For potential investors who have good credit, savings, and a dose of patience, the time is ripe for being a landlord. Like many potential real estate investors these days, you may be worried that the national trend toward declining property values might crimp your ability to draw income from rental property.
The housing bust, however, is actually working in favor of new landlords on two important fronts. First, as everyone knows, homes are getting less expensive. Since prices reached a high in the summer of 2006, average prices for homes of all kinds–single family, multi-family, condominiums, and the like–have fallen 22.8%, according to the National Association of Realtors (NAR).
At the same time, however, because many consumers are skittish about becoming homeowners in the current environment, apartments and other rental properties have remained in high demand. As a result, national average rents have been steadily increasing, seeing rises of 4.1%, 3.1%, and 2.9% in 2006, 2007, and 2008. Average rents are expected to decline roughly 1.5% in 2009, then increase less than 1% in 2010, according to NAR projections.
All told, those numbers paint a rosy landscape for potential landlords. But, as with any major purchase, the first step is to investigate your purchase before jumping in.
Experts say there are a number of things to consider when buying investment real estate:
Determine how much you can afford to invest. Get preapproved by a financial institution that has worked with investors.
Know your criteria. Find out what types of properties rent best in the area you want to invest, whether it’s a townhome, condo, single family home, two bedrooms, or three bedrooms.
Pick the right agent. Select a real estate agent who has experience working with landlords. They’re best equipped to help you identify properties that meet your goals.
Make sure you can lease out the property. An increasing number of subdivisions, condominium, and townhome developments forbid owners from leasing properties to renters. Before you buy, make sure the area is landlord friendly.
Figure out what to charge for rent. The amount you charge for rent determines whether the investment is a deal or a dud. Your real estate agent should be able to provide rental data. Local newspapers and online classified sites, such as Craigslist, can also help you figure average rents in the area. Property management companies are another good source.
Do the dirty work and thoroughly inspect property. Don’t let the nice paint job fool you. Take a look in the attic. Crawl under the house. Yes, you should hire a home inspector, but it’s also good to see for yourself what you are buying.
Maintain a separate emergency savings. Apart from your personal savings, you should have a separate savings account for your rental property. It can take months to find new tenants, plus even minor repairs between tenants can add up.
Further Reading
Is Now the Time to Buy Real Estate?
An expanded version of this article will appear in the December 2009 issue of Black Enterprise magazine.
Wealth For Life Principles
1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy