According to Reuters, demand for rental property is remaining strong despite other challenges within the economy, which means that it continues to be attractive for individuals looking to invest.
“U.S. housing starts rose solidly in September (2015) on soaring demand for rental apartments, a sign that the housing market continues to steadily improve even as economic growth has slowed.
… It was the sixth straight month that starts were above 1 million units, pointing to a sustainable housing recovery.”
Many are becoming landlords with the hope to change their financial future, and open doors that would have otherwise remained firmly shut, thanks to rising debt and fewer employment opportunities.
The worrying trend that we are seeing though, is for some to consider investing in rental property as a “get rich-quick” scheme, and a way to earn an easy buck. That couldn’t be further from the truth. Becoming a landlord is a long-term investment that can be extremely lucrative, but only when it is treated as a business with a carefully crafted strategy for success. This post explains why such a business plan is important to your success as a landlord.
Identify Your Goals
Becoming a landlord is not a form of passive investment. As we have said, it must be treated like a business, and as such, you must identify your goals before you begin.
Knowing what you intend to achieve in the short, medium and long term will help to shape your decisions along the way. For example, you should decide if you are looking for a strong passive income enabling you to quit your job, or are you looking to break even while you slowly pay off the mortgage, for a long term gain?
Knowing what you want to achieve will determine the amount of time and energy you invest in the business, and will reveal if you need to develop any skills in yourself, or if you should hire an expert to support you from outside.
Keeping all emotion out of the planning process will help you to see your objectives clearly, and you will be able to plan your strategy from there. If you feel like you can skip this step, take a look at the following excerpt from Personal excellence.co, on people that don’t set goals.
“Have you ever encountered people who have a passive approach toward life? They don’t set any goals and they just live life on a meandering, day-to-day basis. You see them 1 year, 3 years, 5 years from now, and their lives are largely the same, save for a few changes that are really more the result of others’ actions and desires rather than their own.”
2. Assess the Costs
Once you know what you want to achieve with your rental business, you can start to assess the costs involved. When purchasing rental property, these costs fall into two categories: the upfront payments and the ongoing fees. Both need to be considered carefully.
Much of the long term profit of a rental property investment is determined at the point of purchase.
If you pay too much for a unit, you will lose out in the long run, so always aim to buy below market rate. When it comes to the mortgage, research the options and take time to choose and secure the loan, trying to negotiate the interest rate will also make a huge difference to the profitability of your investment.
Take into account that with a rental mortgage, you will typically be required to pay a downpayment of 20% of the property value, and also to prove that your income will cover the cost of your own home loan, as well as the rental property.
The ongoing costs to consider include taxes, insurance and maintenance, and these should be weighed against the rental income. Once you are able to determine the expected monthly profit per unit, you can ascertain how many units you will need to procure to achieve your landlord goals.
3. Calculate the Risks
As with all investments, there is real risk involved with buying real estate to rent; therefore, a good business strategy is to calculate these risks carefully. It might be sensible to start small, with a single apartment for instance, learning the risks as you go.
Learn everything you can about your “product,” by which we mean the type of home you want to purchase to rent and research the area intimately.
You can even go as far as to pose as a potential tenant and visit rental properties on the market to discover what is available and for how much. Become an expert in the demographics of your chosen area, so that you can purchase the kind of property that appeals to the renters living there. Better still, enlist the skills of an experienced real estate agent who already knows more about these details than you could imagine.
We have all heard the overused phrase “location, location, location.” In fact, it is widely believed to be the single most important aspect about investing in real estate. However, it has been used so frequently that the importance has started to become watered down. The reality is that without a good location, the best numbers and the best data will quickly become irrelevant when buyers or renters show no interest in the property. [source]
4. Attract the Right Customer
Once you have decided on your location and property type, you have probably narrowed your pool of potential tenants to a select demographic, which is perfect. But you can’t leave it there. You need to attract and choose your tenant carefully. This will start with the rental price.
The amount of rent you charge should be chosen after considering your monthly costs and expenses, taking account of other properties on the rental market.
You want to remain attractive to tenants, without losing your monthly income. If it is possible to position yourself slightly below the average in the area, you should guard against expensive vacancy, but that is not always possible. Compare your initial goals with how much you hoped to earn as profit to keep you on track when making these decisions.
Screen your potential tenants thoroughly, using the same process for each. By checking credit and criminal ratings, as well as following up on references, you have the best opportunity of choosing someone that is reliable and responsible enough to pay their rent on time and take care of your investment.
If you do find a good tenant, then do everything in your power to keep them happy! They are your customer after all, and a good tenant will save you stress and money over the months.
“The essence of an investment in real estate is a good tenant,” said James McClelland of the Chicago-based Mack Cos., perhaps the largest owner-manager of single-family rental properties in the Midwest. “A good tenant in a bad location is better than a bad tenant in a good location.” Market Watch
5. Build a Solid Team
If all this sounds like hard work, then you are right! It is serious hard work. That is why a great part of your strategy could be to build a strong team around you, of trusted professionals across the industry that can assist you.
A real estate agent can be invaluable in supporting the purchase of your rental property, and can connect you with their network. Your team can include people in areas that you lack skills and expertise, and may include the following: an attorney, contractor, accountant, mortgage broker and even a property manager, that can handle ongoing inspections and tenant concerns. It is prudent to choose professionals based on personal recommendations, and keeping your business head, move on when relationships are not positively working for you. Once established, a team can save you time, hassle and money, so they are usually considered worth the cost of using their services.
“Engaging the services of a property manager is about more than no longer having to worry about the fine details. It also means that the big picture should be taken care of as well. And in this case, that means ensuring your properties perform to their utmost potential.” [source]
Becoming a landlord is simply a different form of developing a business, and as a result, it is essential to create a business plan. This article identified five of the main aspects to consider when starting out in the rental property business. We have covered everything from setting solid goals, calculating the costs and risks of rentals, keeping the customer happy and building a team. Following these guidelines will keep your business strategy clear in your mind, giving you the best chance of success.