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people have had great experiences being a landlord. Others haven’t.
There is no guarantee that you’ll be a good landlord, but
we’ll give you some suggestions on how to make it work.
Are you made of the right stuff to be a landlord?
Becoming a landlord can become a great investment and learning
experience, or it could be a disaster. Generally, there isn’t
a lot of difference between the two, you just have to be aware
of a few things, follow our suggestions, and you should be well
on your way to being a successful property owner. A recent MSN
Money article explored some of the pitfalls people make when becoming
landlords. We have put together a plan for how to prepare for,
and become, a successful landlord.
Understand the Business
The biggest problem often comes at the very beginning:
expectations. You cannot expect to get the same rates and deals
as if you were buying the property to live in. Typically, you
have to put down anywhere from 20% to 40%, and you will be offered
rates one to two percentage points higher than those offered on
owner-occupied homes. You have some alternative options, such
as specialty lenders, who will accept a smaller down payment for
a higher interest rate, or owner-occupied loans, where a better
rate is obtained by you living in one of your units. Why the higher
rates? Basically, lenders consider you to be at higher risk to
walk away from a rental property compared to your own home.
When calculating how big a loan you can take out,
consider this formula. Add to your other disposable monthly income
75% of any rent you could charge for the property. Therefore,
if you had $500 disposable monthly income, and could charge $1,000
a month renting, then lenders would consider your monthly loan
payments to be in the region of $1,250.
The Expense
The one thing you cannot ignore when calculating what it is all
going to cost, is all the expenses you are going to incur. Amongst
a number of other payments, plan to experience the following costs:
• Mortgage payments
• Insurance
• Tax payments
• Repairs
• Maintenance
The Benefits
With a good return being around 10%, you have to think of this
as a long-term investment. Once the mortgage has been paid off,
any rental income can go toward supplementing your income for
retirement. However, there are some short-term benefits too, which
mostly come in the form of tax advantages. Typically, repairs
and maintenance expenses are tax deductible, plus you can depreciate
your property, and you may even be able to write off up to $25,000
in losses each year if your modified adjusted gross income is
under $100,000.
How to Succeed
There are no hard and fast rules, but here are some
suggestions that should help you along the way.
Screen Your Tenants
Considering a basic credit check can cost as little as $10, with
a more detailed report costing only $20, this is not a lot considering
how difficult a bad tenant can be. In addition to getting their
credit checked, make sure you follow up with references and employment
verification. Talk to previous landlords to determine whether
this person paid their rent on time, and whether they kept the
place in good order.
Learn the Law
Make sure you understand the landlord-tenant laws in your area,
and that you have the most up-to-date rental agreements/forms.
Really bad tenants understand the law, and know how to use it
to their advantage – make sure you don’t fail because
you didn’t understand the law.
Be Handy
If you really want to make a good return on your investment, then
you want to hire as few professionals as possible to make repairs
and keep the property looking good. However, don’t take
something on unless you are sure you know what you are doing –
a simple repair can too easily turn into a complex nightmare if
you don’t know what you are doing.
Resources
If you have decided that being a landlord is right
for you, check out the following Web site resources:
www.landlord.com
Landlord.com is a Web site that brings together most of the things
that the typical landlord or property manager will need in order
to successfully own and manage his or her property or portfolio.
The site includes the following: an Information Center, Landlord
Law, E-Forms Center, Tools and Calculators, Discussion Board,
Tip of the Week and Quality Tenant Screening.
www.nail-usa.com
The site of the National Association of Independent
Landlords.
www.mrlandlord.com
A resource site dedicated to the needs of landlords.
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