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Residential Real Estate
Jul 1, 2014

What To Know About Rental Housing As An Investment

Sponsored Content provided by Michelle Clark - Realtor/Broker, Intracoastal Realty

One of the most interesting real estate trends in recent years has been growth in the number of families renting, rather than buying, their homes. That in turn has led to more attention to buying and managing rental properties as an investment. In addition to the sorts of long-term rental arrangements you’ll find in any city, our area also offers opportunities to tap the vacation rental and college student markets.

As with any major investment, of course, it’s important to understand the pros and the cons, do your homework, and rely on the expertise of professionals where necessary.

Anyone considering getting into the landlord business must carefully consider all the costs of owning rental properties. Those include the obvious ones: mortgage payments, insurance and taxes. (Note that you may pay more to insure a rental house than one occupied by its owner, but you won’t be responsible for insuring its contents.)

As with any business, expect to pay fees to accountants and attorneys, who are needed to help you navigate the complexities of taxes, leases and tenant-rights laws.

A rental property owner should be prepared to make capital investments on such big-ticket items as heating and air conditioning systems and appliances, which sooner or later will need replacement or major repairs. Then there are the more routine maintenance costs, which should be covered by a contingency fund. It might be fixing a clogged drain or a bad light fixture; it will certainly include repainting and shampooing carpets between tenants.

A landlord might also have to pay for utilities – power, water, sewer, trash collection, cable TV -- especially if the property will be rented by the week to vacationers. Likewise, the choice of whether to hire a management firm to help market the property, handle maintenance, and deal with tenants will have an important impact on your costs, and the amount of work you have to do.

My advice to real estate investors is to know what you can afford, know what costs are deductible as business expenses, and to have a plan. That means to understand what you expect to get from your investment, how quickly you’ll see a return on that investment, and how you’ll get out. Having an exit strategy is important because selling investment real estate isn’t as simple as liquidating a stock or a mutual fund.

Some other issues to consider:

  • Think about your property’s vacancy rate. If it isn’t rented all the time, you’ll need to set aside money to pay your fixed costs even when you’re not earning any income. To avoid a long vacancy, set your rates just below your competition. A real estate pro can offer good advice about this.
  • Financing is different for investment properties than for owner-occupied homes. You’ll need a higher down payment and your interest rate may be different.
  • On the other hand, you’ll have some tax advantages, which you should definitely discuss with a qualified accountant or tax expert.
  • To avoid expensive mistakes about technicalities such as setting rents, finding good locations or predicting vacancy rates, you’ll benefit from the help of a real estate professional with experience in rentals.
  • In setting a policy governing pets, I recommend requiring a larger but fully refundable deposit. That gives renters a strong incentive to be responsible pet owners and take good care of your property.
  • If you’re not working with a management firm that handles such things, develop relationships with reliable maintenance people. The time to be looking for a good plumber is when you first buy a rental house, not at 10 p.m. on a Sunday night.

Above all, understand that this isn’t a get-rich-quick scheme. It’s a long-term investment. Most landlords make their money on appreciation of their property’s value over time, not so much from rental income.

One investor I know has the goal of buying a new investment property each year, and calculates that his rental income will just cover his expenses. Eventually, though, he expects to sell a more valuable property. Profits from those sales will fund his retirement.

In my next article, I’ll discuss some of the unique considerations involved with renting to vacationers at the beach and to college students.

Have a question about buying, selling or any other real estate matter? Let me know and I’ll address it in a future article.

Michelle Clark is a broker with Intracoastal Realty, based at the Wrightsville Beach office. She is an Accredited Luxury Home Specialist, ALHS and also a Short Sales and Foreclosure Resource. Whether you are buying, selling, or investing, know that Michelle and her team will go the extra mile for you. To learn more about Michelle and Intracoastal, go to www.intracoastalrealty.com. You may contact Michelle at [email protected] or 910-367-9767. Like Michelle’s team on Facebook at www.facebook.com/MichelleClarkTeam.

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