7 smart moves for getting started as a landlord

So you have visions of becoming a real estate baron, investing in rental property that grows in value while also providing a steady monthly income.

That dream was easier to pursue a couple of years ago when home prices were at rock-bottom.

The real estate market is finally recovering, up more than 10% nationally last year. That makes bargains harder to find.

But rental property remains a potentially solid investment.

"There's still opportunity out there," says Gary Roberts, a vice president with Long Realty in Tucson, Ariz. "You can still buy rental property and actually make income on it."

A big mistake, however, is viewing it as a get-rich-quick opportunity.

"You need to focus on the long-term, make it part of your overall investment strategy, and be pretty deliberate as you get into it," cautions Roberts, who owns several rental properties.

The stronger housing market and higher mortgage rates make it critical to approach becoming a landlord with your eyes wide open to the challenges.

But if you're still itching to tap your inner Donald Trump, here are 7 smart moves to help you get started.

Smart move 1. Recognize that being a landlord is a business.

Being a landlord is different from being a private homeowner — it’s a business and you need to treat it like that.

"Where I see a lot of people make mistakes is they don’t have a good business plan," Roberts says. "This type of investment is not hands-off. It’s not just a passive revenue stream. It requires involvement. It requires your time. It requires certain skills."

Lending requirements for personal mortgages have relaxed a bit recently, but Jim Merrill of Axel Mortgage Inc. in Phoenix says the requirements for rental property have basically remained the same.

If you're borrowing money for your first rental house, you're going to need at least a 20% down payment.

If you can swing 25% down, it's likely to get you a better interest rate and lower fees.

If it's your first rental property, your current income is going to have to be enough to handle the mortgages for both your residence and your new property.

On the plus side, "credit scoring has loosened up a bit," Merrill says, "and once we can show that someone has two years of successfully managing rental property, we can use that to offset the (income) requirement."

Smart move 2. Start small.

Roberts suggests starting with a single house or smaller multiple-dwelling unit, perhaps with a partner, to see if the business really suits you.

"Single-family residences are the easiest properties to buy when you’re looking for investment property," Merrill says.

Condominiums usually require a larger down payment and monthly association fees.

Starting with a single home will allow you to get a feel for the maintenance, bookkeeping and other work required. Roberts and Merrill both recommend choosing an initial property without high-maintenance features such as elaborate landscaping.

Finding a good first tenant is also an important step. LexisNexis, USSearch and similar companies will run background checks on prospective tenants for a fee.

Smart move 3. Don't invest somewhere you don’t know.

As with any business, location can be critical.

A home that seems to be a steal might be priced lower because it's in a neighborhood most people wouldn’t actually want to live in — one that has higher crime, noisy streets or poor schools.

For that reason, investing in out-of-state property is a gamble. Roberts suggests buying in neighborhoods you know well or have carefully researched.

Smart move 4. Figure out the right rent.

Rents differ widely around the United States. Zillow, Craigslist or a real estate agent can give you an idea what they are where you’re buying. Then you need to determine if that rent will be enough to cover your costs.

Too often, people take a look at their loan and think if they cover that, they're doing fine. But you'll need to pay property taxes and insurance. Roberts uses a rule of thumb that also assigns 5% of gross rental income to regular maintenance and another 5% to pay for the downtime and repairs that come with vacancies.

Buzz Farlow, owner of Pioneer Properties, a property management company in Tucson, Ariz., says not budgeting enough for maintenance is a common mistake.

"Things break," he says. "You’re going to need some money in the bank to deal with unexpected expenses."

Professional organizations such as the Institute of Real Estate Management have more information on the income and expenses that come with different kinds of property.

You'll also want to know the rate of return you’re getting on your investment. There are formulas, such as the "capitalization rate," to help with this, but you might want to turn to a professional. A good accountant can make sure the purchase makes sense.

Smart move 5. Be ready to get your hands dirty.

If starting with a single home, you’ll find it to your financial advantage if you can manage the property yourself.

That requires those "certain skills" Roberts mentioned.

The better you are with tools, the easier it is to maintain a rental property without having to call in costly plumbers or electricians every time something breaks.

If you're the kind of person who has put off fixing your own leaky faucet for a month, this probably isn't the business for you.

Likewise, if you're uncomfortable at the thought of calling tenants to ask where their rent check is, you either need to put your money elsewhere or accept that you need to hire a property management company, which will add to your expenses.

Smart move 6. Get professional help when you need it.

If you decide to manage your property, you’ll probably need to consult a real estate lawyer to get a solid lease and learn the rights of tenants. You may want an accountant, and you’ll need a list of good plumbers, electricians and tradesmen.

Turning to a property management company is another approach, although it will take a bite out of your earnings.

"Once I had more than two or three addresses, it made sense for me to hire a property manager, just because my wife and I also have careers," Roberts says. "It’s worth it for us to pay 7% to 10% of our rental income to a manager."

Farlow believes vetting and then dealing with tenants is one of the more valuable services a good management company provides.

"It's a very different dynamic when a tenant is dealing directly with the owner," Farlow says. "There’s a tendency for the tenant to think they’re your friend, and that can complicate things. With a manager, it’s clear it's a business."

It's important to get references and check properties when choosing a management company. But even with a good firm, Roberts notes, you can’t ignore your property.

"They’re just not going to take care of it like you would. That’s still going to be your responsibility," Roberts says. "You’re going to want to inspect the property regularly. You want the property manager to take those late-night calls, but you want to keep a good eye on things."

Smart move 7. Keep your tenants happy.

"Of all the costs associated with being a landlord, the biggest one is vacancy," Roberts says. "Every time a tenant moves out, you’re going to spend money, probably quite a bit of it."

That means finding and keeping good tenants is the heart of successfully investing long-term in real estate.

"Happy tenants are critically important. They’re your customers," Robert says. "And the way you keep them happy is by keeping the property in good shape and treating them with respect."

Do that, and you’ll be building wealth with an investment you can feel good about.


This article originally appeared on Interest.com.

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