If you are thinking about having rental properties for investment, then you are on the right path. However, just like other investment types, this method comes with its own perks and flaws. Not everyone is meant to be landlords. Not everyone can deal with properties management.
Taking a property itself can be a huge responsibility; let alone having several and hoping to make some money out of it. But having a rental property isn’t a bad idea at all. You just need to know what it takes to have one and be able to arrange in the most logical manner possible.
Residential vs Commercial Rental Property
The residential rental property is basically homes that investors buy and then inhabited by other people (as tenants) on a lease (or other rental agreement’s types). Basically, rental properties are properties that are meant for other households or individuals’ dwelling or living. The property itself can be a standalone or separated dwelling for a single family to a big and multi-unit (apartment) buildings.
It’s completely different from commercial rental property, where the building or property is being leased out to companies or businesses within the zone especially designed for making profits. If you are thinking about making a sound investment, you can have both residential and also commercial rental property.
Of course, the target market for your property’s type would be different. The first one is targeted for individuals and people, while the latter one is for businesses. Whatever property type you are interested in, you should know that both of them can generate extra income.
What It Takes
Although having rental properties may sound like a great idea when it comes to investment, the whole arrangement isn’t as easy as it looks (or sound). When you are interested in rental real estate, you need to know about leasing, landlord and tenant relationship, mortgage loans, and also property management.
For instance, do you know that rental real estate investors must have at least 15% to 25% of down payment for the property’s mortgage? Do you know that as a landlord, you would be required to have many skills, such as knowing (basic) tenant law to fixing a jammed plumbing?
Sure, you can always have other people to take care of the issue, but it would cut down your earning (meaning that it will impact your profit). Do you know that full time real estate investors will have to spend most of their times choosing properties and then fixing them up?
The latter one may refer to fix and flip method, but the idea is just the same: to help you earn extra income. You need to ask yourself whether you are ready for all of these responsibilities or not. If they sound like tons of work, they do!
When you decide to become a landlord for your rental properties, you need to understand that it takes a lot of money, time, and also commitment. It’s not exactly ‘fun ways’ to make extra bucks.
If you want it to be successful, then you need to be committed and discipline. It’s basically just like other types of work where you need to pour out your heart and passion into it.
And let’s not forget about upkeep and maintenance costs. Having a rental income may sound lucrative, but you need to consider these ‘operational costs’ as well. When you have a property, there are always chances for emergencies, like leaky plumbing or roof damage.
As investors, you need to be ready with emergency funds. Set 1% aside from your property’s value. Some landlords set up their emergency funds by immediately setting aside 1% to 2% of their monthly incomes. It would help a lot during emergency and unpredictable events.
What Landlords Should Know
Don’t forget about property management. If you only have one rental property, you can probably manage it by yourself. However, if you have more than one property, and you still need to take care of your house and you still have your main job, it can be quite overwhelming.
Many rental property owners would consider hiring a property manager, which can offer various services that would include new tenants screening, late rent payments handling, and maintenance (and also repair work) arrangement. However, such a manager would charge from 8% to 12% of the (collected) rents.
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As the landlord, you must also know and be familiar with landlord-tenant law within your local area and in the state. Both landlords and tenants would have obligations and rights concerning eviction rules, security deposits, fair housing laws, and lease requirements.
As if it weren’t enough, you should also consider the sound protection of your investment. Aside from homeowners insurance, you should also think about buying landlord insurance. It will cover lost rental income, property damage, and also liability protection if a visitor or tenant is injured as property maintenance problems’ result.
Again, you need to ask yourself whether you are ready with the new responsibilities and tasks. Having rental properties may seem lucrative and promising, but managing it wouldn’t be an easy feat.