Low mortgage rates have made buying a home more affordable and turned rentals into an attractive option for investors.
Throughout the downturn in the housing market, average investors, sometimes pooling their money, have bought foreclosed properties at a sharp discount and turned them into rentals.
And many homeowners have purchased a second home and rented out their first property.
Although the housing market is showing signs of recovery, demand for rental housing is expected to remain strong. The national unemployment rate remains high at 7.9 percent, banks are still working through a backlog of foreclosures, and tight lending requirements prevent many renters from becoming homeowners.
Here are some tips on becoming a landlord or an investor in rental property:
■ Understand what it means to be a landlord. Residential real estate generally provides three possible ways to get a return on your investment: when it’s sold, assuming it has grown in value, by collecting rent, and through tax savings, such as the mortgage interest deduction.
So, if you elect to buy a property for the long-term investment potential, the goal should be to ensure that the rental income covers the cost of your mortgage and monthly maintenance costs.
If you buy a foreclosed home, you’ll have to factor in the cost of repairs to ready the home for rent. And if you have a mortgage on the property, you’ll need to be prepared to cover the costs for however long it takes to find a tenant.
■ Buy in an area with a history of strong rental demand. Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.
If you’re going to buy a foreclosure, be prepared to compete with other investors, many of them paying in cash.
■ Consider a management firm. Determine whether you want to select the tenant and handle property issues or hire a company to do it. If you take on the responsibility, you are obliged to fix any problems (leaky faucets, broken furnace, and so forth) or find professionals to do it. Property managers can charge a percentage of the rent, sometimes 10 percent or more.
■ Do the math. Although prevailing rental prices will go a long way toward determining what you can charge, getting the best return on your investment starts with making sure you’re going to get enough rent to, ideally, cover expenses and costs.
One formula is to charge 15 percent above monthly mortgage and maintenance costs. So if those costs add up to $1,000, look to charge $1,150. Of course, flexibility might be called for if you’re unable to get a tenant for months and months.
■ Screen tenants thoroughly. Once your rental starts drawing inquiries, it pays to screen prospective tenants by asking for previous landlord references and running a credit and a criminal records check. Specialists also recommend asking for a deposit equal to one month’s rent, plus extra if the tenant has pets. That will help cover any damage to the property and protect you if a tenant moves out without paying rent.
■ Get familiar with landlord laws. It’s important to know your exact responsibilities under the law. Two good resources are the Department of Housing and Urban Development’s website (www.hud.gov), and the Landlord Protection Agency (www.thelpa.com), which includes state-specific rental guidelines and standardized forms for rental agreements.