Weighing out important factors if you are considering becoming a landlord

I get approached somewhat frequently by current customers or new contacts who are interested in purchasing rentals and trying to develop an income stream. Naples can be a strange rental market and many homeowners rent out property just to try to break even and cover carrying costs for owning the unit. However, there may be some times where it can actually provide a modest income stream. For those folks interested in this as a potential interest, I wanted to share an article that provides some good insights into becoming a landlord. If you would like to  explore this further, feel free to call me at 239.287.2576.

This information was extracted from an article was posted in Florida Realtor's today.

There are a lot of considerations to weigh out if you are trying to decide if Landlord life is for you. One of the first is to decide if you will be a local landlord or a long distance one. "Historically, 70 percent of people buy an investment property within an hour of their home because it's convenient and they know the area," says Gary Beasley, chief executive of Roofstock in Oakland, Calif. "That's fine if you live in a market with good rental demand, and there's no danger of a recession. But it makes more sense to diversify with an investment in another market, just in case job growth declines and rental demand drops at some point."

Another area to sort through is whether you want to buy and flip a property or invest for long-term appreciation and cash flow from rents. "If you want to invest in real estate, you need to know your strategy," says Rick Sharga, chief marketing officer of Ten-X, an online real estate marketplace based in Irvine, Calif., that owns Auction.com. "Most people focus on buying property cheaply, but if you plan to become a landlord, then price is less of an issue. In that case, cash flow is most important, and you want to buy something that will be ready to rent quickly and for more than your costs."

Both of these things will help start the focus on how and what you buy. 

Do an analysis
Although some investors pay cash for their property, many finance the purchase.
Beasley says the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) guidelines require a 20 percent down payment for an investment loan. Typically, the interest rate is slightly higher on investment loans, such as 4.5 percent when owner-occupied loans are at 4.0 percent.

Rand says investors must do a cost-benefit analysis, starting with an estimate of the annual rent, minus 5 percent for anticipated vacancies. They should then subtract all expenses, such as taxes, insurance, homeowners association dues, property management fees and maintenance costs, estimated at 10 percent of the gross rent to generate your net operating income.

The return on your investment is calculated by dividing your net operating income by your mortgage payment. For example, if you purchase a $100,000 property and your profit is $6,000, then your return on your investment is 6 percent. If your property goes up in value, then your return on your investment is even higher.

Hawkins says that your financial evaluation should also include the property condition and estimate of when you may need to replace appliances, heating or plumbing systems or the roof.

Management Oversight
If you're a local landlord, you can manage your property yourself if you have the time and the skills to maintain it. Alternatively, if you have a roster of good contractors, you can avoid the fee for a property management company. However, you also then need to screen your own tenants and handle their rent payments.

"You need to have the right attitude to be a landlord," Hawkins says. "It can be a hassle and inconvenient, so if you want to avoid that, you should hire a property management company." Most long-distance investors need a property-management company to handle tenant issues and maintenance. Typically, property management companies charge a percent of the rent, Rand says.
He says technology has made it easier for people to invest long-distance, because there are national property management companies with branches in multiple markets that can connect automatically with tenants and owners.

The pitfalls
Although real estate investing can be profitable, there are four main pitfalls investors should avoid:

1. Being over-leveraged: If your mortgage is too high and the rent barely covers your expenses, you could lose money if your tenant doesn't pay one month. Rand recommends keeping 10 percent of the gross annual rent in a separate account for maintenance and reserves. "Don't spend your last dollar on a real estate investment," he says. Beasley recommends keeping 1 percent of the property value in a reserve account and adding to that account periodically.
2. Frequent vacancies: Turnover is the fastest way to fail, Rand says. Landlords need to screen their tenants to make sure they have the means to pay the rent and good credit. "One of the biggest risks is in the length of time your rental stays vacant," Sharga says.
3. Chasing too-high returns: Rand says you should expect returns in the mid-single digits. "This is a get rich slowly proposition," he says. "If you're trying to get quicker returns, you're likely to buy a lower priced property and have more turnover. It's better to buy a quality home in an area with good schools where people will stay longer."
4. Thinking short-term: Beasley says investors need to look at rental property as a long-term investment that can build wealth over time. "You're buying through different real estate cycles, but if you don't have too much debt, you don't need to worry about selling even if the property value declines," says Beasley. "Keep in mind that even if home values drop, rents usually don't. This can be a good hedge in the event of another real estate downturn.

The coverage you'll need
Rental properties require a landlord insurance policy, also known as a dwelling policy, which is typically a little costlier than a traditional homeowner's insurance policy, says Laura Adams, a senior insurance analyst for InsuranceQuotes.com in Austin.
"Insurance data shows that rental properties have more claims and higher dollar claims than primary residences," Adams says.
A typical landlord policy covers physical damage to the property for a covered disaster, such as a fire or a hailstorm, along with personal property belonging to the owner, such as a lawn mower or furniture.

You also need to find out whether you need flood insurance and whether insurance rates are particularly high in the area where you intend to invest, such as along the coast of Florida, because high insurance premiums will cut into your profit.

"Liability coverage is included in a landlord policy because of the potential of being sued if a tenant or a guest is injured on the property," Adams says. "Landlords may want to look at all of their assets that could be at financial risk and purchase an umbrella policy for added coverage." Landlords can require tenants to buy renter's insurance to cover the tenant's personal property and to provide their own liability protection.

Adams suggests that another option could be to place the property in a limited liability business structure to increase your personal protection. "If you place your investment property in a business structure, then the only assets at risk are those within the business, not your other assets," she says.

Know the local laws
Whether you are investing in property long-distance or locally, it's important to make sure you are complying with local laws and with the rules of a homeowners association. "If you have a local lawyer and are investing long-distance, you can ask your lawyer for a referral to someone familiar with local laws," says Jeff Bell, chief executive of LegalShield in Ada, Okla., a company that provides legal services in every state for a monthly fee.

A real estate agent will know whether a market is landlord- or tenant-friendly, says Sharga, who adds that it might be best to invest someplace else if your area is unfriendly to landlords.

The expenses
It's tempting to do a quick estimate of how much it costs to buy a property and how much you can charge for rent. But here are other expenses to include in your calculation:

• Financing costs including a down payment, closing costs, and mortgage principal and interest
• Landlord insurance
• Property taxes
• Homeowners association dues
• Ongoing maintenance
• Repairs
• Periods of vacancies
• Property management fees

Tips for becoming a successful landlord

• Be prepared with savings for a down payment and cash reserves of 1 percent of the property value or 10 percent of the gross rent to cover vacancies and repairs.
• Do your research on the real estate market, including both the purchase market and rental market.
• Talk to local real estate investors or real estate agents who work with investors to understand the market and pricing.
• If the property is part of a condominium or homeowners association, make sure you can rent the property and that you can comply with all association rules.
• Decide whether you have the time and skills or contractors to manage the property yourself, or whether you'd prefer to hire a property management company.
• Buy appropriate insurance to cover the property and your liability.
• Consider establishing an LLC for each investment property for liability protection.
• Carefully screen your tenants or hire someone to screen them to avoid issues with nonpayment of rent or too many vacancies.
• Plan for future repairs and maintenance, especially if you anticipate keeping the property for 20 years or more.

The original article was written by ​Concord Monitor, Michele Lerner 2018.