The home inspection came back with positive results, and you're prepared to purchase a property to later rent out. In the excitement of buying the house and the prospect of additional revenue, you may not consider whether you have what it takes to become a landlord. Anyone with the proper financing can purchase a home and say it's a rental, but managing it is a large responsibility.
Here is what you need to prepare for when deciding to become a landlord:
It costs time and money
Besides the process of buying a home, getting a property inspection and closing the deal, it will be some time before your rental house starts earning back the investment. For the first few months, you may not be able to find tenants, have more paperwork to complete or need to finish some repairs. If you get a mortgage for the property, you'll have to pay out of pocket for the monthly bill until the rent starts coming in. The same goes for property taxes.
Additionally, you have to pay for any updates, which can be a significant investment if you're completely rehabbing a home. After you have tenants, you'll pay expenses as the property manager, hopefully recovering them through rent payments.
There are also legal fees, higher taxes and higher homeowners insurance costs for rental properties.
You have to actively manage
As a landlord, you're not able to hand tenants the keys and go about your life. You'll have check on the home every so often to ensure that it's not in a state of disrepair, vet potential tenants and complete maintenance duties. Managing a property is a second job that can at times be more demanding than your main employment. If your tenants have a gas leak or pipe burst, for instance, you may be required to respond to the issue immediately depending on local landlord/tenant laws.
You have the option to contract all or some of the management duties out to a third-party vendor for a regular fee. Some companies sell the property themselves with the understanding that they're responsible for the legwork and you're the owner. If such services don't appeal to you, be prepared to free up some more of your time and brush up on your home improvement skills.
Some tenants are terrible
Before anyone can rent your property, you have to decide on rules for tenants. This includes when rent is due, which maintenance issues are the tenant's responsibility, which utilities the tenant will pay separate from rent and a host of other guidelines to ensure all parties are happy with the rental arrangement. These rules will need to be provided to your renters when they sign the lease.
Hopefully, your tenants will read, understand and comply with the guidelines you determine. However, there are some renters who are unruly. They don't pay rent on time, keep the property clean or respect their neighbors. In regard to the first point, you may have to eventually evict a tenant and miss out on revenue until the unpaid rent is recovered, which could be a while. Furthermore, if the home is a mess when tenants move out or are evicted, you'll have to handle cleanup and possibly pay out of pocket for these expenses until restitution is received.
There are benefits
Rest assured, your investment will not always come with headaches. Owning and managing a rental property provides the opportunity to build equity and pay off a mortgage in full through rent payments alone. Plus, there are some tax deductions you may qualify for as a rental homeowner.