WANT TO BE A LANDLORD?
The HGTV channel continues to excite people’s interest owning residential real estate, including rental property. I have seen more interest the past few years than in several decades. The biggest development in home rentals (besides Airbnb, which is huge in itself) has been the national firms buying and leasing single family homes. In addition to that we now have what I believe is our first completely new single family rental subdivision in Southeast Austin. (More on this later.) All this competition has to make it more difficult for the small investor to find deals . . . not impossible, just more challenging.
It is one thing to find a good rental property to buy, but another thing entirely to secure financing. Now most lenders require landlords pay 25% down, as well as charge approximately ¼% more than the going rate for homeowner occupied loans. Most lenders also require a valid signed lease prior to closing, which can prove challenging. On top of that, most lenders limit small investors to no more than four investment property mortgages.
Despite all financing challenges, I am still a strong proponent of owning a rent property or two. In fact, I often suggest that young people consider purchasing their first home with the ultimate goal of moving in a few years and converting the initial homestead into a rental unit. It is a reasonable way to begin investing with more advantageous financing. While very difficult to find in this market, a duplex is usually a great choice for a first home. The other side provides an income and the duplex homeowner gets the important hands-on experience of dealing with a tenant and property ownership. That is exactly how we learned the landlord business.
Yet, I should qualify all of this by stating the obvious: not everyone should be a landlord. And for those folks who have an interest in real estate but no spare time, they can still successfully own rental property, but they probably should engage a professional property management company. Needless to say, good property management comes at a cost.
As for the owners wishing to personally manage their rental property, I tell my clients they should know several things upfront. First, it can be time consuming. I may go several months without a problem, but dealing with vacancies and make-readies can take time. Sometimes it seems that air conditioners are almost guaranteed to go out while you are on vacation! You have to have contractors you can truly trust.
Second, landlords need some degree of “do-it-yourself” ability. I still try to personally see any problems in order to understand the scope and severity before calling out service people. Often, the tenants are mistaken about what is a problem really is.
Third, it helps to be a people person. Landlords are in the service business. Renters are our customers and it is expensive to lose them. Successful landlords are fair, but firm. I believe in clearly setting expectations before tenants move-in.
Finally, I recommend to my clients that they strongly adhere to a policy of requiring excellent credit. People with near perfect credit conduct their lives responsibly. They pay their bills, they follow the rules, and they do what they say they will do. Admittedly this policy can lead to a longer marketing time, but I find it is worth it in the long run. A number of companies make screening tenants much easier now. National Tenant Network is a long-established firm that researches my applicants. A newer, on-line company, Cozy (Cozy.co), does screening, payment processing and much more.
Rent property is truly a path to financial freedom for the people who are willing to put in the effort. It is like a combination of a monthly savings account and an appreciating asset. In essence, the goal is to buy something with borrowed money and let the tenants pay it off.
I looked back and in December 2009, I wrote an article suggesting it was a great time to buy a rent house. In that same newsletter, I wrote that the median price house in Northwest Hills was $258,333! What will it be in another ten years?
If you have an interest, give me a call and I will be glad to help you decide if this is for you.
Jeff Stewart, CCIM