Part III: Minimize your Rental Property Risk & Maximize your Potential Income

Here’s the good news – tamping down the potential disadvantages of investment real estate is actually quite simple. While you won’t be able to eliminate the risks completely, I offer the following tips to inform your decision making process.

Be Realistic with your Expectations – Of course your goal is positive cash flow, but keep your lifestyles of the rich and famous dreams in check! Just like with the sale of a property, the market, not you, sets the price of the home. Resist the temptation to raise your rental rates to unrealistic rates, potentially pushing out good tenants.

Balancing Act: Earnings vs Effort – Do you plan for a hands-on approach as a landlord, or will you work with a property management firm? Passive income will feel anything but if you are putting in long hours as a landlord after working a full time day job. There are property management firms that will run your rental property for a percentage of the rental income, and this may be a wise investment if you are employed full time.

Know the Rules of The Game – Federal and state laws outline your responsibilities and liabilities, and you won’t be able to claim ignorance if something occurs outside the bounds of the law in a rental transaction you are a party to. You are responsible to do your due diligence, and an investment of your time at the library or with a legal expert in the field of Real Estate could help you avoid courtroom drama later on.

Inspect your Investment – I would never advise a client to invest in a property for personal or income purposes without conducting a professional property inspection. One of the best ways to avoid unexpected expenses is to have the property inspected by a professional before you buy it, and this is true of both a personal home purchase and a rental property.

A Well-Written Lease is Worth its Weight in Gold – If you are unfamiliar with the process of creating a property lease, consult an expert such as a Real Estate attorney or property management company. Expect the best, but prepare for the worst; if you find yourself in court later for a tenant violation of the lease, the terms of the lease will be your ultimate advocate.

Take the Time To Call References and Run Credit Checks – Too many landlords rush to fill a vacancy rather than taking the time to make sure the prospective tenant is a better option than an empty property. If you have time, you may want to drive by a prospective tenant’s current living space – that is what your property will probably look like when that tenant lives there.

Join the Landlords’ Association in Your Area – Joining an association will provide you with a wealth of experience as well as sample leases, copies of laws and regulations, and lists of decent lawyers, contractors and inspectors. Some associations may even allow you to join before you buy a rental property. Make the most of the connections available to you and network network network to gain knowledge about your Real Estate investment.

Make Friends with a Lawyer, a Tax Professional and a Banker – If you find that you like owning rental properties, a network including these three professionals will be essential if you want to increase your holdings.

Make Sure You Have the Right Kind of Insurance – After learning the rules, you will need to buy insurance to cover your liability. You will need the help of an insurance professional to select the proper package for your type of rental property.

Create an Emergency Fund – This is essentially money earmarked for unexpected expenses that are not covered by insurance. There is no set amount for an emergency fund. Some say 20% of the value of the property, but anything is better than nothing. If you are getting current income from a property, you can pool that money into an emergency fund until you have a level of emergency savings you are comfortable with. Plan for potential vacancy periods; How long would you be able to keep up mortgage payments on your investments without a tenant in place? Plan accordingly.

Investing in a rental property can be an excellent decision if you go into it informed. Whether your dream is a cozy cottage in the suburbs for your family or an entire condominium building in the city to invest in, give me a call. I’m here to help with all of your personal or investment property needs.

Jack Meyers

jackestate@aol.com

303.263.3050

Twitter: @jackestate

Advertisements

Part II: Making Informed Decisions about Income Property

The Potential Risks of Rental Real Estate
Becoming a landlord can mean a lucrative opportunity for long term passive income, but there are risks involved. Read on to learn some of what you need to know before making this type of investment.

Liability – What happens if a tenant trips and falls over a loose bit of decking on your property? Frivolous lawsuits are a real risk as a landlord, and this type of liability can be a scary thing. Providing someone with shelter in return for money puts you and the tenant in a relationship where both parties bear responsibility. It is up to you to ensure that the property you are renting out meets all government codes.

Unexpected Expenses – What do you do if termites move in? The water heater goes on the fritz? A pipe bursts? It is impossible to prepare for every expense related to owning rental property, so there are bound to be some unexpected ones. Things such as boilers, plumbing and fixtures often need to be replaced and are not prohibitively expensive. However, faulty wiring, bad foundations, compromised roofing and the like can be very expensive to repair. If you can’t find a way to pay for repairs, you will be left without a tenant and with the grim prospect of selling the property at a significant discount.

Bad Tenants – No one wants to have to use a collection agency to collect overdue rent. Unfortunately, almost every landlord has a story that involves police cars escorting his or her tenant out of the property – erasing all hopes of getting the five months’ worth of overdue rent. Bad tenants can also increase your unexpected expenses and even hit you with a lawsuit.

Vacancy – No money coming in means that you have to make the payments out of your own pocket. If you have an emergency fund for the rental property, you will be able to survive long vacancies with little trouble. If you don’t have one, you may find yourself scrambling to pay the rent to the harshest landlord of all – the bank.

Does this reality check find you running in the opposite direction of the life of a landlord? Before you write off this investment potential, stay tuned for Part III of this series: Tips for Minimizing your Rental Property Risk and Maximizing your Potential Income.

Jack Meyers

jackestate@aol.com

303.263.3050

Twitter: @jackestate

Are you ready to be a Landlord? The Pros & Cons of Income Property

If you’ve ever thought about investing in the lucrative Real Estate market, now is a great time to jump in! The economic challenges of the past few years have led to an influx of renters in Denver and many metropolitan areas as former owners have become renters. Rental rates continue to rise and attractive properties are snapped up by renters within hours of posting – all across town. Landlords have their pick of tenants in this market. There are pros and cons to owning a property for rent. Read on for more information on the potential benefits of Income Property.

The Advantages

Passive Income – This refers to the funds left over after the mortgage and related expenses (HOA, maintenance costs, etc) have been paid. “Passive” income is basically cash that you did not have to work for – your property produces it for you.

Appreciation – Real Estate generally experiences appreciation as time passes. Appreciation is not guaranteed. However, if you own a property in a stable area, the property will likely increase in value over the years.

Leverage – Much like purchasing the home you live in, rental properties can be purchased with borrowed funds. This means that you can purchase a rental property by putting down only a percentage of the total value. The property you purchase secures the debt, rather than your other assets. You may lose the rental property, but you shouldn’t lose your own home.

Tax Advantages – Your rental income may be tax free if you do not receive net cash flow after expenses are deducted. This means that your mortgage is being paid down and you own more of the total value of the property (rather than just controlling it), but you do not pay taxes on the money that is doing this for you. In addition to this, you can also pull out tax-free money by refinancing your loan if the property appreciates and the interest rates have fallen. Lastly, you may be able to avoid paying taxes on the sale of a rental property if you sell it and reinvest the money in another property (called switching or tax-free exchange).

Stay tuned for Part II of this article – Making Informed Decisions about Income Property.

Jack Meyers

jackestate@aol.com

303.263.3050

Twitter: @jackestate