So You Say You Want to Be a Landlord

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168843834It’s a good time to be an aspiring property baron.

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.

You can find a heat map of current property prices by neighborhood for free on several websites, including Trulia and Zillow

  • Kristen Kepner-Coleman

    Un-Clogging a toilet is basic maintenance and is the tennant’s responsibility. If the toilet is clogged, they can call a plumber.

  • Choose your tenants wisely…

    I have spent my career in commercial real estate, and when my family bought a small single family home as an investment 2 years ago I thought, “Piece of cake! I can do this!” and I took on the management responsibility. My first tenants were so demanding (from the day they moved in) that I was miserable. Thankfully we have had better tenants since, but if you are the property manager, be prepared to get called at any hour of the day (weekdays and weekends) for absolutely anything. If you don’t have a fair amount of time on your hands it could be a nightmare…

  • Jennlee

    Kristen, yes a tenant should have a plunger, but if they won’t or can’t clear a clog then it is indeed the landlord’s responsibility. Even if it wasn’t, you’d want it to be if you were the landlord.

    As a landlord I had about $2000 damage to my property caused from a tenant’s toilet that was clogged and overflowed (tip: don’t flush dental floss, ever) and they never called me until after the damage was done. You know who pays that? The landlord, in nearly all cases. Many tenants have no care for property that is not theirs – for example, I had a tenant who plugged up her laundry drain and instead of telling me just decided it was OK to run her washing machine hose right onto the floor – minor damage here because it was in a basement. I’ve heard of tenants plugging their toilets and then just using the yard as a toilet because they didn’t want to have anyone into the place or have the landlord know.

  • kcheme

    Yikes! Those are some real horror stories. I’m a new landlord, and so far our tenant seems great. Hope it stays that way, but of course you never know about the next person…

    One thing that should really be added to this list is getting the proper licenses and tax ID set up in the city you plan to become a landlord in. In my city there are two separate licenses required, a business privilege license and a real estate rental license, as well as the need for a commercial tax ID number! And of course the the dept. of labor and inspections has the right to inspect the property at any time to ensure its habitable (although at least where I am they only do this if they get a complaint). Operating without the proper licenses in place means you lose any rights as a landlord in the event something goes wrong!

    -K