The choice is yours – to collect passive income or to actively manage the rental property, but rental property is a good investment. You can get income and coverage for any mortgages, if you plan correctly. With live-in options and tax-breaks for the beginner, this can be a great start to entrepreneurship. Fix-ups and bargains are ideal for the handy-person, but even those who have no repair skills and delegate can do well with rental property.
There are tax benefits, as well as a generally long-term growth of assets. These past few post-bubble years aside, real estate generally increases in value if you choose a stable neighborhood. This has always been a necessary commodity – housing. More and more folks are renting – from students to starters to retirees.
First, you must educate yourself about rental management – if you can manage your own property, and be ready for any repairs, etc., you are a few steps beyond optimal ownership. Initially, finding a low-maintenance property in a safe and appealing neighborhood near public transportation and jobs will assure you of a steady supply of tenants. Get familiar with contracts, leases, and general local statutes about rentals. Many college communities have more stringent requirements.
One of several options is for vacation rentals. This may be in a place you love and want to spend time. Second homes and minimal rental periods are outlined in the IRS publications. This can be a good way to subsidize your own vacation home. There are limits to the time allowed for rentals – and this is very small, like 14 days per year…perhaps you really want just an income property?
You do want employed and long-term renters, ideally. There are forms available for interviewing tenants that may help you sort out the best possibilities. Do require references and make those phone calls. Also require a damage deposit, as well as first and last months’ rent. Have a rental contract legally drawn up, or use one of the printed forms available in office-supply stores or online. Forms and examples of leases can be found many places – from the major investment philosophy of Carleton Sheets and Robert Kiyosaki to smaller books available at your local library.
Take your time interviewing possible tenants, and wait for one that feels right. It is your decision to interview all possibilities, and then decide. You cannot discriminate about race, but children and pets can be a factor. If you take a deposit, it is a contract. Advertise where it will get responses from your kind of people – newspapers are fast, but sometimes the local health food store or book shop will reap better rewards. You want as little turn-over as possible.
Use your “street-smarts” to interview a tenant. There are laws about equal-opportunity, but fiscal responsibility trumps all. Set your own standards, here, and decide how you will define your agreement. Pets are not included in Constitutional rights, and they do, bless their hearts, create a risk. You may want a special pet-clause and damage deposit to cover the option.
Most tenants should pay their own utilities, unless you have an older property with singular meters. You must be clear about responsibilities for payments, and how they will be divided if a multi-unit property with one meter for furnace or electrical system or public water. Separate meters are always worth the investment in the long run, and make for happier tenants. Parking, appliances, yard access? Put it all in the lease!
The initial start-up costs are basically the down-payment and any settlement costs. Your profit margin will decrease with your need to hire-out for repairs and basic turn-over costs. If you are cutting it close, you can get a conditional rental contract before you settle on a property. Some tenants will be willing to paint for the cost of the supplies and the choice of color. You may want to restrict this to a few neutral choices.
Filing a schedule E is easy. You must keep records of your expenses. It is always good to keep up with minor repairs, which save bigger expenses when not neglected. Your tenants will take pride in a property that is well-maintained, and respect their stewardship of your investment.
It’s a wonderful thing to provide a good home for tenants, and many landlords have great experiences, loyal tenants and long-lasting agreements…it is a two-way street. Be careful and considerate, available for problems (or delegate), and learn the rules for your state or community. Rental property has been an honorable provision for many, and can be an ideal income-producing investment. Be fair and then enjoy your role as landlord.