The risks and rewards of landlordship.
- Purchasing investments to rent out carries risk.
- 20% down payment is standard.
- As a landlord, you take on a lot of responsibility and may want to have a broad, related knowledgebase before getting into it.
- It's a good idea to have a financial cushion in case there are periods between renters, or you're renting at a loss for some reason.
1. Make sure you're comfortable with this responsibility
Most landlords don't want to spend money maintenance, so they prefer to do it themselves. Those repairs dig into your profits, and they add up over time like $20 lunches.
This means you'll also want a decent pile of cash to address any issues that might come up.
Once you gain more properties, or if you own places around the globe, you'll want to have a team of people to address any possible problems. In each area, you'll want to know the right plumber, handyman, etc. Having a dedicated team like this not only makes things easier and more efficient, but also establishes relationships which could open more business opportunities and ensures quality.
The idea of real estate in foreign lands sounds great. If you're persistent, you'll get there, but it's not necessarily a good idea to start out like that. It's good to establish a system before taking things that far, and either start local or localized.
2. Chip away your personal debt
Good debt is a good investment strategy. Using OPM is how the rich get richer, but the if you're in a pressing debt situation it's probably best to hold off on getting a rental property. That is, unless you find a great opportunity. The reason behind this thinking is debt management. It's necessary to ensure you're going to make money on your investment, not accidentally dig your own grave.
If you have debt that you can handle, aka you have a decent cash reserve, then real estate is a good idea. Turning money into more money is the only way to make it in America, but you want to make sure you make the right moves. A good move isn't good in all situations, so make sure you analyze your whole situation before jumping into such a key investment.
3. Qualify for a down payment
It's usually harder to get a loan for non-owner-occupied rental properties. Instead of a few percentage points, you will need a 20% down payment. You might also consider a personal loan through a bank or a guy in a leather jacket with two bald meatheads flanking him. We advise against the latter, for the former, but that's not official legal advice.
4. Research the best location
We don't want o buy places in areas that are going to decline in a market where most investments go up. It's a good idea to look for properties in cities with scheduled public investment plans in the near future, or with high value, consistent neighborhoods already.
You want to consider property taxes, the school district, public spaces like parks, malls, restaurants and movie theaters, and potentially crime rates and the job market in the area.
To simplify this, imagine what living in the area is like, imagine your target renter is like, and ask yourself if that renter wants that property. That'll help you see the whole picture and determine if it's a good investment off-paper.
5. Buying vs. financing
Which is best? That depends on your goals. Annual return on investment is typically higher with financing, but you might just want to own a property flat out if you have the money. It's worth considering this though: you could get one $100k property with cash, or five $100k properties by putting 20% down on each and using OPM to pay the rest. Consider your best options before diving in.
6. Watch the interest rates
Ensure you know exactly what your finances for this property will look life from start to finish. You don't want any surprises, so if you finance the place then go over every minute detail of the agreement, especially the interest rates.
7. Show your work
Wall Street aims for 5-7% returns because they have to pay staff. Most people usually aim for 10%. Imagine maintenance costs 1% of the property value annually, and work from there. You want to plan some kind of financial buffer for the future. The goal isn't for the property to maintain itself, it's to make a profit, so every percent counts.
8. Get landlord insurance
Protect your investments with home-owner's insurance and possibly landlord insurance. The latter usually covers damage, lost income, and liability protection in case of injuries on the property. To lower your costs, try to combine both policies.
9. Consider future costs
Plan to save 20% to 30% of your rental income to address any possible problems that arise. Again, you want some kind of financial buffer when taking these chances.
10. Get a turn-key property
Turn-key properties, or places that are ready to rent with no additional work required, are ideal for your first investment. It's essentially the "easy" difficulty in the real estate game.
The fixer uppers can turn to headaches even when you know what you're doing. Wet your feet then get into the complex stuff when you have a foundational understanding.
11. Calculate your finances
Calculate your operating expenses and your returns. Do all of the finances BEFORE you get into it and thank yourself later. We don't have to turn this into a gamble when, for the most part, everything can get laid out on paper.
12. Aim for low-cost houses
The more expensive the home, the more expensive the upkeep. Experts advise starting out around $100-200K, and scaling up from there. Also, avoid buying the best or worst home in any neighborhood. It's usually a bad idea.
13. Understand the legal side of landlordship
Owners have to familiarize themselves with their local laws. Understanding both your tenants' rights and your obligations will go a long way for not only your professionalism and capabilities, but your pockets.
14. What's your risk/reward
As in any investment, we want to make sure it's going to pay us well. Some things to consider:
- Your money is making you money, its "passive" income.
- Beyond rental income, the price of your property will likely go up if you do this right, so that's two income streams in one investment.
- Rental income is free from the chains of Social Security tax.
- The interest you pay on an investment property loan is tax-deductible.
- With bubbles aside, real estate is more sound than the stock market. It's tangible, whereas stocks are imaginary, but what's real anyways.
- Tenants can suck. That's why we wrote ""passive" income."
- You might find yourself subject to a surtax if you do well for yourself.
- Rental income might miss the mortgage mark, and, if you did this all wrong, you could end up renting at a loss.
- Real estate takes time to sell, unlike most stocks.
- Entry costs and exit costs are a high barrier to entry.
- If you have a gap between tenants, you have to cover those costs.
The point is that this is a large undertaking, and you want to put the work in on the front end so you're not stuck correcting your own mistakes. This is one of the situations where, in the beginning, it's worth working with a professional to get you on track. With the understanding you gain from them, you can go on to build your empire on your own. It's worth it to pick an area, then reach out to a specialist from there so you get the most accurate picture of the market.