Written by Rebecca GrahamRebecca Graham is BestCompany's expert on home loans and cell phones, empowering readers to make the best financial decisions based on data and research. Rebecca unplugs from consumer culture on occasion to hike with her family.
Part 2 of 2
Choosing a lender for your personal residence or rental property is an important decision and so is deciding on the property itself. In Part 1, real estate experts described circumstances in which purchasing an additional home and renting one of them makes financial sense. In Part 2, our contributors discuss the nitty-gritty of renting a property, including choosing a home type and how to best manage a property.
If you or someone you know is pursuing the course of additional-home ownership, consider this advice about renting various property types and the demands required of landlords.
Choosing a property type
“There are ways to mitigate your risks when owning a rental property, such as buying multi-family properties. If you are renting a single family home and your tenant moves out, then you are stuck paying for the turnover costs and the vacancy while you try to fill that vacancy. However, if you have a 4-unit property and one tenant moves out, you still have three units producing income. The income from the three other units will still pay for the mortgage, turnover costs, and marketing costs.
Purchasing a multi-family property will not negate that you're still going to run into bad tenants, repairs, and vacancies, but it will allow you to use cash flow from other units to pay for the unit needing attention.”
Shawn Breyer, Owner of Breyer Home Buyers of Atlanta
“Single family homes and duplexes are always a safer investment bet than condos since you have more control over your expenses. If you run into tough times, you can decide to turn off the water or electricity, skip the landscaping, drain the pool, etc. In a condo, those things stay maintained, and your condo fees don't change just because you are having financial challenges.
On the other hand, condos are just so much easier to maintain, especially if you are an out-of-state investor. The association does most of the heavy lifting.”
Sep Niakan, Founder and Broker at Condo Blackbook and HB Roswell Realty
“Renting condos is a completely different ball game than single or multi-unit residences. Prospective home buyers (without expertise in real estate investment) should proceed with caution before purchasing a condo as an investment. Condos are subject to a Homeowners’ Association (HOA) and the associated HOA fees. HOA fees, used for upkeep of the community’s common areas, cost hundreds of dollars per month. HOA fees often cause rental property to be a net loss every month. Unfortunately for homeowners, the HOA fee is beyond their control and thus even a smart landlord can’t mitigate it. I often work with sellers who are desperate to get rid of their condo because the HOA fees are slowly draining their finances.
Prospective condo buyers must also be wary of the dreaded “special assessment.” This occurs when the HOA makes a one-time expense, repair, or improvement, and charges community members for that expense. To guard against unexpected special assessments, condo buyers should request financial statements from the HOA to ensure it has enough reserves to cover unanticipated expenses.”
Earl White, Co-founder of House Heroes
Juggling demands as a landlord
“You or a property manager need to respond to the plumbing leaks, appliance failures, and complaints that the grass is too high or that there are bugs. In some instances, roommates don’t get along, the renter and other owners or tenants don’t get along, or the HOA wants something done. You may have collection and default issues to deal with. For that reason, having a professional management company is well worth the expense.”
Bruce Ailion, Realtor and Attorney at RE/MAX Town and Country of Atlanta
“A big part of the challenge that people face when getting a rental property is staying on top of all the things they need to do manage, maintain, protect, and possibly improve their rental property. Here is a quick list of things that people need to be prepared to manage for their rental property:
- A preventative maintenance schedule: The rental will need to have the gutters cleaned, the air filters replaced, the hot water heater drained, the dryer vent duct cleaned out, trees pruned, etc. Having a digital property maintenance calendar that reminds you of when these things needs to be done is important to avoiding expensive repair costs.
- Many people buy a rental property and spend money remodeling it to fix it up. It is important to plan out a budget, track costs, and keep photos, receipts, warranties, etc. for all the new material installed on the project. This will keep on you budget, but you also need to save this info for tax time and to make sure the home is properly insured after the new remodel. If you ever sell the rental, it is helpful to use this information to market the home.
- A home inventory is important to make sure the house is insured properly. Taking and keeping photos of the condition of the house and all the equipment and appliances ensures you are prepared in case disaster strikes your rental.
- Stay on top the estimated value and your equity in the rental property. Home values are always changing based on the local neighborhood market conditions and your mortgage balance is always changing based on mortgage payments.Keeping track of the difference is your home equity, which keeps you informed and ready for the right time to re-sell.”
John Bodrozic, Co-founder of HomeZada
Final thoughts: benefits of renting your home
“I had a nice home in a suburban neighborhood and decided to move into a downtown atmosphere, so I rented out my home to move into a rental. In order to make this decision I had to consider the current rental market and weigh that against my own financial goals. In my case, I could have sold the home for a small profit, or rent out the property and have a small deficit at the end of each month. I made the decision to rent because I felt that my original neighborhood was still rebounding from the drop in 2008 and equity was still building. Would I put $200 a month into a savings account or keep building that equity? This was the question I considered.
I am a big proponent of keeping real estate whenever possible. The cost to sell a property can be significant and eat into your profits if you move too often. These should be considered and as long as you are working on paying down the mortgage and comfortable being a landlord — why sell it? Especially when many of your other options are low-interest savings accounts.”
Teris Pantazes, CEO and Co-founder of EFynch
“I spent the last 19 months writing about my experience as a homeowner turned accidental landlord due to the housing crisis. I had to move but couldn't sell at the time, so I decided to become a landlord and I have had absolutely no regrets! It's a been a great learning experience, and I have since expanded my portfolio.
My advice to people considering this strategy is to first run the numbers and see if it makes sense. Not every property can be a rental. Second, take stock of your abilities. Do you have the skills and mindset to treat it like a business? Because that's what it will be. It is no longer your home. It is a business.”
Domenick Tiziano, Blogger at AccidentalRental