Becoming a successful landlord can be a shrewd investment opportunity. You have the potential to make great financial gains, but it is not all plain sailing, and you must not assume that buying a property as an investment is an easy route to success. It takes a lot of time and energy to prepare a property for the rental market and to maintain its worth at the market value. Here are 4 tips to help you be a successful landlord.
1. Think Objectively
You must be able to separate between the properties that you would like to live in, and the ones that are good for investment. You are not going to be living in the property, so do not buy to suit your lifestyle. You need to concentrate on the percentage of your return on investment. Keep an eye on real estate rentals, and even go and ask them what their most popular rental properties are in your chosen location. The real estate agents know first-hand about what moves, and what doesn’t.
Experienced and successful landlords discriminate against certain properties because they have an understanding of what the tenants want, and what, as landlords, that means for them. For example, two-bedroom apartments that are quite new will attract young professional couples who are reliable tenants; however, they expect a standard of accommodation that may be expensive to furnish and remodel initially, but the maintenance costs will be low. Or, another option is to have more than houses with multiple occupancy, larger and more likely older properties that are converted from family homes into housing for multiple singles: the profit is far greater than renting to couples, but the initial expenditure will be large, and the time that the landlord must devote to the property is also far greater than a two-bed apartment. You need to think about the time that you realistically can spend on your enterprise.
2. Manage Your Borrowing
Unless you are a cash buyer for your property, you will have to undertake some form of borrowing. This is one of the main attractions of investing in property: your ability to borrow. Say you have a $110,000 deposit on a property, borrow $165,000 for a property worth $275,000; you rent it out at $1,250 per calendar month, which gives you an annual income of $15,000. Your mortgage rate is 4%, and so you pay back $550 per month – your rental income is now $750 per month – that’s an impressive return of 8% on your down payment; however, while the returns seem fantastic, they are not without risk. Borrowing rates are relatively low now, which means that they only have one way to go in the future, so you must have a financial plan in place to cope with any adjustments.
3. Make rental the largest aspect of your return
You do not want to rely on the hope that your investment is only going to ride on the coattails of capital growth, there have been so many disaster stories of landlords who have done precisely this. Your property is only going to be an asset if it services its own debt, if you find that you are having to top up mortgage payments each month with your salary, your property is a great liability. You need the rental income you receive to cover the costs of mortgage, and insulate you from any interest rate rises. So how do you ensure that you can command the greatest rent for your property? Here are 6 key features that tenants consistently target:
• A great location: tenants are always prepared to compromise on amenities if where the property is located is desirable. Consider transport links, closeness to shops, closeness to hospitals or universities, and entertainment. A great location negates the need for extensive refurbishment.
• Renovation: tenants are always attracted to properties that have had some form of renovation. This does not necessarily mean a complete remodel, but rather a coat of paint, perhaps new faucets in the kitchen and bathrooms, and a deep clean.
• Appliances: you may not have to provide appliances in your property as per your rental lease agreement, but if you do have to, ensure that they are matching; you can create your rental lease agreement. The aesthetic lure of matching appliances must not be undervalued, and is a simple way to attract renters. Consider getting a dishwasher too, while some people may consider it a necessary appliance, others will view the inclusion of one as a luxury, and something that sets your property apart from the competition.
• Off-street parking: if your prospective tenants are car owners, they will be drawn to your property by the inclusion of off-street parking, particularly in a city location. Parking is a premium in areas of high population density, and even in areas that are more suburban.
• Outside space: if your tenants are able to access some outdoor space that is large enough for them to be able to sit outside, you will be able to charge a higher rent, especially in urban and built-up areas.
• Storage: tenants are drawn to properties that provide adequate storage, so again, depending on your tenancy agreement, either provide it or ensure that there is space for them to store their belongings.
4. Always undertake tenant checks and inventories
No matter how personable and sincere your tenants appear, you must always undertake thorough screening of your tenants. You do not want your investment to be undermined by allowing unscrupulous tenants to take up residence in your property. Not only is the cost of putting right any damage that is caused throughout their tenancy a financial and potentially legal burden, but it will undermine the goodwill that your property’s neighbors and the community have for you, and they are your eyes and ears in your absence.
A detailed inventory is vital if you wish to protect your property further, and will allow you to be in control of your property when it is time for your tenants to move on. Every make, model and serial number of appliances should be documented, as well as every curtain rail, closet, bathroom accessory: any item that you have provided. This protects you from any risk of dispute if you are holding back any deposit at the end of the tenancy.
As a landlord, you are taking a financial risk, and so you must protect yourself and your investment by the decisions that you make. It is not only the location of your property that will determine your financial success, but the time and energy that you are willing to invest.
Good article Jamie! The last point is the most important. You can find the right house at the right price that will provide solid cash flow but if you install the wrong tenant you will lose. Thorough screening, credit and background checks including eviction records is the key to avoiding costly evictions and repairs.
I also ask the previous landlord (not their current landlord) about their payment history and how they treated the rental. This tells me what I need to know better than any reference from a friend or family member.