Home > 2015 > Personal Finance

The 411 on Buying a Rental Property

Advertiser Disclosure Comments 1 Comment

Picture this: cash rolls in like clockwork every month, and you don’t have to do a bit of work to get it.

That’s the promise of rental properties. In theory, they are passive cash-generating machines that deliver you money every month with little to no effort on your part. In reality, they can be a real pain or, worse, a drain on your wallet.

If you’re serious about owning a fleet of income properties, you may want to read one of the many books available on the subject to uncover all the finer details. And if you’re interested in renting your house to travelers, read this article on how to turn your home into a profitable vacation rental.

For everyone else who is playing with the idea of buying an income property, keep scrolling for a rundown of the basics.

5 Ingredients for a Perfect Income Property

Not every property can be turned into a moneymaker. Some houses are destined to be duds. Before closing on an income property, consider all of these:

  1. Prospective renters: Who is renting in your area? Is it college kids who might be happy with a couple of small rooms to call their own, or families who need more space to spread out? More importantly, will the property you’re looking at meet their needs?
  2. Neighborhood: It doesn’t matter how nice the house is, a property in a bad neighborhood is probably not going to rent at top dollar. Plus, a high crime area may boost your insurance costs and could make your property a nightmare to maintain if vandals frequently make the rounds.
  3. Price: For this, you need to consider not only the price you’ll pay for the property but also the amount you can reasonably charge for rent. What’s more, will the latter cover the monthly mortgage payment if you end up financing the purchase?
  4. Taxes and insurance: The list price should be only part of your cost analysis. You also need to estimate the property taxes and insurance you’ll be paying annually. Depending on where the property is located, these costs can make a reasonably priced property unaffordable.
  5. Condition: Tenants don’t always make decisions based on price alone. They will also take into consideration the condition of your property. Be realistic about the amount of work a home will need to be marketable, and have it inspected just as you would with any other major purchase.

Managing Your Rental Property

Once you find the right property at a price you can afford — bonus points if you pay cash — the next step is to figure out how you’re going to manage it.

Here, you have two choices. You can do it yourself, or you can hire a property manager.

Property managers will cost you some money, but you may find their services are worth the price. When the furnace in your rental goes out at 3 a.m., the management company will get the call, not you. The managers will also collect the rent, communicate with tenants and keep income and expense records. In addition, they typically oversee marketing the property and screening potential tenants. In other words, the property manager does all the work.

While hiring a property manager is the easiest way to maintain income property, some balk at the price. For a company to provide all management services from screening tenants to arranging for cleaning after they leave, you could be looking at a one-time fee equal to a month’s worth of rent plus a monthly cost of as much as 10% (or maybe even more) of the rental amount. Some companies may also require you to sign a contract that can lock you into their services and result in hefty cancellation fees if you try to back out.

On the flip side, managing your own property can be cheap but may make your life more difficult, especially if you end up with challenging tenants or have an older property prone to maintenance needs.

One positive of managing your own property is that you may be able to deduct any losses from your rental on your tax return. That’s an option not available to those with a property manager. However, check with your tax adviser for more details and to ensure you qualify. Otherwise, you could be setting yourself up for an unpleasant audit.

5 Ways to Get Good Tenants

If you’re using a property management company, they will likely be responsible for finding good tenants for your property. If you’re doing it yourself, here are five tips to help find decent renters.

  1. Perform reference, background and credit checks: It’s not enough for a potential tenant to simply provide references, you need to call and speak with those people to confirm they do indeed have good things to say about your applicant. Also, while it may cost you a little money, you’ll want to run a criminal background check and perform a credit check to look for potential red flags.
  2. Have a face-to-face conversation: When taking rental applications, arrange to meet potential tenants and take them on a tour of the property. It offers the opportunity to have a conversation without the pressure of a formal interview. Another tactic could be to meet applicants at their current residence to see how clean and well-maintained they keep it. However, be careful not to run afoul of the law. Under the Fair Housing Act, landlords are prohibited from denying a rental application for reasons such as race, religion or family status.
  3. Require a deposit: Requiring a deposit serves as a form of insurance for your property and can also weed out any applicants who may not be able to pay the monthly rent. State laws vary, but it’s not uncommon in some areas to require both first and last months’ rent in advance along with a security (aka damage) deposit. If you’re renting to someone with pets, you might want to charge an additional amount to cover any pet-related damage. You can visit Nolo.com to find the security deposit law and limitations in your state.
  4. Have a formal lease agreement: A handshake is not enough to protect your investment. You need to have a formal lease agreement drawn up. A good agreement goes beyond listing the rent and deposit. It will spell out who is responsible for what, and what’s included in the rental price: utilities, yard work, and so on. Before you pay big bucks for a lawyer to draw up this agreement, see if there is a rental housing association in your area. These groups may provide their members with standard forms for the lease agreement, lease application, pet addendum and more. They may even run background checks for you.
  5. Complete a pre-rental checklist: Finally, before your tenant moves in, take one last tour of the property with them. This time, bring along a pre-rental checklist. Use this checklist to note any existing issues to the property, such chipped drywall or scratches on appliances. Both you and your tenant should sign the checklist, and then you can refer to it later if there is any question about whether damage was caused by the renter.

This post originally appeared on Money Talks News.

More from Money Talks News:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Compu Byte

    Excellent article. great info!!!

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team