVAC unit last? Is the attic insulation sufficient? What if a pipe freezes in winter? Replaced blinds, or a broken window? If you are operating on razor-thin cashflow, learning these lessons along the way can be expensive.
  • Maintenance: This can be a black hole that eats cash. A property inspection during the buying process will help but not always find all the issues. One way to handle maintenance is to have a team in place already. Do you have professionals you can trust? A plumber and electrician might be needed, but often a general handyman can do a lot of the work. There are also services that provide maintenance for your property, but you’ll want to check references as quality varies widely. Here’s a property maintenance checklist that may help. If the prior owner was a “slumlord”, you may have to invest much more to make the property a good investment.
  • Time: How much time is the property going to take to manage? Can you afford the time away from your job? Say you need to let in a carpet installer who is supposed to be there at 10am but shows up at noon. Will your boss understand? If you go out of town, do you have a support network that can help you with these issues?
  • Distance: The further the property, the harder it is to manage. When tenants don’t see the landlord around the neighborhood they behave differently. They might keep an old couch in the driveway and get a complaint against the property. You might have to go check a toilet leak or clogged disposal at 10pm on a weeknight .. how far are you willing to drive? While the financial returns are important, don’t forget to value your time as well.
  • Conflict: Are you prepared for potential conflict? For some people, becoming a landlord is their first exposure to management. Are your tenants telling the truth about when they are going to pay rent? Are your service providers charging you appropriately? Are the neighbors upset with the tenants playing music too loud at night? If there is a power line down in the street tenants will expect you to do something about it. You will be the boss. You have to set expectations and hold people accountable. If you aren’t ready for this step, you could find a property management company you trust. They may charge you 6-8%+ of rent but it might mean a lot less headaches.
  • Taxes: Expect significant tax implications. Rent counts as income, but there are many deductions too. The biggest tax deduction is often the annual depreciation of the property. You may be able to deduct maintenance, repairs, and other expenses incurred in renting the house. Some people are surprised to find a rental property that is a good financial investment can often operate at a loss for tax reasons. Bookkeeping will become much more important, so you may want to talk to a tax professional to make sure you handle becoming a landlord appropriately.

Hopefully these were some helpful things to consider for those considering buying a house to rent. Please add any comments you have below.

Enjoy this post? Get New Posts by Email!

Leave a Reply

Your email address will not be published. Required fields are marked *