According to a Bankrate survey conducted in July 2019, rental properties are now the most popular long-term investment in the U.S., surpassing the former investment of choice, stocks. This is particularly the case for those who aren’t expecting to need their money for at least 10 years.
But there’s a lot to consider if you’re thinking of investing in a rental property.
If you’re keen to invest in a rental property, but not sure where to start, we have some pointers on preparing to buy an investment property once you find one, and how to set your rent prices for 2020.
Legal and Financial Considerations
There’s a lot more to investing in rental property than simply buying an apartment and finding tenants. Each state — and even each city — has its own set of laws to protect tenants and regulate housing.
Whatever state or city you live in, make sure you have a clear understanding of the zoning and tenant laws on the books.
For example, in Massachusetts, landlords must disclose certain information in the lease, including a list of people allowed to act on a landlord’s behalf, a detailed list of landlord-tenant laws and a list of non-refundable fees the landlord may charge.
Certain states have rent control laws. Others have laws limiting the number of occupants per unit. If you’re buying a single property and thinking of turning it into a multi-family, you’ll have to check zoning laws to see if that’s allowed.
There are even laws about raising rent, when you can do it, and how much notice you have to give your tenants.
And keep in mind you’ll need separate accounts for all security deposits. You’re not allowed to keep security deposits in any personal or business accounts, combining it with your own money or that of your business.
Finally, be prepared for tax time. Make sure you fully understand what you have to claim as income, what you can deduct from your rental income, and any surtaxes you may have to pay.
Preparing to Buy
Once you have a good understanding of what it means to be a landlord in your area (or the area you’re looking to buy in), there are some steps to take before you buy.
1. Define What You’re Looking For
Before you start looking at properties, pinpoint the kind of property you’re looking for. Are you okay with a fixer-upper? Do you want something brand new? Are you looking for one unit or a multi-family property? And how much are you willing to spend?
2. Identify the Tenants to Match
First of all, keep in mind that there are discrimination laws that prevent landlords from denying housing to certain populations. That includes families with children, students, and the elderly.
That said, it’s important to match your unit with the right tenant. Are you looking for a place that lends itself to long-term tenants, or is yours an area with a heavy student population, with high turnover?
Once you have a picture of the kind of tenant you want, you can concentrate on where to look for them and how to use your property to attract them.
3. Get Your Money Together
Make sure you have all the money you need upfront, both for the initial purchase and for down-the-road costs. That includes your down payment, closing costs, property taxes, repairs and cleaning, utility bills, and the cost of finding tenants.
Collect enough money for a rainy day fund, as well. You never know when you’ll have a month (or two) of vacancy or a leak that needs immediate repair.
A note about down payments: If you want to avoid paying private mortgage insurance (PMI), you’ll have to pay at least 20 percent of the purchase price.
4. Find the Best Market for Your Goals
You have your property and tenant in mind. You know how much you want to spend and you have your money together. Now it’s time to research the best market to buy in. Depending on your ideal tenant, look at things like accessibility to public transportation, schools, or food and entertainment options.
From a landlord’s perspective, look for property tax rates, development in the area, and other factors that could affect your margin or the value of your property.
5. Do Some Housekeeping
Set up that bank account for security deposits. Create a separate email and phone number to give out to tenants. (Google makes it easy to do both.) Set up a calendar with reminders for lease renewals, rent increase notices, and move-in and move-out dates.
Finally, find the best places to list your property to attract the right tenants.
Setting Rent for 2020
You’ve closed on an investment property. Congratulations! Now it’s time to figure out what kind of rent you should be charging.
Follow these steps to get to your ideal rent.
1. Understand Your Market
The best way to set your rate is to start with a very granular study of rent prices in your area. Get really specific. Look at what other landlords are charging for similarly sized units with comparable amenities in the same neighborhood.
And focus your research not only on your neighborhood but on your street or even in your building.
Rents can vary drastically for different units for a number of reasons. In most cities, rents can vary depending on which end of the street you’re on, the view, or the condition of the building. A unit on an upper floor or closer to a subway stop can charge more than a garden level apartment or one that is a walk from public transportation.
Take a look at these two examples from Rentometer.
The two addresses are just a block away from each other, and yet, a one-bedroom at 1358 York Ave costs about $1600 less than one at York Ave. and East 72nd St. If you take a closer look, you’d find that the York Ave address is an older, smaller building that may even be a walk-up, while the corner building is a larger, more modern apartment building with luxury units.
It’s important to dig this deep to make sure you’re not charging too much or too little for your unit.
2. Calculate Your Margins
Make a list of all your monthly and yearly expenses. Those will include
- Water, heat, and other utilities (if you’re including those in the rent)
- Property and income taxes
- Maintenance and the cost of repairing normal wear and tear
- Money for emergency repairs
- Services like snow removal or landscaping
- The cost of finding tenants (credit check fees, listing fees, etc.)
Once you’ve tallied up all of your expenses, set your profit margin. Investopedia recommends a 10 percent margin.
3. Check the Economic Climate
Keep an eye on national and local economic trends in housing. Many experts, for instance, are predicting a softening of the housing market in 2020, while others are predicting a full recession. That could mean falling house prices and the increased opportunity for people to buy rather than rent. Landlords might see a decline in demand for their units.
But a national housing recession may not hit your area as hard as others, especially if local businesses or universities are driving a steady demand for rental units.
4. Keep Those Rental Laws in Mind
Finally, factor in any legal restrictions on rent. You may have to abide by rent control laws in your area. If you’re already thinking about how you’ll increase rent in the future, there may be statutes restricting that, as well.
For example, Oregon’s new rent control law keeps landlords from increasing rent by more than 9.9 percent in 2020.
Buying your first investment property is very exciting, but there’s work to be done before you sign those papers. Follow these steps and do your homework to make sure you’re getting top dollar for your new nest egg.
About the Author: Laurie Mega is a writer, editor, and former landlord. Her work has been published by HomeandGarden.com, The Economist, Buildium, and Rentometer, among others.