10 Tips for Rental Investors, Part 2

By Christina Suter on Dec 14, 2011 at 10:00 AM in Real Estate Issues

In Part 1 of this article, I provided my first five tips for rental investing in today's volatile market. Here in Part 2 are the remaining five caveats to consider if you want to become a landlord.

6. Screen Tenants Carefully

Talk to any landlord and you will no doubt hear horror stories of nightmare tenants who stopped paying rent, trashed the premises or regularly hosted wild parties. The eviction process should only be a last resort and can often drag on for months. That’s why you always need to screen tenants with care (or outsource this to a reliable firm), including a credit report, background check and calling references from their rental application.

7.  Foresee Emergency Repairs

Collapsed roofs, burst water pipes, cracked foundations…it is the nature of buildings to fall apart when you least expect it.  As a landlord, you must be able to respond quickly to emergency situations or use a reputable property manager to oversee the property and handle repairs. Although expenses are normally considered to be 35% of your gross rental income, count on 50% and reserve the extra 15% for emergency repairs and replacement costs of large items like a roof.

8. Hire a Property Manager

If you own investment buildings far away, or prefer to avoid hands-on management, hire a local property manager to respond to emergencies, perform maintenance, collect rent and screen tenants on your behalf. Remember, if you manage them well, you can get a mediocre management company to perform well. But you cannot get a bad management company to do well no matter what you do. To find a reliable company, ask local owners for referrals, study their websites, interview at least three candidates and call their existing clients. Typical fees are 5–8% of your monthly rent on multi-units and can be up to 25% on single-family properties—be sure to negotiate your rate with the management company to get the best deal.

9. Expect Higher Expenses

In addition to closing costs of 2-4% of the purchase price, general maintenance costs, including taxes, property insurance and repairs can eat up a lot of your investment profits. In states prone to natural disasters such as flooding, tropical storms and earthquakes, insurance premiums are often raised dramatically without notice. Extensive water damage might lead to mold, which insurance companies are notorious for punishing; this could more than double your insurance costs for several years. In these situations, be sure you have cash reserves on hand of several months’ rent or the 15% reserve discussed in point 7 above.

10. Don’t Depend on Refinancing

Since the housing bubble burst, lending standards have tightened greatly in comparison to the last 15 years, despite lenders’ claims that they have returned to traditional standards. They seem to be overcompensating for their previous deficiencies that led to the meltdown. With a decreasing market still ahead of us, I strongly suggest that you do NOT count on being able to refinance to improve your buildings’ cash flow. While it may work out in some cases, do not count on those funds being available, especially as an investor. Banks prefer to refinance loans for homeowners, whom they perceive as being less likely than investors to walk away from their property.