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The same is true with rental properties.
View the questions below not has having a right or wrong answer but as having a right or wrong answer for you. Note these questions were not compiled in any particular order. Good luck and keep me informed of your success!
1. What type of property do you want to own: a property that isn’t likely to appreciate but generates strong cash flow or a property that hopefully you can sell in the future for a profit but whose rents typically don’t even cover the mortgage payment?
2. How much cash do you have for a down payment and any necessary upgrades? Remember, most banks require larger down payments for rental investments than primary residences and they tend to charge higher interest rates as well, so be prepared.
3. How long can you survive financially if you didn’t have any rent coming in? If you have a problem tenant or if you are between tenants, how long can you go before you get desperate and make a decision that may not be the best long term because you need cash today. Always try to have reserves to protect against these issues.
4. Do you have the personality to deal with flaky tenants? Sometimes problems happen and you need to be able to deal with these problems. If that is not you, no problem. That is what property management firms are for. Just budget accordingly because they need to be paid.
5. Do you have the time to show the property to prospective tenants? The more flexible you are in showing the property, the more people can see it and the quicker you may find somebody to rent it to. On the other hand, if your job is restrictive or if travel is an issue then you it may take you longer to find a tenant since you can’t show it as often.
6. How far will you drive to change a light bulb? If the property is far from your house, than stopping by to check on the condition of the property or make minor repairs will feel like a major hassle and you may be more willing to pay a professional to do something minor, such as an electrician to change a light bulb, because the thought of driving that far is not worth the hassle.
7. Are you handy? I am not handy at all so I have a higher budget for repairs where other owners I know do all the maintenance themselves. Don’t plan on saving money on a contractor if you don’t know the difference between a Phillips screwdriver and a Wilson Phillips record.
8. What will the neighborhood look like in ten years? Rental properties tend to be held for many years so try and imagine what the demographics will look like in 10-15-20 years. If you are not comfortable with that potential future, then look for another property.
9. What type of tenants would you prefer to deal with? Owning a property near a college lends itself to renting to college kids. College kids have different traits than office professionals. Also consider the number of rooms in the property. The more rooms, the more people the house can hold and past a certain number of rooms, you begin to see multiple families joining together to rent a house. Every type of tenant has their own strengths and weaknesses, but you should try to match your personality style with their style.
10. Where will you get your financing? Will it be a fixed term or adjustable term? How much does the bank require as down payment? What credit score does the bank need in order to lend you money?
11. How will you find prospective tenants? I have used Craigslist, curbside signs and realtors. Ask around other owners in your neighborhood on how they found their tenants.
12. Do you want your tenants to know where you live? My tenants mail their rent checks to my house so they know my address. One of my friends who also owns rental properties gives his tenants a PO Box to mail their rent checks to so they don’t know where he lives.
13. Who will manage the properties when you are on vacation? Either you need to leave a number on your voice mail for who your tenants can call for help while you are unavailable or you need to be able to reach somebody local to take care of problems if your tenants can call you while you are on vacation.
14. What are the realistic rents that the property or area could support? I made the mistake once of fixing up one of my rental houses too nice for the area. I tried to rent it for a number where I would make the money back that I put into the house, but past a certain rent amount, I found people would rather buy than rent or if they were renting would rent a bigger, nicer house.
15. How long do you plan on holding on the property? If your rents more than cover any mortgage and repairs, this is not a big issue, but if you find yourself “feeding the kitty” every month, you should already have a plan as to what price point you will sell the property for a profit and how much losses you will suffer before selling it and walking away.
16. Do you have a list of service professionals you can call for help? I keep numbers on file for the following people: electricians, tile people, plumbers, painters, gardeners, carpet cleaners, property management, realtors and landlord legal help.
In addition to the list above and due to the complex nature of tax accounting for rental properties I strongly suggest you consult your tax professional for guidance concerning how any rental income, expenses, and depreciation may or may not impact your taxes.
