Being a landlord can potentially be a very lucrative move — if you continue receiving rent payments long after the building purchase has been paid off, it basically takes care of itself in terms of maintenance costs and taxes. Plus, the market is strong: 74% of Millennials, the largest generation in history, are renters, and that’s just one of several demographics that prefer a security deposit to a down payment.
But it’s not as simple as finding a good building and stocking it with tenants. If you’re considering purchasing a rental property, consider these three things:
1. You’ll Need A Down Payment
As is the case with a typical home purchase, you’ll need to have a significant amount saved up for a down payment. Typically, you should be prepared to put down 20%-25% of the purchase price, but that amount can vary depending on your specific loan terms and credit score. The type of property you’re interested in will also affect the loan. Although you can get a personal loan for smaller properties, such as duplexes and triplexes, you’ll need commercial financing for properties with more than four units.
When qualifying for the mortgage, you won’t be able to count the income you’ll be making from your tenants — unless, of course, you have a different property that is already earning you income.
2. You’ll Need to Do Research
Before you commit to a specific property, check out several neighborhoods and study up on housing trends in the area. Keep an eye on construction and business trends — more units being built means more renters will be flocking to the area, but it will also impact how much you can charge for your property. After you’ve narrowed it down to a specific area of the city, you’ll want to look into tax rates, municipal codes, and any other local laws that could impact your finances and responsibilities.
If you know what property you want, ask for a copy of the current owner’s Schedule E, which will give you information about the profits and losses the current owner experienced. At this point, you could also get a quote for insurance — which can be as much as 25% higher than typical homeowner policies.
Lastly, speak with a handful of property managers and ask them for tips or advice they wish they knew when they started.
3. You’ll Need to Work (Or Pay Someone Else To)
“Passive income” is extremely misleading when it comes to rental property management. As the owner of a rental property, your involvement will be anything but passive. You’ll have to be responsive to your tenants’ maintenance requests, no matter the day or time. You’ll also need to be on top of rent payments. If they come late — or not at all — you’ll have quite a bit of work on your hands.
If the challenge of managing your rental units yourself is a little too time consuming, you can hire a resident property manager to live onsite and take care of your property’s day-to-day operations, or hire a property management company to take care of everything for you. Hiring a resident manager may be some work for you; you’re now an employer with payroll, but property management companies, on the other hand, charge fees. They may charge you anywhere from 5% to15% of your rental earnings.
If rental property management is calling to you, be sure to do your research, get your finances in order, and be prepared to work. But it should be lucrative — the amount of renters is poised for continued growth.
Written by: Sam Radbil is a contributing member of the marketing and communications team at ABODO, an online apartment marketplace. ABODO was founded in 2013 in Madison, Wisconsin. And in just three years, the company has grown to more than 30 employees, raised over $8M in outside funding and helps more than half a million renters find a new home each month.