Mortgage rates are still hovering near record lows. And, for most parts of the country, it’s cheaper to purchase than rent, which means you can buy low and rent high. (Curious to see if your region is a hot rental market? Check out our map of the the best and worst places to be a landlord.
The time is also ripe right now for would-be landlords because the recovery in the housing market is accelerating. Real estate research firm CoreLogic reports that nationwide home prices were up 10.5% year-over-year in March, according to the latest data available. “While some former bust markets are experiencing rapid new home sales demand, due to the decline in distressed supply, the rebound in other markets is due to economic improvements, such as employment growth,” notes CoreLogic senior economist Sam Khater.
A rental property has a ton of financial advantages. It can appreciate in value over time, and provide you with income once expenses are paid. Rental property ownership also offers many tax benefits, including the ability to sell the property and buy a similar one without paying capital gains tax on the transaction.
But there’s more to being a landlord than simply purchasing property. ”Finding the right tenant, coordinating lease documents, handling maintenance … all of these things take time, energy and money,” says Ellen Derrick, a CFP® with LearnVest Planning Services.
She should know: Derrick and her husband, John, own three duplexes, and they’re about to buy a single-family house to rent. Her husband also co-owns a property management company. “A lot of my knowledge comes from watching him over the last 13 years,” she says.
Dabbling with the idea of picking up a rental property of your own? Here are five key things you need to know well before you hand over the keys to that new tenant.
Hone in on the Right Neighborhood
Location, location, location may be the most common refrain you’ll hear while real estate shopping. But Pierre Calzadilla, manager of apartment industry relations at online real estate marketplace Trulia, has more specific advice: Purchase property near universities, vacation areas and large workplaces. Basically, popular locales where renters tend to live.
His other tip: Avoid pricier spots that will cut into your profits as a landlord. “You’re not going to find great deals in a place like San Francisco, where buyers are paying 20% above asking price,” says Calzadilla.
But if you do live in a high-cost region, you can still find neighborhoods or nearby cities that provide value to landlords, Calzadilla notes. For example, Oakland, which has a median home sales price of $557,000, offers relatively reasonable prices for rental properties close to San Francisco, which has a much higher median home sales price of $815,000.