buying real estate for rental income

New Tax Laws Benefit Landlords

Through a late provision added to the tax legislation, the new GOP tax plan signed into law on December 22, 2017, gives landlords and real estate investors the potential for a large tax break. The Tax Cuts and Jobs Act (TCJA) permits landlords to take advantage of a “pass-through” provision intended to benefit limited liability companies, partnerships, and other “pass-through” businesses.

What is a Pass-Through Business?

A pass-through business is a business entity that “passes” business income through the business to the owner or owners instead of paying corporate taxes on the income. Therefore, the income is taxed as personal income at a lower tax rate instead of being taxed at a higher corporate tax rate. Many sole proprietors operate their businesses as pass-through businesses, including landlords and property managers.

How Can Landlords Take Advantage of the Pass-Through Deduction?

Under the TCJA provisions, a person who owns rental property can qualify for the same tax break as a pass-through company. In other words, if a landlord operates his rental properties as a sole proprietorship, S corporation, a limited liability corporation, or a partner in a partnership, he can qualify for the tax break.

Landlords who operate their business as a pass-through entity can deduct up to twenty percent (20%) of the net rental income. In other words, a landlord pays taxes on 80 percent of the net rental income. This deduction is a personal deduction; therefore, a landlord can also take advantage of all other business deductions.

Furthermore, because the individual tax rates are lower for 2018 under the TCJA, landlords and real estate investors can also benefit from the lower tax rate. Depending on the tax bracket, a landlord could see a six percent (6%) decrease in his tax rate. The deduction and lower tax rate are huge incentives for landlords to organize their businesses to qualify for the pass-through deduction.

Two Important Notes for Landlords Who Want to Use the Pass-Through Tax Deduction

One very important note, you are only entitled to the full twenty percent (20%) discount if your taxable income from all sources is less than $315,000 after deductions if you are married filing a joint tax return with your spouse. If you are single, your taxable income from all sources must be less than $157,500 after deductions. If your taxable income exceeds the maximum amount, your pass-through discount may be limited.

Another note to keep in mind if you want to set up your rental properties as a pass-through entity. The details of the new pass-through tax deduction have not been worked out by the Internal Revenue Service. An important question is whether property management will be considered a personal service business. If so, the pass-through deduction could be phased out completely for some taxpayers.

Taking Advantage of the New Deductions to Prepare for Retirement

Individuals searching for ways to create passive income, especially retirement income, could benefit substantially from the pass-through provisions in the TCJA. When compared to the volatile nature of investing in the stock market, investing in rental properties could be a safer way of earning passive income if the long-term expenses of owning real estate make sense to do it.

Because the tax law is new, and the IRS is still working out certain details, consulting a tax professional and investment adviser is a wise first step if you want to invest in rental property as a means of earning passive income.

Looking for a Property Manager ? 16 Questions to Ask, Final Installment13-16

When do you typically pay landlords the rents collected?

Why is this important? Remember that the property manager has a fiduciary duty to manage your money. Knowing how long the manager waits between collecting rents and giving them over to you helps with your own business budgeting (because owning rental income properties is a business). Don’t schedule to pay a bill on the 5^th of the month if the collected rents will only be available in your account on the 10^th. Also, beware any manager who holds onto the rents longer than is truly necessary. Typically rents should be paid to you before the 10^th business day of the month.

How do you pay rents collected?

Why is this important? It is infinitely more efficient and faster to have rents direct deposited into your bank account, than it is to have to wait for a check. However, the answer to this question will let you know if the method you wish to conduct your business is even available to you. Some managers may not send out checks, doing everything electronically and you may prefer a check. In addition, some methods of payment may incur a “service fee” which you will need to budget for and which you will definitely want to know, up front when you are still comparing your property manager options.

How do you handle tenant emergencies?

Why is this important? Income property owners need the dependability of long-term tenants in their properties. Each time a property is vacant, that represents lost income for the duration of the vacancy. Property managers who handle tenant emergencies well and who have access to repair people who can make emergency repairs as well as normally occurring ones timely and pleasantly are more likely to attract and keep the types of tenants an income property owner needs. It is important that any property manager you hire knows that there is a correlation between how responsive the manager is to the tenant when there are issues at the property and how likely the tenant is to renew a lease.

