By ALEX VEIGA, AP Business Writer
Low mortgage rates have made
buying a home more affordable and turned rentals into an attractive option
for investors. Throughout the downturn in the
housing market, average investors, sometimes pooling their money, have bought
foreclosures at a sharp discount and turned them into rentals. Many homeowners
also have purchased a second home and rented out their first property.
Although the housing market is
showing signs of recovery, demand for rental housing is expected to remain
strong. The national unemployment rate remains high at 7.9 percent, banks are
still working through a backlog of foreclosures and tight lending requirements
prevent many renters from becoming homeowners. And the Fed has said it will
keep its short-term interest rate, the federal funds rate, at a record low until
U.S. unemployment falls below 6.5 percent, something many economists don't
expect to happen until late 2015 at the earliest. "In this market, at this point, it's a sweet spot," says Chris
Princis, a senior executive at financial advisory firm Brook-Hollow
Financial and owner of two rental properties in Chicago. "You're getting the
market where it's just starting to rebound, but still at the bottom, with what's
looking to be a great recovery."
Here are six tips on becoming a
landlord or investor in rental property:
1. UNDERSTAND WHAT IT MEANS TO
BE A LANDLORD
Residential real estate
generally provides three possible ways to get a return on your investment: when
it's sold, assuming it has grown in value, by collecting rent and through tax
savings, such as the mortgage interest deduction. So, if you elect to buy a
property for the long-term investment potential, the goal should be to ensure
that the rental income covers the cost of your mortgage and monthly
maintenance costs. If you buy a foreclosed home,
you'll have to factor in the cost of repairs to ready the home for rent. And if
you have a mortgage on the property, you'll need to be prepared to cover the
costs for however long it takes to find a tenant. "Real estate is a great
investment if people are paying their rent," says Princis. "If they're not
paying their rent, it's a horrible investment."
2. BUY IN AN AREA WITH A HISTORY
OF STRONG RENTAL DEMAND
Neighborhoods near universities
are a good option. For homes in residential areas, proximity to schools can be a
good draw for families. Condominiums and similar
properties in communities with a homeowners' association can be a great option
because the association arranges for upkeep on the property. But check the fine print on your
mortgage and homeowners' association rules to make sure turning your property
into a rental isn't forbidden. If you're going to buy a
foreclosure, be prepared to compete with other investors, many of them paying in
cash. And because many require upgrades and repairs, expect that it will take
longer until you'll be generating rental income.
Websites like Zillow.com and
Trulia.com list foreclosures, as well as rentals in a given area.
Foreclosure tracker RealtyTrac
Inc. recently ranked U.S. metro areas, with a population of 500,000 or more,
according to the supply of available foreclosures for sale and their discount
versus other homes, among other criteria. Among the top 20 cities deemed the
best places to buy: Miami, Chicago, Philadelphia, El Paso, Texas; and
Poughkeepsie, N.Y.
Claire
Thomas, a retiree in Phoenix who owns 10 rental condos in Las Vegas, says
that landlords looking to keep their properties as income-generating rentals for
many years should look into areas that are not too expensive.
"I would rather have a
middle-of-the-road rental that stays rented than a higher-end (property),"
she says.
3. CONSIDER A USING A
MANAGEMENT FIRM
Determine whether you want to
select the tenant and handle property issues or hire a company to do it. If you
take on the responsibility, you are obliged to fix any problems (leaky faucets,
broken furnace, etc.) or find professionals to
do it.
"Are you prepared to do all of this this on your weekends or
evenings or get calls while you're at work because a pipe burst and it's
flooding?" asks Jim
Warren, chief marketing officer for property management company FirstService
Residential Realty. "What's that threshold worth to you?"
Property management firms can
charge a percentage of the rent, sometimes 10 percent or more.
Hiring out the hands-on landlord
job also makes sense if your rental property is not in the same city where
you live.
4. DO THE MATH
Although prevailing rental
prices will go a long way toward determining what you can charge, getting the
best return on your investment starts with making sure you're going to get
enough rent to, ideally, cover expenses and costs. Princis' formula is charging 15
percent above monthly mortgage and maintenance costs. So if those costs add up
to $1,000, he'll look to charge $1,150.
Of course, flexibility might be
called for if you're unable to get a tenant in for months and months.
Experts recommend starting with
popular rental listings in newspapers or on Web sites such as Craigslist.com,
Trulia and Zillow, to see what comparable apartments or rooms are going for.
Another option is rent analysis website Rentometer.com.
The good news: Rents for
single-family homes rose 2.3 percent last year from 2011, according
to Trulia.
5. SCREEN TENANTS THOROUGHLY
Once your rental starts drawing
inquiries, it pays off to screen prospective tenants by asking for previous
landlord references and running a credit and a criminal records check.
Experts also recommend asking for a deposit equal to one month's rent, plus extra if the tenant has pets. That will help cover any damage to the property and protect you if a tenant moves without paying rent. Also, have a walkthrough of the unit with the tenant and ask that they sign off on the condition of the property before they move in. That will help avoid conflicts over the security deposit if there are damages once they're ready to move out.
6. GET FAMILIAR WITH LANDLORD LAWS
Two good resources for rental rules are the U.S. Department of Housing and Urban Development's Web site (www.hud.gov ), and The Landlord Protection Agency (www.thelpa.com ), which includes state-specific rental guidelines and standardized forms for rental agreements.
An attorney or the Landlord Protection Agency also can help you craft a well-written lease, which is crucial to protect your property. It will help you evict a tenant or hold them accountable for damage if necessary.
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