Buying a Rental Property
Filed under: Home Buying, Multi-Units, Condos, Real Estate Investing
The rental property equation is so simple that it is hardly believable. On one side of the equation, you put down a relatively small amount of money on the property purchase price. On the other side, tenant rental payments cover your mortgage payments, property taxes, and maintenance costs. In time, you get to own the building for the cost of your down payment. If this sounds too good to be true, consider this—if you are paying rent now instead of owning, you are already part of this equation, only on the wrong side. There is probably no reason, beyond your unwillingness to act, for you not to be on the winning side.
Rental properties come in all shapes and sizes. You can even divide your own home. Vacation homes in desirable locations often serve as rental properties for much of the year. The first home you own may be a two- or three-family dwelling, perhaps in a neighborhood you could not otherwise afford.
State and local codes vary for multiple dwellings, so you need to consult a knowledgeable real estate agent, or lawyer, to make sure you understand all areas of compliance. For example, in some places fire codes and other regulations affect multi- but not single-unit dwellings. When a rental property consists of more than, say, three or four units, more stringent regulations may apply at state and local levels. Don’t be discouraged by this red tape. Many regulations deal with safety, which ultimately protects you as well as your tenants. I suggest to individuals or couples buying rental properties for the first time, that they limit themselves to a maximum of four units per property.
What about collecting the rent? Contrary to expectation, this is usually not a problem. Most tenants simply mail their monthly checks to the address provided. Most of the work involved in a rental property is likely to be in two areas: prospective tenant screening and maintenance. Having good tenants and keeping the building in good shape are the essential things for a prosperous rental property. One troublesome tenant or a recurring building problem can make life miserable for everyone, owner and tenants alike. Time spent screening your prospective tenants is worth every minute you devote to it. Also, the services of a reliable and skilled local handyman are indispensable. Whether you, as the owner, live in the building yourself, is likely to make a difference. The further you live from the building, the harder it will be for you to manage. Retaining a property-managing firm to take care of everything can cost five to ten percent of rental income.
For single units, you have the choice of a house or condominium. There is a trade-off involved. A house is likely to require more ongoing personal attention than a condo. With a condo, you pay a monthly maintenance fee. This is likely to cost you more than a house would, but frees you from the requirement of personal attention. The convenience of condos, particularly for people who live most of the time at a distant location, has contributed to the present boom in their market. In some places, speculation in condos is so intense, beginners would be wise to keep their distance. In my book Bubble Proof, I dive further into the incredible flexible opportunities in rental property.
