Thinking About Buying a Rental Property?

Thinking About Buying a Rental Property?

You’ll Need Quite a Bit of Money Up Front

First, there’s the down payment, which will depend on the building you’re looking to buy. A loan for a duplex or a triplex might only require a 5% down payment, but it’s still a good idea to have up to 20% on hand. Interested in buying a larger property? A building with more than four units requires commercial financing. (Remember: If you have no history as a landlord, most banks won’t allow you to count income from tenants when you’re applying for a mortgage.)

And unless you’re planning on making absolutely no changes to the building, you’ll also need a budget for repairs, remodeling, and general upkeep of the building. It’s hard to attract quality new tenants if your building sorely needs new floors, a new paint job, or a deep cleaning.

Research Is a Must

Don’t wait to do your research. Before you enter the market in earnest, meet with your financial advisor. Call up a few rental property owners and ask them for advice. Spend some time researching property values and tax figures, to finding out where assets are appreciating in value. Sometimes buildings are for sale for a good reason. If property values in an area are in freefall, don’t assume that you’ll be able to reverse the trend as a first-time landlord.

Once you’ve narrowed your focus to a single property, get as much information as possible. The city assessor is your friend here. All the vital facts for a structure — age, property value, new property taxes, new major repairs — are available through the city assessor’s office. Also, ask the current owner for a copy of his or her Schedule E, which will give you an idea of profits and losses.

Insurance is Mandatory

Insurance policies for landlords cover your property against damage from hail, fire, wind, lightning, snow, ice, and other hazards. They also cover losses or injuries your tenants might incur while on the property. As a result, landlord insurance policies are typically more expensive than homeowner policies — sometimes by as much as 25%.

Turns Out “Passive Income” is a Misnomer

People often refer to income from collecting rent as “passive.” Nothing is further from the truth. When you own a rental property, you’re responsible for nearly everything that could (and probably will) go wrong. Has the washing machine flooded the basement? Has the furnace given out in the dead of winter? Have weeds overgrown the yard? Are tenants filing noise complaints against each other? Guess who takes those calls.

You Might Need a Property Management Company

Managing a rental property is a challenge, and if you don’t want to go it alone, you have two options: Hire a resident property manager (aka a “super”) to live on site and take care of day-to-day operations or hire a property management company. Hiring a resident manager means adding more tasks because you’ll be an employer in charge of his or her payroll. Property management companies, on the other hand, are typically independent contractors. They’ll charge you anywhere from 5% to 15% of your rental earnings. But the peace of mind could be worth it to you. Schedule meetings and ask for quotes.

The Lledon Stokes Group is here for you every step of the way. Allow us to become part of your team, as your preferred real estate advisor. For more information about how The Lledon Stokes Group can help you grow your rental and rehab business send us a message! 

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