8 Things You Should Know Before Buying Rental Properties

Real Estate Investment Isn’t For Everyone

Patriotic MailboxMany people daydream about buying rental properties with stars in their eyes. They envision a tidy house with a friendly family and $500 extra in passive income each month, fondly known as mailbox money. This scenario is possible, but reality isn’t typically so pleasant. Like any business venture, real estate ownership comes with plenty of drawbacks. It’s important to consider every angle carefully! Before diving into the world of real estate, consider these 8 points and do your research.

Things to Think About

1. Does That Discount Have a Catch?

Many first-time buyers scour foreclosures and deeply discounted listings in an attempt to save money. Use caution because this method can be dangerous. Before buying a fixer-upper property, hire an inspector to evaluate exactly what you’ll be fixing up.

Once you understand what the property needs, you can calculate the approximate cost of repairs and losses you’ll absorb while the property is off the market.

These numbers are important and will help keep you from chasing a losing venture. Consider every property carefully, no matter what the price tag says.

2. Choose Your Tenants Carefully

As a landlord, you’ll encounter all kinds of kinds. Some tenants will be a dream. They’ll pay the rent on time, every time, and care for the property like it’s their own. Others? Not so much. The internet abounds with horror stories of destroyed properties, months of unpaid rent, frivolous lawsuits and demanding tenants.

Avoid this by establishing a thorough screening process. This method might seem involved (and it is), but it will save you a lot of headaches and a bunch of money.

  • Develop a pre-application screening for phone inquiries. Questions like these will help you determine basic eligibility before an application ever crosses your desk:
    • When are you looking to move in?
    • Do you have any pets?
    • What is your monthly income?
    • May I call a previous landlord for a reference?
  • The rental application will bring you a wealth of information. Use it!
    • Call the references and ask questions
    • Complete a background check
    • Complete a credit check

Make sure you abide by the Fair Housing Act, or you will find yourself in hot water!

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3. It Takes Money to Make Money

Real estate is not a liquid investment, and property management takes lots of time and money! From the moment you choose that property, everything will be hurry up and wait.

First, there will be the months of nail biting between finding the home and finally closing on it. Purchasing a property comes with headaches completely separate from the rental process.

Then, you’ll begin the screening and application process for your future tenants, complete necessary repairs or renovations, collect deposits, maintain paperwork and conduct regular checks for the duration of the lease.

Did the property taxes spike? Are the tenants a nightmare? You found a better deal and want to pursue it? Unless there has been a direct violation of the lease, you’re stuck until the contract ends.

Rental Properties Are Taxed Differently4. Death and Taxes

Landlords calculate their taxes differently than traditional homeowners do. Use current data when calculating your tax responsibility on your rental property, and pay attention to your market.

Familiarize yourself with both the relevant tax codes and the local characteristics of the neighborhood. Local politics, incoming or outgoing businesses, and city developments can all affect your tax base and property value. Pay attention to your investment climate! Don’t forget you are still responsible for certain taxes and fees even if the unit sits empty.

Remember that you’ll also be paying income tax on a portion of the money you collect. There are many tax deductions available for landlords that can help offset the costs of advertising, cleaning, maintenance and repairs, utilities, and insurance premiums. Be sure to explore all your options!

5. Being a Landlord Can Really Suck (No, really. There’s no better word.)

Buying Rental Properties Can Be FrustratingAs mentioned earlier, some tenants will be fantastic. Others will try your patience through the entirety of the lease.

Nobody looks forward to the middle of the night phone calls about a heater going out or a toilet backing up into the hallway. It’s disheartening to enter a recently vacated property and find it destroyed. Raising the rent on good, reliable tenants is tough, even if the property taxes have spiked and it’s a necessary evil.

It’s unpleasant to chase someone to collect the money you’re owed or initiate eviction proceedings, which can take months to finalize and cost you lost time and income. It’s difficult to recoup lost rent, and you often settle on just getting them out of the property.

As a landlord, expect the worst. It may sound grim, but hard situations are easier to deal with if you have a plan. Create policies, establish boundaries, and enforce them.

6. Be Prepared

Accept it now: it will ALWAYS be something. You’ll experience brief, blessed 24-hour periods where all is right with the world… and then the water heater will explode. Repairs and maintenance issues are inevitable in rental properties. As a landlord, you’re legally responsible for prompt responses to such problems, so the best thing you can do is be prepared for them.

Build a substantial business emergency fund! You don’t want to dip into personal savings for company repairs. Develop a network of technicians you trust to do good work at a fair price, and take care of them. These relationships will be worth their weight in gold when something goes wrong, and you need a late-night emergency service call.

Be Prepared When Buying Rental Properties7. Cover Your Butt

As a landlord, it is your responsibility to maintain safe properties, and you can be legally liable for any mishaps or injuries that occur. In addition to adequate insurance coverage, be familiar with building codes and safety guidelines in your area, and check your properties regularly.

Always check your state’s requirements for insurance on rental properties! Your agent can help choose the correct type and amount of coverage for your holdings. Most coverage is a combination of property damage, liability insurance, and loss of income.

There are additional coverage options available. It’s also a good idea to require your tenants to carry renter’s insurance of their own. Renter’s insurance won’t protect the property, but it will cover their belongings in case of damage or theft.

8. Vacancy Can Eat You Alive

Downtime between tenants is necessary to repair and clean the unit. Always factor this into your budget! But what happens when that downtime turns into a prolonged vacancy, and you can’t find anyone to fill it?

Without money coming in, you’ll find your resources quickly depleted. A smart landlord prepares for the worst, and that emergency fund will come in handy.

An effective marketing strategy is a powerful tool. It is an important part of owning rental properties. Determine your audience and get those properties out there for public consumption! You can use traditional methods such as newspaper advertisements and yard signs, post your rental on a variety of relevant websites, and distribute the listing across social media. Landlordology has an excellent article that covers marketing rental properties.

The Bottom Line

Real estate can be a great tool to diversify your portfolio and establish several income streams, but to be successful, you will have to exercise due diligence and do your research. Understand the neighborhood you’re buying into, know what taxes and fees you’re responsible for, build a reliable network, vet your tenants carefully, and plan for the worst!

Ready to sell your home, or do you have a rental property eroding your bottom line? Whitestone Acquisitions specializes in buying homes AS-IS. If you’re eager to sell, we can make the process quick and pain-free. Most sales are completed in three weeks or less!

For more information visit our website or send Allison an email. Let’s see what we can do for you!