If you're thinking that a steady stream of income and increasing equity in a property sounds interesting, you're right. For many people, it's a tried-and-true way to build wealth, but before you start, here are some things to consider.
- Projected monthly rent needs to be greater than the monthly mortgage payment or your loan application won't be approved. I found this out the hard way on my very first real estate deal when I was buying for myself. Lenders like positive returns.
- FHA and VA don't issue mortgages for investment property.
- Interest rates will most likely be higher for investment property than for a primary residence because it's a riskier deal for the lender. If the buyer finds themselves in financial difficulty, they're more likely to stop making payments on their investment properties before they default on the home they're living in.
- Speak to a real estate attorney about creating a Limited Liability Company (LLC) to own the property. Creating one is easy, and it may protect you from personal liability if someone decides to sue the property owner. Be sure that all written communication with the tenant comes from the LLC. You can create a free gmail account for this purpose.
- Read your state's Landlord and Tenant Act to become familiar with each party's rights.
- Screen your applicant's backgrounds if an HOA doesn't already do it. Many Realtors belong to associations that have access to cheap and thorough screening services.
- Use a Realtor's standard lease or write your own (have a real estate attorney review it) once you have experienced situations that may not be covered in the Realtor lease. I don't recommend grabbing one off the Internet.
- Locate a handyman before you start. Finding someone who's good and dependable to make repairs was the hardest thing for me to deal with as a landlord.
- Are you psychologically prepared to be a landlord? If not, hire a property management company, or pay for a home service warranty that will provide direct repair service to a tenant. It may save you a lot of hassle, and the plans are relatively inexpensive.
- Be prepared for the almost-guaranteed possibility that increasing property taxes and insurance costs will cut into your profits, forcing you to raise the rent or accept the lower rate of return on your investment. It's a fine line. If you increase the rent above market rates, you may not be able to attract a tenant.
So these are my tips based on my own experience. If you're still interested, find a Realtor to help you and take the plunge! Come and visit my website often because I'll be posting future tips on how to maximize your income and save money on taxes. You won't want to miss it.