Low mortgage rates have made buying a home more affordable and turned rentals into an attractive option for investors.
Throughout the downturn in the housing market, average investors, sometimes pooling their money, have bought foreclosures at a sharp discount and turned them into rentals. Many homeowners also have purchased a second home and rented out their first property.
Although the housing market is showing signs of recovery, demand for rental housing is expected to remain strong. The national unemployment rate remains high at 7.9 percent, banks are still working through a backlog of foreclosures and tight lending requirements prevent many renters from becoming homeowners.
And the Fed has said it will keep its short-term interest rate, the federal funds rate, at a record low until U.S. unemployment falls below 6.5 percent, something many economists don't expect to happen until late 2015 at the earliest.
"In this market, at this point, it's a sweet spot," says Chris Princis, a senior executive at financial advisory firm Brook-Hollow Financial and owner of two rental properties in Chicago. "You're getting the market where it's just starting to rebound, but still at the bottom, with what's looking to be a great recovery."
Here are six tips on becoming a landlord or investor in rental property:
1. UNDERSTAND WHAT IT MEANS TO BE A LANDLORD
Residential real estate generally provides three possible ways to get a return on your investment: when it's sold, assuming it has grown in value, by collecting rent and through tax savings, such as the mortgage interest deduction.
2. BUY IN AN AREA WITH A HISTORY OF STRONG RENTAL DEMAND
Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.
Condominiums and similar properties in communities with a homeowners' association can be a great option because the association arranges for upkeep on the property.
But check the fine print on your mortgage and homeowners' association rules to make sure turning your property into a rental isn't forbidden.
3. CONSIDER A USING A MANAGEMENT FIRM
Determine whether you want to select the tenant and handle property issues or hire a company to do it. If you take on the responsibility, you are obliged to fix any problems or find professionals to do it.
4. DO THE MATH
Although prevailing rental prices will go a long way toward determining what you can charge, getting the best return on your investment starts with making sure you're going to get enough rent to, ideally, cover expenses and costs.
Princis' formula is charging 15 percent above monthly mortgage and maintenance costs. So if those costs add up to $1,000, he'll look to charge $1,150.
5. SCREEN TENANTS
Screen prospective tenants by asking for previous landlord references and running a credit and a criminal records check.
Experts also recommend asking for a deposit equal to one month's rent, plus extra if the tenant has pets. That will help cover any damage to the property and protect you if a tenant moves without paying rent.
Also, have a walkthrough of the unit with the tenant and ask that they sign off on the condition of the property before they move in. That will help avoid conflicts over the security deposit if there are damages once they're ready to move out.
6. GET FAMILIAR WITH LANDLORD LAWS
It's important to know your exact responsibilities under the law.
Two good resources for rental rules are the U.S. Department of Housing and Urban Development's Web site (
www.hud.gov ), and The Landlord Protection Agency (
www.thelpa.com ), which includes state-specific rental guidelines and standardized forms for rental agreements.
