Investing in rental properties may seem a lucrative business and an attractive prospect for beginner investors in the real estate industry. However, managing properties for rent is not only the source of constant monthly income but also an arduous task. This job requires some special skills, lots of energy and effort.
We will describe the advantages and disadvantages of investing in commercial or residential properties and some tips on managing the properties for rent on your own without hiring a property manager, realtor or real estate agent.
Advantages of Managing the Property for Rent
- Stable Monthly Income
The most obvious benefit of owning and managing a rental property is a stable monthly revenue. When the property is in good condition, then the paychecks that you receive from the tenants every month can compensate for the mortgage costs and some expenses for maintenance of the property. If the mortgage payment is lesser than the sum collected from the rent, then you will receive the positive cash flow every month.
It is vital to note that you need to put aside some money for the emergency fund – the expenses in unforeseen circumstances and some costs for the repair, upgrades, and taxes. The amount of these costs depends on the tax bracket, the state of the house or apartment and your predictions on the turnover of tenants.
In case, if the expenses on the maintenance exceed the revenue or negative cash flow, the investment still can be profitable. You may apply the buy-and-hold method and wait for some time till the property value increases, and you will be able to gain the returns through the appreciation. It depends greatly on the conditions of the rental market.
- Equity as an Investment
Investing in real estate is always accompanied by risk. On the other hand, this business is considered to be very rewarding. Firstly, the value of the property may grow over time. Secondly, the investment may be fully covered by the earnings from the property.
So, in case of the appreciation of the property, you may receive a significant amount of returns if you sell it or refinance the mortgage.
- Alternative for Sale
Renting out the property before selling is a good solution to the problem when the market is going through tough times. If the investors have difficulties with financing and the property is not growing in value, then you can rent the property out until the situation in the market stabilizes. Also, you can build equity in this way.
- Tax Benefits
On one hand, there is a wide range of expenses that are related to owning and managing the property. These typically are mortgage interest, repairs, travel expenses, and insurance costs. There are also expenses connected with accounting and legal services, marketing, home office expenses, and some other costs needed for the business.
The above-mentioned costs can be returned to you by the end of the year due to the tax advantages. Also, the scheme of paying taxes for homeowners differs from the one that is aimed at self-employed people, so the landlords do not need to pay the self-employment tax.
Independence is one of the main advantages of owning rental property. You are able to manage your business on your own and gain passive income. It is important to note that the earnings from one property maybe not enough for living. However, the investors who already have a diverse portfolio turned their income from the rental property into the livelihood. Of course, it takes a lot of time and works to manage these properties but the profit is worth it.
Disadvantages of Owning and Managing the Rental Property
- Irresponsible Tenants
After leaving the property, at best, the tenants may cause some minor damage. In this case, you will need to make some repairs, for instance, paint the walls. But sometimes, if the tenants happen to be irresponsible, they can leave the house in bad condition or even ransack the rental property, so you will need to make the total refurbishment.
Sometimes the tenants may stop paying the rent or delay the payments – and it will be a nuisance for you because you have to take them to the court for eviction which is a time-consuming and stressful endeavor.
To avoid these problems, you need to make research on the background of the tenants – their criminal rates, credit, and rental history.
- Investment Requires a Considerable Sum
Besides the investment capital to purchase a property, there also should be a considerable amount of money to manage the rental property. This is the emergency fund that is needed to put aside in case of the damage caused by tenants – for repair and taking them to the court for eviction.
You also need the additional coverage of the insurance due to the reason that homeowner insurance can be applied only to the property occupied by the owner.
- A Lot of Time and Effort Needed
Managing the property on your own is time-consuming and takes a lot of effort. It is often difficult for the landlord to balance rental property management with a full-time job. You need to search for the good tenants, conduct interviews, tackle the issues related to tenants.
There is a great amount of paperwork – signing the contracts, recording the expenses, the taxes, fees, and income. Doing everything on your own requires strong nerves and much energy.
- High Risk of Losing Money
Owning and renting out the property always involves a high degree of unpredictability. The issue is not just about the unforeseen circumstances, sudden repairs or damage from the awful tenants. If your aim is to sell the property and gain revenue through appreciation, then there is a high risk of losing money.
You can calculate the approximate appreciation of the property on the basis of the special formulas, but the process of the market growth is very chaotic and sometimes things do not happen the way you expected.
How to Manage the Property on Your Own
- Choosing a Profitable Property
The first step is to buy the profitable real estate from the dealer. Before the transaction with the seller, you need to make sure that the property will bring the income. You can make the real estate market analysis and analyze the investment property thoroughly.
After the purchase, you should examine the property with the house inspector to define the areas that need repairs. Then it is better to hire reliable contractors who will help you to prepare the property for rent.
- Setting the Price of Rent
In order to set the most satisfactory price for both sides – the homeowner and the tenants – you need to perform the rental market analysis and make your own research on the prices of comparable properties in the area.
- Learning the Landlord-Tenant Laws
One of the common mistakes of beginner investors in the rental property is the ignorance of the local law concerning real estate. To avoid legal problems, familiarize yourself with the local regulations and consult an attorney to receive guidance on the required information.
- Developing the Marketing Strategy
After learning the local property laws, you can start searching for the tenants. Marketing is a very important step to find good tenants. You can use different channels for advertising – social media, word of mouth, traditional approaches like bandit signs or bird dogs and others. It is better to apply all the listed methods in the complex.
- Screening of the Tenants
The tenant screening process is a vital procedure because it directly affects your income and what happens to your property next. Define your own criteria of a perfect tenant, conduct the interview, check the background of the person and do not ignore your intuition.
- Signing the Contract
The rental agreement generally includes the points like rent payment time, security deposit, the responsibilities of both sides, the eviction procedure, etc. To make sure that the contract is drafted correctly, involve the real estate lawyer who will check the agreement. It is better to clarify every point of the rental contract with the tenant to prevent disagreements in the future.
- Maintenance of Rental Property
The maintenance of the property usually consists of the regular inspections of the property by the homeowner, solving the problems and answering the questions from the tenants, making some minor repairs if needed. You need to have the contacts of the local contractors who can fix the issues quickly.
- Collecting Rent
Establish the way of collecting the rent – this can be the direct payments, checks or electronic methods. To prevent the late rent payments, there should be a fee in case of the delay. If it does not work, you have the right to evict the tenant through the court.
- Accounting of the Rental Property
Accounting of the rental property may seem difficult for novice real estate investors. It requires recording income, taxes, expenses, and transactions. If you want to simplify this process, you can hire an accountant who will manage these issues.
Having the rental property in your possession and managing it on your own may seem easy to an outside observer, but in reality, it is quite challenging. However, with the right strategy, step-by-step plan and some help from the experts and more skilled investors, you will definitely achieve success.
Real estate investing is a long game, that is why you need a lot of patience to wait for the moment when the property starts to bring you the profit. Though this business has many risks and pitfalls, the revenue is high. We hope that with the help of our advice from this article you will be able to start your profitable business and make fortune.