You have your CDs, stocks, bonds and mutual funds. Real estate is one way to diversify your investment portfolio. There are still some bargain deals out there and you have always wanted to be a landlord.
Just like with any other investment, with real estate you have to do your homework. All too often, I see real estate investors jump in without properly doing their homework. These investments frequently crash and burn.
For example, I saw one investor fall in love with a cute little house that would be just perfect to rent. She was able to rent it out ok because it was so nice. But it cost her nearly $1,000 per month in expenses over and above the rent received. She had to feed it every month.
In another instance, I saw a recent retiree who had never been a landlord before, cash in his entire 401(k) for a down payment on a 25 unit apartment complex. No bank would lend him the money for the balance because he had no landlording experience, so he seller financed with a land contract at 11%. Fast forward three years: no cash available to make needed repairs, defaults on land contract, loses apartments, loses retirement and has to go back to work to pay his bills and to pay income taxes on his 401(k) withdrawal for which he did no withholding.
When looking to invest in real estate, the three most important factors are location, location and location. As part of your exit strategy, you or your loved ones will eventually need to sell the real estate.
For rental property, you want to make sure that it has a positive cash flow. If a property has a positive cash flow, it is bringing in at least as much income each month as there are expenditures. You do not want to have to feed it each month with additional investments.
Once you have a property, your next task is to preserve and protect your investment. To assist you with this, you need adequate capital. For non-income producing property such as vacant land, you shohttp://www.emrha.orguld have adequate capital to cover expenses for the period of time you expect to own it, times two.
For rental property, you want to be able to cover property expenses for at least three to six months in the event you have very little rental income coming in. You may want to extend this cushion to six to twelve months or longer.
Qualified tenants are the key to preserving and protecting rental property. There are a variety of ways to find tenants. Yard and/or window signs can be effective, especially for prospective tenants driving through neighborhoods in which they want to locate. You can purchase For Rent ads in the newspaper and/or list them with a realtor who, for a fee, will locate prospective tenants.
There are both fee based and free online vacancy listing services. Through the website of the Eastern Michigan Real Estate Investment Association at HYPERLINK “http://www.emrha.org” www.emrha.org, you can have free access to Michigan Housing Locator vacancy listing service. You can list your vacant properties with photographs. When the unit is rented, just check a box on the website and it no longer shows up on the listing service. After the tenant moves out, un-check the box and the listing again appears.
There is no one way that is a sure fire way to get good tenants. It is best to use a variety of ways to get word out that your unit is available for rent. What has been effective for me is window and yard signs. along with a listing on www.michiganhousinglocator.com.
Once you have a prospective tenant, you will want to screen them. To do that, you are going to need a full and complete application from the prospective tenant. I ask for a completed signed application for every occupant over the age of 18, even if they are not responsible for the rent. The application should include driver’s license and social security numbers, former landlords with phone numbers and proof of income. A signed authorization that you can do credit and reference checks should also be included on the application.
With application in hand, verify the information. Check with prior landlords. I know some landlords who contact all prior landlords within the last five years. Check the St. Clair County Register of Deeds website to cross check the landlords and addresses listed on the application with public records. It is not uncommon for some prospective tenants to list friends’ names and numbers as their former landlords.
Next, verify income with the employer or other sources. Always do a credit check. Nowadays it may be difficult to find people with good credit. However, if the bad credit is due to unavoidable expenses such as medical bills or an illness, it is a whole lot different than if people have just not been paying utility or Visa bills. Through www.emrha.org, you can pull credit checks twenty-four hours a day, 365 days a year.
Do criminal record checks. Check federal and local court records through links on www.emrha.org to see if prospective tenants have any Federal, State or local reported criminal violations or evictions. Do not overlook the links to the Michigan Department of Corrections list of convicted felons and the Michigan Sex Offender list.
Once you get a good prospective tenant with good references who can pay the rent, enter into a comprehensive lease with them. Some landlords like month-to-month leases while others prefer one-year leases. I personally prefer one-year leases because I find that I get less transient tenants that way. As long as you have a comprehensive lease, you can generally evict somebody if they are causing any damage or disturbing the neighbors.
Even if you do you screen your tenants, some do slip through. I find that even with extensive screening, I have a really bad tenant every 3-5 years that I have to evict.
Seek out other landlords who can mentor you in the landlording business. When choosing a mentor, see how familiar he or she is with the court process. If the landlord is intimately familiar with the court process because he or she is in court all the time, you may want to choose another mentor who screens tenants a little better and stays out of court.
When investing in real estate, make sure that you do your homework and you are properly capitalized and properly educated. Happy investing.
By: Matthew M. Wallace, CPA, JD
Published edited May 24, 2015 in The Times Herald newspaper, Port Huron, Michigan as: So, you think you want to be a landlord