What is the eviction process in this state for tenants who don’t pay their rent and how long does it take to evict a non-paying tenant?

Why is this important. No matter how great your property manager is, or even how great you are as an income property owner, evictions will happen. They are greatly minimized with an excellent property manager, but even the best of managers cannot predict life events that sadly may put a tenant into a situation where rental payments are not made. It is good for your business planning to know the eviction process occurs and how long it might take from the date eviction proceedings are started, till the property is returned to you so it can be rented out again. Unfortunately, in some states, the eviction process is very lengthy and a tenant can stay in a property for up to a year, without making a single rent payment. Knowing this, lets you plan for perhaps needing to make mortgage payments and property tax payments from your own funds, instead of rental income funds, for the duration of the eviction process.

Knowing the eviction process and in particular how your property manager handles that process also lets you know if the property manager is willing to both file an unlawful detainer action on your behalf and appear in court on the matter, or if you need to do that. This is particularly important to know if you have an out-of-state income property that is being managed, because if your property manager will not file the matter for you, or appear in court on your behalf, you will need to travel to that state for each hearing. There are often several hearings on an unlawful detainer action after it has been filed.

Photo Credit: Copyright, Michaeljung

Looking for a Property Manager ? 16 Questions to Ask, Cont. 10-12

10. Do you charge a leasing fee?

Why is this important? Many managers simply charge the percentage of rents as their fee regardless of whether or not they have to secure new tenants during the term of their management agreement. Many other managers are willing to charge a lower percentage of collected rents but will add a leasing fee to their agreements. Leasing fees can add up to a substantial amount of money, effectively more than the difference between 8% with a leasing fee and 10% without a leasing fee, so it must be considered in any financially-based decision to hire a manager. Some leasing fees are charged with every new lease written while others are charged once in the same calendar year for the same property. Don’t assume you are getting a great deal because a property manager has agreed to manage your properties for a lower percentage than others you have spoken to. Ask about the leasing fee.

11. Do you require that I give you a deposit to hold for property repairs?

Why is this important? Some property managers require that you allow them to hold additional monies for “future” repairs as they may arise. This repair deposit is generally between $200 and $500 dollars (often more for a high-end property) and will be used by the manager to pay repair people who perform general wear and tear repairs on the property during the tenancy of the tenant. This provides some funds for the property manager to pay repair bills on your behalf if the collected rents will not cover them completely, or if there is a delay between when the rents are collected and repair invoices are due to be paid. If you have more than a single rental property, or if that single property has a high income rental rate, then it is generally unnecessary for you to provide a repair deposit to the property manager.

Remember, also that it is generally considered fair and reasonable to ask that a tenant pay a deposit that is equivalent to a month’s rent. Often a smaller additional deposit is required if the tenant has a pet, in the event that the pet causes additional damage to the property. Your property manager will generally hold these deposits in trust for you and will act according to local law and regulation to deduct repair and damage costs from it upon the tenant vacating the property. Carefully consider the reasons why a property manager says that a repair deposit from you is necessary because that will be income that will be unavailable to you for the duration of the property management contract.

12. Will you please send me a copy of your typical property management agreement?

Why is this important? Even my list of tips is not exhaustive. There may be clauses in the property management agreement that you don’t like. Never hire a manager without first looking at the type of agreement you will be required to sign. Also, and people forget this constantly, if the property manager (or the property manager’s legal advisor) wrote the agreement, it is definitely going to be written in a way that fully protects the property manager, not you. You can ask that clauses be added to protect your interests as well. So secure a copy of the contract and get some legal input on where your risks are and how to guard against them by adding additional language to the contract. Getting a copy of the property management agreement in the interview stage allows you to compare the contracts of the managers on your short list and can help you make your decision.

Stay tuned for Questions 13 through 16, up next…!

Looking for a Property Manager ? 16 Questions to Ask, Cont. 7-9

sas-goodnight-quote-pic 7. Have you or any of your staff been charged with a crime or felony related to the management of other people’s money or any money-related crime? Has any property management company you have owned or work for ever filed for bankruptcy?

