As the economy continues to gain momentum heading into the last quarter of the year, rental prices will continue to bounce back across the country. According to Apartment List, rents are rising quickly in the 100 largest cities in the U.S. and the surrounding metropolitan areas.
The high demand for rental houses and apartments is driving down vacancies and driving up prices, with median rentals estimated at over $1,250 as of August 2021. It’s a good time for rental property owners. If you are thinking of purchasing your first rental property, this guide will give you tips for entering the rental market while minimizing your financial risk.
Find the ideal location
While rental prices are on the rise practically everywhere, you want to find a property in an area that is either stable or on the rise. If you choose a property in a location with a declining population or neglected infrastructure, you better be prepared to lose money quickly. On the other hand, a property in a high-growth area is one of the best investments you’ll ever make.
How do you find a suitable location for your property search? Here are some signs you should watch out for:
Low property taxes: Property taxes vary widely, even within your desired area. Many good neighborhoods have high property taxes, but you can ask the city’s assessment office for property tax figures if you wish to minimize your losses. Many towns facing financial difficulties are also likely to raise property taxes to get back on their feet.
Amenities and facilities: Looking up a potential property on Google Maps will let you discover if there are amenities within a two-kilometer radius, such as schools, malls or shopping centers, theaters, train stations, bus stops, and parks. The presence of these amenities can boost your property’s rental value significantly.
Future development: A visit to your target city’s urban planning department will give you information on planned developments in the area. If there is a construction boom in the area, find out if they consist of new housing or business establishments. New housing could lower your rental value, while commercial developments can increase rental prices.
Job market: A rental property close to business will always be in high demand. For example, when Amazon announced plans to build its second headquarters in Arlington, VA, the city became one of the country’s most competitive housing markets despite its plan to invest in affordable housing in the area.
Aside from doing your research at City Hall or on Google, the best way to get information about your intended location is to talk to people who live there. Current renters and homeowners will give you their honest assessments about the area.
Look for a property you can put on the rental market quickly
Once you’ve identified a target location for your rental property purchase, you need to look for a property that will allow you to generate revenue as soon as possible. It is tempting to look for a fixer-upper, but unless you’ve already flipped houses before, it’s probably not a good idea. Instead, look for a property that’s priced below the area average and would require only slight repairs. Chipped paint on the sidings is acceptable, while a hole in the roof is a red flag.
Since companies also allow their employees to work from home more often, your potential tenants will want to spend more time at home. Houses with dedicated office spaces, provisions for network connections, outdoor grills, porches, and play/exercise areas will command premium rates compared to smaller properties without outdoor amenities.
Choose between buying and financing
Is it better to buy a rental property with cash or finance it? The decision will depend mainly on your goals. Buying with cash can help your property generate a positive cash flow almost immediately. Depending on taxes, rental income, and depreciation, you could get an annual return of just below 10% for the first year alone.
However, financing can help you generate a higher return on investment in the long run. Let’s say you pay a 20% downpayment on a rental property. By deducting mortgage, interest, and expenses from your monthly rental earnings, you could earn between $5,000 to $6,000 per year. It might be lower than a 10% return on the cash payment, but a $5,000 return on a 20% downpayment is a higher ROI and won’t hurt your savings account too much.
That being said, you need to look out for exorbitant interest rates on investment properties. If you decide to finance your investment, you’ll need to find one with low mortgage payments that will allow you to maximize your monthly profits.
Calculate your margins, costs, and returns
Your target margins will depend mostly on your rental investment’s location and the associated operational expenses. If you intend to do all the repairs yourself (and have the ability and equipment to do it), you can save thousands of dollars in maintenance costs each year.
However, hiring a property manager to take care of advertising your property, vetting and choosing tenants, maintaining the property, and collecting rent will save you a lot of time and effort. Most property management companies take around 8-12% of the monthly rent collection. If you’re not comfortable with this kind of expense, you will need to learn how to maintain your new rental property.
You also need to set aside a certain amount of money for unexpected costs, such as burst pipes or roof damage. While you won’t always encounter these emergencies, it’s advisable to set aside up to 30% of your rental income for such instances. Investing in landlord insurance will also cover property damage, lost rental income due to lack of tenants, or liability protection if your tenant gets injured due to issues with your property maintenance.
All in all, these expenses can take up to 50% of your rental income every month. Your ROI will then depend on the rental rate you’ve set as well as the cost of acquiring the property. If you paid for the property with cash, your returns would be small but immediate. But if you’ve decided to finance the purchase, you’ll have to deduct the mortgage from the rental income as well. Aim for a rate that will allow you to go beyond breaking even.
Make it easy to collect rent payments
Renting out a property is a business transaction. While collecting rent is something most landlords are not very vocal about, it’s as essential as buying the property or setting the rental rate. Determining the best way to collect rent will help you get paid on time and make money available for repairs, mortgage, and future investments.
There are several methods you can use to collect rent payments. Hiring a property manager to collect rent is one. Collecting in person is another method that allows you to check your property every month to see if it needs repairs. However, this method won’t be practical once you’ve already expanded your rental property portfolio.
If you own an apartment building, you may install a drop box in a common area in the property. However, this poses a security and theft risk. You might need to monitor the box with a security camera.
Of course, you may also set up a post office box where your tenants can mail their rent checks. While this is the most common way of collecting rent, it is also the slowest and most uncertain. Getting the rent on time is not guaranteed, and many of your potential tenants might not even know how to write a check, especially if they’re millennials or members of Gen Z.
Finally, you can use online methods to get your rental payments. PayPal and Venmo are two of the most popular platforms. However, they charge service fees that can eat into your margin. A dedicated rental payment platform such as RentDrop can help you set up ACH payments for your tenants, monitor payment status, and provide insight into occupancy and vacancy rates for your properties at a relatively low cost.
Know your legal rights and obligations as a landlord
As a rental property owner, you need to know the landlord-tenant laws in your city, county, and state. For instance, landlords in Arizona may collect a security deposit that can’t exceed 1.5 times the monthly rent payment. You also need to return any unused security deposit within 14 business days of their moving-out date.
Suppose you intend to enter the property for routine maintenance, repairs, improvements, or inspection with a potential new tenant. In that case, you must give the tenant at least two days’ notice before the visit. You also visit only during regular business hours. However, you can enter at any time for an emergency such as a fire, flooding, or a gas leak.
In return, you also have your rights as a property owner. For example, you may evict a tenant if they engage in any activity that endangers or disturbs their neighbors. These include drug trafficking or prostitution. They also need to ensure that they follow applicable building codes, especially regarding the number and voltage of their electrical appliances. You also have the right to demand written documentation for maintenance or repair requests.
Conclusion
The U.S. economy is in the middle of a resurgence, which means that rental rates continue their rice from pandemic levels. If you’re looking to enter the rental property market as a landlord, you need to know how to acquire and manage a rental property the right way.
Choosing a suitable property in a prime location will help you attract tenants. On the other hand, knowing your rights and obligations as a landlord and using an easy and convenient rent collection method will help you maintain good relations with tenants and make money from your property. Visit RentDrop.io for more tips about rent collection and managing rental property.
