Unfortunately, many (if not most) new landlords are not successful in their rental property business. The reasons tend to be simple, and avoidable, for landlords who are serious about succeeding in the rental agreement business.
Cutting right to the chase, by far the greatest problem most nascent landlords run into is under-capitalization. New real estate investors buy rental properties, borrow lots of money to pay for the purchase, renovations, etc., and then struggle when the property goes four months without a rental agreement signed. There are some ways to avoid this problem, but the easiest way to avoid it is simply to maintain a strong cash reserve if you become a landlord.
New landlords understand the predictable expenses: principal and interest on the mortgage, and usually they budget in real estate taxes and rental dwelling insurance. So far so good, but what about maintenance? Repairs? Eviction expenses? Vacancies? Property management fees? Entity (such as LLC) maintenance fees? Sure, it would be great if every rental agreement you ever signed led to friendly, responsible, long term tenants who pay like clockwork and care diligently for your rental property, but that's a fantasy you can't afford to have.
Mortgage lenders, when underwriting your loan, calculate income from rental agreement contracts at 75%, BEFORE subtracting out your predictable expenses. For example, if you own a rental property bringing in $1,000/month, they'll immediately chop that number to $750, then subtract your $700 mortgage (which escrows for taxes and insurance), and only count $50 towards your income. "But," you splutter, "I earn $300 every month from that property!"
No you don't, at least not when averaged over time. When you're calculating the cash flow, before even signing a rental agreement, chop out 25% from gross rental income right off the bat, and use that figure to calculate your cash flow. I would go so far as to suggest that landlords aim to own their rental properties free and clear, or with mortgage payments that are absolutely no higher than half of their collected rent each month.
A second problem that cripples new landlords is failure to adequately screen their tenants, starting with a strong rental application all the way through the verification process. Landlords get lazy, they get trusting, and then they get bankrupted when a tenant fails to pay for four months and the landlord has to carry the property for another four months before signing a new rental agreement (EIGHT vacant months total, plus eviction and legal fees, plus advertising). Print off a solid rental application (EZ Landlord Forms offers one for free, along with customizable rental agreement), confirm their income and employment, pull their credit report, and verify their rental payment history. Take the credit report seriously, because generally people fall into two camps: people who responsibly pay their bills on time, and people who don't.
There are other reasons new landlords fail, but the fact is that if you can afford to stick out the bad times, you can cash out when the market is hot, and make a decent profit. Being a landlord is not for everyone, but if done properly, it can help you escape the drone of 9-5. Best of luck, and consider hiring a property management company to handle tenant screening and management for you.
http://www.myspace.com/thomasproperties
Thomas Simjian 203-506-0388
po box 321
Branford CT 06405
Hi Tom,
My problem is that I found I was allergic to tenants.
It was fun and easy to find and buy investment properties but absolutely no fun owning rentals.
That's why the property management industry will always thrive :)
Ross Hair
www.erealestate.com
Real Estate Advocate
eRealEstate.com