Being a real estate investor has come back into vogue as of late, and more and more people are trying their hand at being a landlord. Investing in real estate can be a great way to diversify your retirement or add cash flow to your bank account. Before you dive in or before you buy your next property, there are some questions that should be answered to ensure you know the pros and cons of being a landlord. It is imperative that you know the laws and the responsibilities of a landlord; there are plenty of websites, reality shows, Podcasts, and YouTube videos out there on investing in real estate that can shed some light on the day-to-day of being a landlord. This article scratches the surface on investing in rental property and hopefully provides some valuable tips for you to get started.
1. Build your team
One of the first things a new or experienced real estate investor should do is build a network of professionals to help get started. A few of the professionals that are key to your success are: lender, real estate attorney, real estate broker, contractors, and a property manager to name a few. It is important to find professionals that specialize in real estate investing. Not all real estate agents understand how to analyze a potential rental property to see if there will be positive cash flow and what the potential ROI is moving forward.
2. Develop A Plan
What type of rental property would you like to buy? Will it be a single-family home, condo or small office building?
What price range do you feel comfortable spending?
What is your target ROI?
What locations do you want to invest in?
Make sure you have cash reserves. How much is right for you?
3. Should you buy the property as an LLC?
Talk to a real estate attorney to see if buying a property(s) as an LLC is right for you. I am not an attorney or accountant and cannot give legal advice, but I do own rental property as an LLC. A couple of the benefits of purchasing a property as an LLC are to protect your personal assets and potential tax advantages. One of the downsides of buying as an LLC is that most lenders will not lend to an LLC. There are legal fees as well for setting up an LLC. Again, you should consult an attorney and/or CPA to see if this option is right for you.
4. Should I hire a property manager?
Do you want to deal with finding a tenant?
Do you want to handle maintenance calls?
Interview property managers to see about their marketing plans, historical rental increases & vacancy rates with current clients.
Will the property manager make you more money in the long run with their market knowledge, tenant retention and rental increases?
5. How do I analyze if a property is a good investment?
Have your real estate broker run a pro-forma, so you know the potential cash flow.
Use conservative rental rate comparisons.
Plan for improvements if buying an older property.
Expect the unexpected – like failing kitchen appliances and other home improvements that need to be made over time.
6. How do I finance an investment property?
This is one of the first steps in the process. If you are going to finance your investment property, it is a good idea to talk to a few lenders. My recommendation is to talk to a big bank, mortgage broker, local bank, and/or credit union. Start with the bank that you currently use to see if they have special financing options for existing customers.
Another decision you will have to make is what is the right mortgage for you. There are adjustable rate mortgages or ARMs or fixed rate mortgages. Each option has its pros and cons, so you will want to talk to your real estate agent and lender to see what is the right for fit.
Should I pay cash or use a HELOC? This might be worth talking to your CPA about. In my opinion, it depends on the market and where interest rates are when you want to buy. At the moment, interest rates are historically low, so why pay cash? You could write a book on this subject, but to be brief, one should analyze the investment property to see what is the best return on your capital.
7. Accounting & Cash Reserves
I recommend having an accountant assist you with your rental property accounting. First start by having a separate bank account for your rental income and expenses. Pay the mortgage, HOAs, taxes, expenses, etc. through your business checking account (i.e. 123 Main Street, LLC). And you guessed it, have the tenant or property management company make rent checks payable to your business account. Better yet, set it up on ACH (automatic deposit/withdrawal) into your business account.
It is important to have cash reserves in your business account for unfortunate expenses that come along with owning rental property. Depending on the age of the home, be prepared to replace kitchen appliances, hot water heaters, and other systems that have a limited life. For example, a landlord should plan to replace the hot water heater every 10-years or so. Having cash reserves in your business account will help you prepare and be ready for replacing or upgrading your property. Big-ticket items like a roof, sewer line, or HVAC can cost a pretty penny. My recommendation is to have at least $10-$15k in your account. Also, think about upgrades that need to be done like new flooring, paint, and other home improvement projects that need to be done to keep the house in good condition.
Brought to you by, Greg Pond, Realtor for TJC Real Estate.