Smart Steps for Investing in a Second Property

Smart StepsDo you want to earn passive income? If so, investing in real estate might be the answer. As home prices stabilize, there’s been an increase in the number of people investing in rental properties.

Owning a rental property can create extra income for you each month. However, before you jump into buying a second property, you need to understand the good and the ugly. A rental unit is a big responsibility, so you need to get your finances in order and do your research before investing.

Improve Your Credit Score

The fact that you already own a home doesn’t mean you’ll automatically qualify for another mortgage loan. Truth be told, having an existing mortgage in your name makes you a risky applicant. Mortgage rules for buying a second/investment property are more stringent than buying a primary residence. Your lender may require a higher credit score and a lower debt-to-income ratio. Aim for a credit score in the mid 700s or higher. Pay off as much debt as possible, such as credit cards and auto loans, and always pay your bills on time.

Know the Local Real Estate Market

If you jump into buying an investment property too soon, you could end up in financial hot water. Research the local area. For example, what type of properties make good rental units in the area? What’s the average rental rate for these properties?

Knowing this information provides a pretty accurate picture of how much you should spend on a property, and how much you can expect in rental income. If you spend too much buying a rental property, you might not earn as much in rental income, especially if your mortgage payment is comparable or more than the average rental price for the area. Ideally, you’ll want to purchase an investment property below market value, such as a foreclosure or a short sale.

Can You Afford an Investment Property?

Consider whether you can realistically afford to purchase and own a rental property. Based on the condition of the house, you might need to make improvements or repairs on your own dime. Also, once a tenant’s lease ends and he moves out, it might take a couple months to find a new tenant (depending on the local competition), at which time you’ll have to cover the payment. A rental property can provide a steady income stream, but there are no guarantees. So, make sure you can handle the monthly payment on the second property, in addition to your personal expenses — just in case the house sits empty for a period.

Consult with Other Landlords

There’s a good and a bad side to owning rental properties.  If your friends, relatives or coworkers also have rental properties, get their advice and listen to their stories. You might envisions yourself earning big bucks from an investment property, but owning a rental is work. You’ll have to pay taxes on your rental income, tenants might skip out on the lease early, and you never know when you’ll have to spend money on repairs. Speak with experienced landlords and then decide if you’re up for the challenge.

Buying a rental property can generate passive income and improve your personal finances. However, consider whether you have the financial resources and the time to manage a rental property.

This article originally appeared on Total Mortgage.

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6 Reasons Nice Guys Make Broke Landlords

broke landlordSuccessful property management takes more work than simply buying a house or condo and sticking a “For Rent” sign in the front. Being a landlord takes many skills, from handyman, to ambassador, to collection agent. Unfortunately, would-be landlords often make mistakes that cost them big time in both headaches and cash. Lots of these mistakes stem from operating their business as a nice guy.

Now, that doesn’t mean landlords should forgo being cordial and helpful to their tenants. Property management best practices dictate there are boundaries that property managers need to recognize and respect. Crossing these lines can result in renters taking advantage of the situation.

Here are six reasons nice guys make broke landlords.

They take applicants at face value.

Landlords who believe they can go with their gut in choosing a renter will often end up paying dearly for that mistake. Failing to perform a tenant background check, review the credit report, and speak to the current landlord can result in renting to someone who is unsafe or won’t pay their rent.  Avoid becoming a broke landlord by ordering a thorough criminal history records search, credit report, and reference check. Review every tenant background check to ensure a successful property management process.

They ignore negative information on the applicant.

A property rental best practice is to weigh all the information about a potential renter, and make a decision. Sometimes, landlords will try to be nice by ignoring  pieces of information that may be embarrassing to or reflect negatively on the applicant. Beware! Landlords who let a previous eviction slide or disregard bad credit or a shoddy work history can end up with an expensive disaster on their hands. Be consistent. Red flags in the tenant background check that make you not rent to one person should also be a factor in turning down another.

They break the rules for tenants.

Nice guys make broke landlords when they begin bending rules to help tenants out. Allowing a cat when there is strict no-pets policy. Making room for an extra vehicle when the lease says otherwise. These actions seem like no big deal, but they set bad examples. Soon, other renters will push the boundaries, and chaos will ensue.

They become too personally involved in tenants’ lives.

Saying hello during a property inspection is one thing, visiting for poker night and pizza is quite another. Fostering a professionally cordial relationship and communicating effectively with a renter is a property rental best practice, but draw the line. Personal friendships with tenants can go awry fast, leaving the landlord with a lost rent, an empty property, and possibly even a lawsuit.

They rent to friends, family.

It’s tempting to rent to a buddy or cousin who is going through a hard time. Landlords must keep in mind, however, they aren’t running a charity. Renting to a friend or family member sets a landlord up to not only lose rent, but the horribly stressful idea of evicting them. Family poses an especially big issue, as this can permanently damage existing relationships. Aunt Edna will never forgive you for kicking her baby son Joe out on the street. If this situation presents itself, the best best is to assist the friend or family member in finding a residence. But don’t let it be on your property.

They forget it’s business.

The overall goal of a landlord is to make money ontheir rental property. As we mentioned above, successful property management is achieved when the landlord operates in a professional, businesslike manner. Issues arise when landlords forgo business protocol and forget it’s business. By always running a rental business as you would any other business, you can avoid potential tenant pitfalls that can be costly in time and money.

By ordering a tenant background check, landlords protect themselves from renters who won’t pay or will damage the property. Additionally, while landlords don’t need to be monsters, they must maintain a professional stance when communicating with tenants. Avoiding these six behaviors will minimize your chances of becoming a broke landlord.

This article originally appeared on AAOA.