Buying a property as an investment is a great choice, and definitely necessary for many in need of rentals across the US. But becoming a landlord with financial holdings is a big step. If you’re just starting out, it can be overwhelming. What kinds of financial concepts do you need to become familiar with in order to take care of your investment?
In order for you to fairly price rent at your property, you are going to need to do a valuation. This is similar to an appraisal done before the sale of a property, except, of course, your property is not for permanent sale. It is, however, being marketed to “sell” the monthly rental of it, so you need to know how to price that amount. If you price too high for your area, there will be no renters and you’ll lose money. Too low, and you will not be getting the value you need, nor the quality of renters you need. There are calculators to help you in this process.
No, keeping financial records is not perhaps the most fun of any rental agreement for a landlord. You should keep accounting records for at least 7–8 years just in case you find yourself on the wrong end of an IRS audit. You also want, of course, to be able to accurately track financial gains and whether or not your renters have paid on time, especially if you have multiple rentals. Keeping accurate financial records is important, both to be able to track your investment over time, and to be able to keep your tax documents accurate and legal.
Simply speaking, the amount of cash flow for your property is the gross income of the rental, minus the expenses, minus the amount of debt. For example, if your property is renting for a thousand dollars a month, but your debt to the bank is eight hundred monthly, and you had a two hundred dollar property maintenance fee, you have no cash flow! You need some cash flow coverage from your property, for this reason. Your expenses include things like advertising, property maintenance, and upgrades or remodels which have to occur, cleanings between renters, and other such complications. This is why having an accurate valuation is critical, in order to make sure your rental is priced accurately.
At some point in your career investing in real estate, you will want to be able to sell a property, so understanding how the Capital Gains Tax affects your income is important. Basically, it’s important to know that you can defer (meaning avoid for now) Capital Gains Tax if you are selling a property and buying a similar property. You’re probably familiar with this when buying and selling a home. You can avoid being penalized for the sale of one home if, during a set time period, you are purchasing a different home. Capital Gains Taxes can take up to 20% of your income from a property, but instead, if you follow the laws, you can avoid this entirely by knowing how to defer these problems.
This seems so obvious, but the realizations that becoming a landlord is a business is critical to your success! Good entrepreneurs do several things which sometimes landlords forget. The realization that preventing as many problems as possible is part of your job will save you not only money but also time and energy in the long run. Having things like smoke and carbon monoxide detectors, requiring rental insurance, and varying deposits for pets and other complications, will save your money for paying off the mortgage on your investment. You also have to make sure that you have your contracts in order. Dealing with things like eviction, property rules, and other stipulations is all much easier if you have a solid contract.
When attempting to find a high caliber of renters, you need to use your marketing dollars wisely. This includes making your listing similar to a real estate listing, with the most beautiful description and photos possible. Make sure all of your updates are finished after the last renter, and that cleaning is done. If needed, find a professional photographer. Photographs should be taken with the best possible lighting. Natural lighting is your friend! Open blinds and use the lovely midafternoon or early dusk light.
You are exceptionally busy, and having renters will make you more so. If this is a complication for you, and especially if you’d rather outsource things like finding plumbers in the middle of the night, utilizing a great property management company might be a good option for you. At minimum, knowing what they do is important for your business in case you need one. While you relinquish some control on finding tenants, if you source a great professional who is careful in screening, mostly what you gain is your own time and energy back.
You need excellent tenants in order to have success as a landlord. This means more than trusting your gut and hoping that nice guy stays nice or hearing that cousin Bob’s second cousin on his mother’s side needs a place to stay. You want employed renters with good credit scores, who have references, and preferably no criminal history. Any one of these things can be a “deal-breaker” for a rental agreement because it could mean that the person is not willing to follow through with their commitments. However, there are, of course, exceptions to all things. A newly divorced woman, for instance, who has been a stay-at-home mother might not have an excellent credit score, but be employed and need housing. Make wise choices for the situations you have with the best information you can gather, for your business.
You can’t be a good landlord unless you have excellent, loyal renters who are going to take care of your property, which is their home! Treat your renters with respect and as valuable team members in your business. They might not be your coworkers, but they are an asset in your success!
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