When it comes to wealth building, it’s hard to beat owning real estate. And, of course, you have to start somewhere. That’s why one smart strategy to building your real estate portfolio is to hold onto your first “starter” home once you buy your second home.
“Anyone who can afford to keep their home and rent it out while moving into another one should do so,” says Cedric Stewart of Entourage Residential Group in Rockville, Maryland. “In a healthy market, you are likely to build equity year-over-year, while having your mortgage covered by a renter.”
The hardest part is getting started because most people aren’t accustomed to being landlords and dealing with tenants, Stewart notes. Here are some tips for successfully finding your own rental gold mine.
Hold onto the Right Property
Of course, when you bought your first home, you likely weren’t considering its future rental potential (if you were, good for you!). And while almost any home can become a rental, price and amenities are the two main elements most likely to ensure rental success.
First, let’s examine the price point: You want to make sure that it will cash flow well. In other words, in a perfect world the rent you are able to charge will at least cover your mortgage, taxes, insurance and general maintenance costs.
While your local market matters, in general, a strong rental home will be in the $75,000 to $200,000 price range, says Mark Ferguson, a real estate broker and investor who runs the site InvestFourMore.com. “With a more expensive home, the rent that someone is willing to pay often won’t keep up with the value, which means you may begin to lose money. And with a cheaper rental, you may run into maintenance and turnover issues,” he says.
To decide where to set the rent, look for comparable properties on Craigslist and other rental sites and try to determine a cost per square foot in line with the market – ideally one that will cover your expenses.
And remember that you will need to cover your mortgage bills even if your property is vacant, so take care not to price yourself out of the market.
The second key to a successful rental is proximity to amenities, such as shopping, dining and public transportation, says Stewart. Homes near schools, military installations and hospitals are particularly good rentals because they can be attractive for people who work in those facilities or prefer to be near them. A location near a major corporate headquarters can offer the same benefits, since executives often choose to rent before buying in an unfamiliar region, he says, adding that this is a strategy he often sees in the D.C. area.
Make Sure the Property Is Improved – but not too Much
First, be aware that a rental must adhere to strict code requirements, so make sure that you have covered all the safety bases, says Stewart.
And then, focus on improvements that will bring the most bang for the buck by giving the rental an inviting look. First, make sure your home has adequate curb appeal. You don’t have to go all out on landscaping, but make sure the lawn is freshly mowed, and consider planting flowers and touching up the front door for a pop of color.
On the interior, add a fresh coat of paint and new hardware on cabinets for an easy and inexpensive face-lift. But don’t go overboard, Stewart warns. “It’s tempting to make the kinds of upgrades you see on HGTV, but focus on the basics first.” And of course, make sure the entire property shines from a professional cleaning, which can reap more ROI than many fancier finishes.
Know the Laws
Aside from bringing your property up to safety and building codes, there are a host of federal, state and local laws you’ll need to abide by as a landlord that involve a wide variety of issues from leases to tenant communication. You may want to work with a real estate attorney to assist you in drawing up the lease and other documents, to ensure they protect you and are enforceable.
In addition, remember that you can be held liable for tenant or visitor injuries, so be sure you have adequate insurance, such as landlord liability insurance and landlord property insurance.
Market Your Rental to Get the Right Tenant
Sometimes the old standbys are the best for finding tenants, says Stewart, who sees Craigslist and Facebook Marketplace still among the top sites potential renters flock to. Another option is to list your home for rent with a real estate professional. “They will charge a fee for their services, which varies depending on the individual broker, market conditions, etc., but they can save you a lot of hassle in finding good tenants,” he says.
And what makes a good tenant? Make sure to meet them in person to get a general read, but then find out about their finances by looking into their employment history and credit score. You also might want to consider conducting state and federal background checks – it’s a smart way to make sure the person isn’t hiding something. And talking to past landlords, if possible, is always beneficial.
Consider Hiring a Property Manager
If staying abreast of the many laws and codes, as well as finding and keeping tenants, sounds daunting to you, consider hiring a property manager – especially if the rental home isn’t local, says Ferguson. And even if it is, do you really want to drive across town at 2 a.m. to investigate a leaky pipe?
A property manager can help find tenants and make sure that rent is collected each month. They also deal with other assorted issues that come up. “Sometimes you have to be tough with tenants on late fees, code violations or other problems,” says Ferguson, who adds that a property manager is also helpful for handling routine checks to ensure the property is being kept up.
Of course, this service is another expense – approximately 8 to 12 percent of the monthly rental – but that might be a small price to pay for the peace of mind. When you’re choosing a manager, consider their fees, but also make sure to get client references to double-check they’ve been responsive in the past.
Although you shouldn’t minimize the work involved in managing a rental, it is still a smart financial move, says Ferguson. “When you sell a home, that’s the extent of the money you will make on the property. But if you hold it as a rental, you could continue to earn money every month, realize tax advantages and, ideally, see appreciation.”
Have you ever owned a rental property? Share some of the lessons – good and bad – that you’ve learned below.
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