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If the home you own has increased in value or you’re looking for a supplement to your holdings in the stock market, you may want to consider becoming a landlord.
While some investors buy and flip homes for a quick sale, others are interested in benefiting from long-term appreciation along with the cash flow that comes from tenants.
Ideally, as an investor, you’ll have a tenant whose rent covers your mortgage payments and other costs while you can enjoy tax benefits and pay down your loan. Eventually, you can have rental income without the mortgage expense.
Real Estate Investment Basics
Buying a home as an investor rather than as an owner-occupant typically requires a higher down payment, at least 20%—and often 25%.
According to the National Association of REALTORS® 2014 Investment and Vacation Home Buyers Survey, 46% of investors paid cash for their property in 2013. Among those who financed the purchase, the average down payment was 26%.
You’ll need good credit and a low enough debt-to-income ratio to qualify for the new mortgage in addition to your current housing payment and other recurring expenses.
A lender may allow you to credit some of the potential rent payments as income, but it depends in part on your other qualifications for the loan and whether the property you’re purchasing has a tenant in place or a solid history of tenants.
In addition, you need to have cash available to pay the mortgage if you lack a tenant for a month or two—and the funds to pay for routine maintenance and repair.
Buying Rental Property
There are several factors that influence whether a property will make a good investment. For example, a REALTOR® experienced with investment properties in your area can give you good advice about neighborhoods that are popular with renters.
Your goal, as always with real estate, is to buy low and sell high—but when you’re investing, you also need to estimate the potential rental income and the probability your property will be consistently occupied.
Renters with kids often look for a location within a good school district, while young singles and couples may be more attracted by a rental near public transportation with easy access to recreational amenities and nightlife.
Next, you need to estimate the time and money required to maintain the property. While many landlords manage their property themselves, you need to realize that this means your tenant may call you with problems you’ll need to fix yourself—or have reliable contractors to call.
Some investors choose to hire a property management company, particularly if they own several properties. While using a property manager can relieve the stress of becoming a landlord, you’ll also need to pay a fee—typically 6% to 10% of the rent.
Finding the Right Tenants
Another responsibility of a landlord is to find and evaluate tenants.
A property management company can do the job for you, but you can also use a professional tenant-screening service to check credit reports, references and criminal backgrounds on prospective tenants.
Taking the time to thoroughly evaluate potential tenants will make a big difference to your experience as a landlord, since you want responsible tenants who will not only pay the rent on time but also take good care of your property.
Owning investment property also has tax and insurance implications, so be sure you consult a tax adviser and insurance agent so you understand your responsibilities.
Taking a methodical approach to buying a rental property and relying on experienced professionals for advice increases the likelihood you’ll make a worthwhile investment.
Updated from an earlier version by Emmet Pierce.
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