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Rental property ownership can be one of the most secure and profitable investments for building a retirement portfolio. Buying right and keeping a handle on costs can generate great monthly cash flow, and the home should appreciate in value over time. The tax advantages are also far better than those available to a stock market investor.
Given the hot rental market, there is a lot of current interest in rental investing, and many investors are looking to move money from the stock market to rental properties. Those new to real estate frequently buy one or two homes and self-manage to avoid the cost of professional management, but before taking the leap, investors should be aware of landlord-tenant relationships and pitfalls.
Know the law
Rental property owners must follow the law, especially for applications, lease agreements, deposit money handling and eviction actions. Use applications and lease forms that have been examined by an attorney for legality in your state, and make sure they also protect your interests. Include plenty of detail on your forms; should a dispute arise, it's harder to support your case if a lease agreement or other document lacks specific information about your requirements.
Practice patience
While most rental relationships are relatively problem-free, some tenants can be a bit difficult. They might find the smallest things to complain about - all the time. If you have a problem with renter phone calls during the dinner hour, perhaps the role of landlord isn't for you. A clear set of renter instructions and rules can help in this regard - it's your responsibility to set expectations. For example, it's OK to tell your renters that they should not call you to complain about a missed garbage pickup if you informed them of the day and time prior to move-in.
Budget for repairs
Renters might not demonstrate the same level of concern for taking care of your property as you would. You shouldn't expect it, and you should anticipate repair issues to be more frequent compared to an owner-occupied home. At move-in, conduct a thorough inspection using a detailed checklist to note the condition of everything in the home. Use the same form at the end of the lease to compare conditions. Using your smartphone to record a video of the walk-through is a great way to avoid disputes at move-out. In the lease, include a detailed explanation of what constitutes "normal wear and tear" versus damage that must be paid out of the renter's deposit.
Expect a few late payments
It's a tough economy out there, and late payment of rent is more common than you might expect. You'll be sending late notices, attempting to collect late fees and making payment calls if you want to keep your cash flow on track. Again, make sure your lease spells out when rent is due, how it must be paid, what the deadlines and penalties are for late payment, and how you'll handle notices and eviction. The rules must be legal in your state, and you must follow them as well as the renter.
I'm not trying to discourage rental property investment - it can be secure and highly profitable. If you are considering this investment asset, however, you should know about more than just the numbers. If you're not willing to take on a few landlord headaches, consider using professional management. It's going to cost you a percentage of the rent, in many cases 8 to 10 percent, but it could be well worth it.
If you plan on professional management from the start, you can negotiate your property purchases and rents to cover the added cost, plus, it will be a deductible expense. A good management company will market your property, screen prospective renters, collect rents and handle late payment issues. They will have legal leases and proven procedures should problems arise.
Once you’ve decided that rental property investment makes sense for you, weigh your options, be informed and prepared, and decide if you have the time and patience to take on the responsibilities of a landlord.
