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10 Tips for Clients Buying a Rental “Coach Em Up” Before They Run You Around
Home/10 Tips for Clients Buying a Rental “Coach Em Up” Before They Run You Around
10 Tips for Clients Buying a Rental “Coach Em Up” Before They Run You AroundDaniel Dobbs2023-05-25T11:57:37-07:00
With all the home renovation shows, loosening of ADU regulations, a slowing economy, historically low-interest rates, and the mood of millennials to rent instead of own, income property has been on an uptick since the Great Recession.
But as an agent; with limited time & resources, the question is this:
How do you minimize your exposure (time & expenses) while still encouraging your clients to begin their discovery process and unleash their “inner investor spirit”.
Here’s a quick “primer” you can give your clients – so they start their educational process with eyes wide open – before you have to commit resources. Better to be at the beach with a glass of wine than working on a transaction that “can’t / won’t close”!
The post draws from an article posted on bankrate.com by James Royal. I’ve shortened it and added a “twist”, which is from the perspective of an agent’s time and resources!
However, you can read the post in its entirety by clicking on the link!
Real estate is now Americans’ favorite long-term investment, according to a recent Bankrate study.
The popularity of real estate is at its highest point since Bankrate started the survey 7 years ago.
But, should your clients take the plunge on a rental property? Experts offer a qualified yes, provided they do their homework first.
Here are 10 actions buyers should be aware of BEFORE they run you around.
1. It’s Not as Easy As It Looks
To maximize income property requires an accountant’s eye for detail, a grasp of landlord-tenant laws & should they choose to manage a rental property – a landlord’s firm but friendly disposition.
While rental property is considered a “passive investment” its not!
Toilets – termites and tenants are often the complaints of landlords!
2. Success Requires a Long-Term Outlook
“The way that people get in trouble with almost all investments is, they just don’t hold onto things long enough,” he says. To make money in real estate, buyers want to think long term.
3. It’s Easy / Costly to Break the Law
State landlord-tenant laws can act like an open manhole cover for rental owners who ignore them.
A case in point is tenant security deposits. It’s not as simple as collecting and holding the money.
“There is bookkeeping involved. You need to have an account for each tenant and keep that money in that account and save it,” Hertzog says.
“Security deposit laws govern how much time landlords have to return a security deposit when the tenancy ends, less any expenses for cleaning and repair, all of which have to be itemized.”
This is only 1 aspect of the laws surrounding a rental property, & there are many other landlords must know to avoid running afoul of them.
4. Make Sure You’re Landlord Material
Should landlords be their own property manager or pay 6-10% of your rental income to a management service?
“They do the background check on your tenant, make sure they sign the lease and pay their rent on time,” George says. “That frees landlords to manage money, not property and tenants.”
There’s a possible downside to being your own landlord.“If you get too close to tenants and tenants have financial problems, landlords find themselves stuck because you don’t want to evict them,”
On top of this issue, are is the client comfortable making the executive decisions that must be made in managing a property?
Will they repair or end up replacing a failing AC or leaky dishwasher? Or will they be paying for a home warranty policy to solve the problem?
5. Analyze whether paying cash or financing is better.
While buying cash is good; “Leveraging” a mortgage typically magnifies returns, on both the upside and downside.
6. Budget for the Unexpected
Failure to plan for the myriad expenses of owning a rental can become a fast track to disaster.
As a landlord, you want to save about 20% to 30% of your rental income for upkeep, maintenance, and emergencies.
7. Remember to Renew Leases
If mom & pop landlords have 1 blind spot, it’s the failure to renew tenant leases in a timely manner.
When tenants slide, it can be challenging to get them back on track.
California mandates landlords to give 60-days’ notice for tenants who have lived in the property for more than a year (or 30 days for less than a year), though the situation may be different in rent-controlled cities. The landlord also might offer a new lease contract at the same time.
8. It’s all about location, location, location – sort of.
That old Realtor mantra about the importance of location takes an exciting turn when applied to income property. The best locations with the most appreciation are where you’ll potentially have the worst cash flow with a rental.
In some areas, investors may want a higher cash flow to compensate them for slower appreciation.
However, if investors expect an area to appreciate substantially, they may be willing to forgo cash flow to enjoy that appreciation.
The result: house appreciation outstrips the growth in rents, and houses appreciate while yielding relatively low cash flow.
9. Want long-term tenants? Consider Section 8
A sudden tenant vacancy is the bane of every rental owner; each month a rental stands vacant, landlords are out $$$.
Section 8, aka the HUD’s Housing Choice Voucher Program, typically caps the rent for low-income Americans who qualify at 30% of their adjusted monthly income.
Many landlords are skeptical of the paperwork & potential upkeep problems, presented by some Section 8 renters, But older populations and persons with disabilities are excellent tenants.
Most take excellent care of the property because this is their home. This is where they want to be. If they don’t pay their rent they ruin their vouchers.
10. Don’t forget rental property at tax time
There’s a singular ray of sunshine that beams down upon income property owners each spring as they hunker down with their accountant to prepare their federal income tax return.
“When you have your own home, you can write off the interest and that’s about it. With an investment property, a Schedule E tax form landlords write off nearly everything, from painting the home to changing the light bulbs.
It’s that powerful combination of tax benefits and investment returns that help keep investors interested in rental properties.
