Rental property investing has some specific financial factors to consider before you begin.
- Successful Central Alabama rental property investor Deborah Dias advises buying within your means. “Make sure you have enough for the property PLUS the needed renovations and repairs. Don’t overextend yourself trying to make a buck. It’s way too stressful,” she said.
- Many lenders consider a loan for a rental property riskier than a loan for the same property that will be lived in by the owner. Insurance on rental properties is higher too.
- “Talk to your banker or lender about your business goals and pre-approval to purchase,” said Carol Bowman, a Realtor with Lucretia Cauthen Realty, “and have a financial plan in place to make repairs, perform maintenance and carry the mortgage costs between renters.”
- Have a plan in place for managing your property. Will you do it, hire a property manager to handle it all or take a hybrid approach?
- Know (and follow!) all the provisions and requirements of the Fair Housing Act as well as other laws and legal paperwork pertaining to rental properties. “Talk to your property manager or attorney about the documents needed, like an application and a lease,” Bowman said.
- Dias added this: “You need a thorough application process to help you determine who the right renters are. My criteria are no past evictions; gross income three times the rent; and three months verifiable income,” she said. “From my experience, finding tenants with good credit has been a bit of a challenge, so I keep an open mind regarding the circumstances that brought down their credit score.”
Pro Tip: Zillow helps landlords screen potential renters using an online application and background checks.
- Pay attention to the tax benefits; some costs associated with your rental home can be deducted, and a 1031 exchange is another tax perk to explore, and one that Dias has used. “I have sold a house in the 1031 exchange sales structure,” she said. “It allows you to defer capital gains from the sale by ‘exchanging’ like properties.”
Wondering how rental rates get determined? Most property owners/landlords follow the 1 percent rule, meaning they charge between 0.8 percent and 1.1 percent of the home’s value. But it’s also wise to check the rent prices of local comparable properties.
According to Zillow, the average monthly rent (across the country) went above $2,000 in mid-2022.