Thinking of buying an investment property to fund your retirement? Or maybe you want to own a rental home in order to have some extra income? Whatever your reasons are for being interested in an investment property, you should know that becoming a landlord is not without its challenges. Namely, there are some hidden costs when it comes to owning rental properties, but these tips can help you stay prepared.
Establishing Your Business
Once you’re ready to get started on your rental property business the next step is to file your legal paperwork and establish your business. Most rental companies form LLCs to protect themselves from legal problems should any arise and to separate their personal and business assets. There are a few things that have to be done to accomplish this:
- Check that your desired company name is available.
- File your Articles of Organization with the Secretary of State.
- Obtain any necessary copyrights or trademarks.
- Get a Federal Employer Identification Number from the IRS.
- Register your business with the Department of Revenue.
- Last, set up a business bank account.
Filing all that paperwork is tedious and time-consuming, which is why it may be a smart idea to hire a company that can file all that LLC paperwork for you.
Budget & Plan for Remodeling Costs
When you buy an investment property, chances are it will need some work. It may be tempting to put off some of those upgrades until you’ve collected a few rent payments, but some renovations need to be taken care of ASAP in order to attract tenants and avoid irritating them.
For example, you may need to install a new water heater if the old one is broken or faulty. Some other indicators that it’s time for a water heater replacement include leaks, rusty water, lack of heat and an appliance that is more than a decade old. Bear in mind that this can be a rather costly project, but this is one repair you won’t want to skip for your rental home. Also, keep in mind that this is one major home repair that is illegal to DIY.
Plan for Higher Property Loan Costs
Buying a rental home can provide some pretty lucrative profit, but first, you need to figure out how to finance your property. If you already own a home, you may think that the process is fairly similar, but in reality, getting a loan for an investment property tends to come with higher upfront costs and monthly expenses. That’s because banks and lenders consider investment properties to be much riskier to finance than residential properties. After all, you will not be living in your rental property so there’s less incentive to maintain the monthly mortgage payments. At least this is the way that lenders view these sorts of transactions. So if you are only thinking about investing in your first property, now is a good time to check in with your finances and make sure the time is right.
Start by examining your credit reports for any mistake or opportunities for improvement. You will need a much higher score to qualify for loans when you intend to buy a rental property, so this step is absolutely crucial. You will also likely need a much larger down payment, so if you do not have that saved, start using budgeting hacks to come up with it.
Before purchasing an investment property, it’s critical that you discuss your options with a knowledgeable and experienced realtor. A dedicated and insightful realtor like the Victoria Ranck Group will have first-hand expertise in your local market and can fully protect your interests.
Adjust for Maintenance & Management Fees
Once your investment property is secured and updated, you may think that the financial work is complete, but this can be a serious mistake. This is because if you don’t want to take on the responsibilities of being a landlord on your own, and novices really shouldn’t, you will also need to factor property management fees into your overall budget. These fees can vary by location and property management companies, but you typically receive a considerable amount of assistance in return for your investment.
Property managers are experts when it comes to marketing rental homes, which means your home will be vacant for less time, plus these professionals take the hassle out of collecting rent and dealing with tenant issues. Speaking of tenant issues, one of the most common problems will likely involve property maintenance, which property managers can also handle. Maintaining a rental home can be rather costly, so keep this mind. Also know you can recoup many costs on your tax returns.
If you play your cards right, owning an investment property can be a good way to supplement your income or savings. Just remember that there’s more to owning and managing a rental property than that initial purchase, so you can plan and prepare for the entire process.
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