Thinking of owning a rental property? Being a landlord can be well worth it financially, but how do you know if you're ready to take the plunge?
Who's The Boss? - Managing Your Rental Property
Are you going to manage your rental property yourself or will you hire a property management company to manage it for you? If you manage it yourself you'll have to screen tenants, handle repairs and maintenance, and collect the rent. If you hire a property management company, they should handle all this for you—for a fee, of course.
Repairs - Are You a DIYer?
Are you a handy kind of person who can take late phone calls from a tenant saying their toilet is broken or their pipes are frozen? Or would you prefer to have a handyman on speed dial whenever your tenant has a maintenance problem?
If you have a full time job, it may be hard at times to fit in maintenance work on your rental property, especially if it's an emergency such as no heating in the middle of winter. It may be easier to have a trusted handyman available whenever there's a problem, but a handyman is going to be more expensive than if you undertake the maintenance yourself.
Show Me the Money!
It may be fun to think of all the rent money you'll receive from your tenants, but a landlord also has expenses. The mortgage payment, taxes and insurances have to be paid every month. It's also wise to factor in at least a 25% vacancy and repair rate.
Here's a hypothetical example:
Your single-family home rents for $1,000 per month, but your mortgage payment is $500 per month and taxes and insurance are $55 per month. A 25% vacancy rate is $250 per month. That all adds up to $805 per month. Your cash flow (what's left over after expenses) is $195 per month.
Screening Tenants - Do They Pass Your Test?
If you're managing your rental property yourself, you'll need to screen your prospective tenants by having them fill in a rental application and getting their signed authorization in order to run a credit and criminal check on them.
The basic rule of thumb is that a prospective tenant should earn at least three times the amount of rent. It's also important that your prospective tenant has the security deposit and first month's rent ready and waiting. You don't want to receive the security deposit in dribs and drabs, $400 now, $300 next week and the remainder next month!
Owning a rental property can be an exciting and fun journey, but only you know if you're ready to take the plunge!