If you’re considering buying rental property, there are some tempting reasons to move forward. Depending on your location, demand for rentals can be high with 35 percent of Americans renting the properties they live in. Single family homes account for 35 percent of those rentals with apartment buildings, duplexes and mobile homes accounting for the remaining 65 percent.
Buying a rental is just one form of investing in real estate. Real estate investment is not something to take lightly, and certainly shouldn’t be done without due diligence. Many people find out that they like being a real estate investor, but do not like being a landlord.
Here are 6 myths about buying rental property.
1. Buying a Rental is Just Like Buying Your Private Home
Banks nor insurance companies view rentals like a private home. Financing rentals may take a larger down payment and will likely result in a higher interest rate than a traditional home mortgage. The paperwork will be a bit more challenging. You’ll also find insuring the property more expensive than your private home. Insurance companies know that owners who live in their homes are more likely to respect their property than a renter, causing rental home premiums to be generally higher.
2. Rent Payments will Pay for the Rental
Many investors considering buying a rental property simply look at the mortgage they will pay vs the rent they can expect to receive. They forget that there will be many other costs associated with owning and maintaining a rental. There are costs of insurance, property taxes, maintenance, repairs, utilities, cleaning, painting, background checks and advertising. Depending on location and property condition and age, these costs can add 40 to 50 percent or more on top of the mortgage costs. Before buying rental property, make sure you understand the full cost of ownership and that you can cover as much of those costs as possible with a market competitive rental rate.
3. You Will Keep Your Property Rented 100% of the Time
You should understand that 51 percent of renters are under 30. Many of them haven’t “settled down” yet and move more frequently. Renters overall, tend to be more transient and have slightly lower median income than homeowners. Keeping properties rented with quality, long term tenants is more of a challenge than first time real estate investors may realize. In 2014, the average rental vacancy rate in the U.S. varied between 7 to 10 percent. That means investment property owners had better be prepared for at least one month per year when they will not have rental income due to a vacancy.
4. A Rental Provides Passive Income
Buying rental property with expectations of passive income is a big mistake. There is nothing passive about owning a rental. At least not in the short term. Don’t invest in a rental property expecting it will make you money on a monthly basis. Investing in a rental property is more like putting money into a bank. You may not like doing it, but as long as you stay the course it will eventually pay dividends. You are far better off understanding that every dollar, every moment, every late night night phone call is not going to make you money in the short term. This is an investment you are making for the future, and it may not pay off until the mortgage on the property is paid. At that point, the money you were paying to the bank or mortgage lender, you can keep for yourself. You will also end up with real estate that has been paid for by renters. The goal is not necessarily to make a passive income monthly as it is to acquire a long term asset with the help of those who have rented from you.
5. You Can Perform All Property Maintenance Yourself
While buying rental property when you have handyman skills is certainly helpful, it will not eliminate maintenance costs. There will still be the hard costs of paint, pipes, carpet-cleaning or replacement, broken windows and changing locks. You may have to hire a drain cleaning service, a roofer, or an emergency plumber. Many landlord’s quickly find that they end up spending a far larger proportion of their time maintaining and repairing a rental than they anticipated. This oftentimes results in them paying for repairs they may be skilled enough to accomplish on their own, but just don’t have the time.
6. You Can Trust Tenants
Many who buy a rental property learn the hard way that you can not always trust tenants. You can’t trust them to take care of your property like you would. You can’t trust them to always have rent money on time. You can’t trust them to completely fulfill their lease and not move out in the middle of the night. Tenants will make weekend phone calls to you for a leak in a kitchen faucet or because they locked themselves out. These problems can be better limited through extensive background checks, reference checking and high deposits but this can be time-consuming, expensive and it may limit your pool of candidates, resulting in longer vacancies. Just about every landlord has been faced with a tenant who moved out leaving trash or worse behind. The bottom line is it can come back to haunt you if you trust tenants too much.
While these myths may seem discouraging there are steps you can take to better protect yourself. It is very helpful if you have a large down payment on the rental or can pay cash to minimize the size or even eliminate payments. This may then allow you to consider the services of professional property manager, eliminating other hassles. Know the difference between the facts and the myths when buying rental property and you’ll be far better prepared for what lies ahead.
2 Point Highlight
Depending on your location, demand for rentals can be high with 35 percent of Americans renting the properties they live in.
It is very helpful if you have a large down payment on the rental or can even pay cash to minimize the size of or eliminate payments.
