What It Takes To Be A Landlord

The ins and outs of buying and managing your rental property

of the investment income from the rental property to your income to qualify the property. Let’s say you earn $100,000 a year and are looking to buy a four-family home that brings in $40,000 per year. The lender will add $30,000 of the building’s revenues to your income to see if you can handle mortgage payments.

The next step is a financial analysis of the property. The property may net you $40,000 annually under current market conditions, but you must project how much rent you could get under various market conditions. An apartment in the building that goes for $1,200 today may only bring you $850 a month under less ideal market conditions. The best way to make these projections is to get the tenant history from the seller — the tenant turnover rate and payment history. Financial institutions use projected rents from a real estate broker or an appraiser who will quantify the rental rates for a given property in a specific neighborhood.

A
lso, consider the type of tenants you will attract and any additional expenses that will be incurred. "Is the property located in a stable area? If you have tenant turnover every six months, that means you’re going to make such improvements as repairs, painting and cleaning, which will add to your expenses," explains mortgage broker Frank Gooden.

For example, if college students are the tenants in a neighborhood, you have to consider that they are only in school eight months — that leaves you with four months of vacancy each year.

Lastly, define how much of a return you want on the investment. Gooden suggests that if you can put your money in the stock market and get a 15% return, then try to find a rental property with at least that level of potential income and appreciation.

Another factor: a positive growth trend in neighborhood prices. Ten years from now, you want the value of the property to rise to a level where you can sell or refinance it so you can pay for your retirement or send Junior to college.

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