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.
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.
Although real estate investing can be profitable, there are four main pitfalls investors should avoid:
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.
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:
Tips for becoming a successful landlord
The original article was written by Concord Monitor, Michele Lerner 2018.
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