There is an increasing interest among homeowners who choose to rent out their property instead of selling it when they move. Perhaps your home value has dropped, or you must leave quickly to take a promotion in another city. There are many reasons you might not have the time or inclination to sell your existing property.
For whatever reason you decide to dip your toe into the rental real estate market, there are five ways to tell whether you’re a born landlord — or not!
Do You Have What It Takes to Be a Landlord?
These five essential skills or achievements may tell you whether you're ready to become a landlord.
1. You Have 5% of the Property Value Save for Unexpected Expenses
Whether you’re renting out a property you own or searching for real estate rental property, it's important to have reserves to cover repairs and maintenance. Additionally, you should have 20% for a down payment if you choose to buy a rental property.
A large down payment can keep your mortgage payment low enough to cover your rental income. So, for a $200,000 home, you’ll need $40,000 for a down payment and $10,000 for big-ticket maintenance, such as roof or HVAC system replacements.
2. You Can Handle Problem Renters and Evict Them if Needed
Are you ready to deal with the headaches that come with owning rental property? What do you do when tenants don't pay the rent? Eviction has many repercussions and sometimes takes months to happen. Meanwhile, you still must pay property taxes, utilities, and other holding costs.
What happens when you have tenants with small children or members suffering from various illnesses? It's important to understand your limitations when it comes to dealing with problem tenants. However, you can always elect to hire a property management company if you wish to take a more hands-off approach.
3. You Don’t Mind Others Using Your Stuff
Whether you lived in the rental property previously or just have pride of ownership, there are a few things you must let go of when you become a landlord. Expect scratches on hardwood floors and stains on carpets. It's going to happen, along with other typical wear and tear. However, it's important to hold security deposits for excessive damage such as broken appliances and damage to window treatments, flooring, and other components of the rental property.
What happens if the cost of repairs exceeds the security deposit? You may have to take legal action to get your money back or report the tenant to the credit bureaus. Are you comfortable doing this? If so, you might make a great landlord.
4. You Know How to Screen Tenants
If you don't know how to do this already, you'll need to learn how to screen tenants quickly. This includes running a series of checks:
- Non-payment of rent
Build criminal and credit checks into your rental application and call listed references to find out about any problems with non-payment of rent. Even if you have your property manager handle the details, it’s important to know what it takes to find good tenants.
5. You Have a Moderate to High-Risk Tolerance
All investments carry risks. However, real estate rental property comes with unique challenges and considerations. Although real estate is generally considered a safe investment, property values go up and down. Also, your investment may not pay off for up to 10 years or more.
For example, the property values may fall, or competition may force you to lower your rent. So, it's important to know whether you have a moderate to high-risk tolerance to withstand market fluctuations without panicking.