Why is this important? The property manager collects your tenant’s rent payments, deducts the management and repair or maintenance fees and must give you the rest. Misappropriation of your money will be devastating. This is an important question to ask and too often it is never asked. If a property manager feels this question is too intrusive, just move on. There are many reputable property managers and in states where licensing is required the licensing process requires fingerprinting and background checking. However, the lag time between licensing and renewals and between the filing of charges and a conviction could mean a person is licensed but has not yet addressed an issue like this with the licensing board. If a property management company has filed for bankruptcy it likely experienced severe business mismanagement and should raise questions for a landlord and should be discussed.

It is also a good idea to ask if and how the property manager vets vendors who do repairs and maintenance on properties. Also ask if the property manager requires them to have a bond and insurance. This is particularly important if repair personnel will be given access to tenant occupied properties, especially when the tenant is not home.

When choosing someone to undertake a repair or maintenance at a property, how many quotes do you obtain for the job?

Why is this important? Some property managers have a contractual (sometimes just a verbal one) or a mutual service agreement with their friends or family in the business. They will only steer the work their way and not open it to competitive bid. You want your work to be competitively bid on to make sure that you are getting the best price for the job. It is, of course, fine for the property manager to secure bids from friends and family, so long as they are properly qualified to undertake the work, have all applicable state and local licenses to do the type of work contracted for, are not overcharging to “kick back” a portion to the property manager for the referral and will guarantee the quality of the repair. This also goes back to the vetting process mentioned above, but competitive bids help you to know the work is being done at a market reasonable cost.

What percentage of the collected rental income do you retain for your management fee?

Why is this important? It is what you are paying for the property manager’s services. In residential management, this number is usually between 8% and 10%. In commercial, it is more often a negotiated percentage based on the total collected rents and the size of the property and it can be as little as 5% and as high as 15%, or more depending on what is negotiated and the extent of the work involved. Whether residential or commercial, you can negotiate this number. It is not a given. Remember to take into account the amount of work involved for the manager and the amount of rents that will be collected. This is a cost of having someone else manage your properties, but it will also decrease your annual income by that amount, so consider it carefully.

Stay tuned for Questions 10-12, up next…

Looking for a Property Manager? 16 Questions to Ask

Always “Interview” Your Property Manager
The first step to securing a property manager for your property is for the property owner to be clear about the purpose of renting the property. Is the purpose to secure passive income; or to rent until the market improves so it can be sold; or is it being rented till the owner can move back in after a time away? If the purpose is to secure passive income, this is generally a long-term plan to keep the property as an investment and selling it is usually not a consideration. Renting till the market improves to sell and renting till the owner can move back into the property are generally shorter-term rental plans. Keeping the purpose in mind, a property owner can create a list of property owners using rentUSAnow’s search tool and then can interview potential property managers using these guidelines:

1. Are you a realtor, licensed real estate professional, or a member of a property manager association like National Association of Residential Property Managers, American Apartment Owners Association, etc.?

Why is this important? In some states, a property manager is required to hold a realtor license and be licensed by the state. It is important to find out from your state’s real estate commission if this is required and to check the licensing status of the property manager to ensure that the manager is in good standing with the commission and that there have not been any adverse actions taken against the manager for poor professional practices.

In a similar vein, the NARPM and the AAOA have standards of conduct that they require members to comply with. These associations also conduct educational sessions to ensure the ongoing education of their members of the newest trends and changes in local and federal laws regarding the industry. You want your property manager to be up to date on local ordinance and federal law and to be interested in participating in ongoing education related to the property management profession. You can also check whether the prospective manager is a member of these associations by contacting the association directly.

A follow up question to this is to ask if additional staff at the company are also licensed and/or members of the industry associations. This will be addressed below.

2. Do you have a resume? Please send me a resume.

Why is this important? Remember that the property manager is asking you to employ him/her and you will be paying for any services rendered. You are entitled to know what education and experience the manager has and knowing this information is critical to being able to properly evaluate the manager’s ability to manage your property. I would not hire a manager who was not willing to send me a resume for the job, and any manager should be willing to supply a resume, even if it means sitting down and writing one because nobody has asked for it in years. The resume may even answer the next two questions, but in case it does not, here are two other questions you should always ask:

3. How long have you managed properties belonging to others?

Why is this important? Some property managers only have experience managing their own properties. Others “fell into” the job because they were doing something else and were asked to take on the management of a property as well. This is how I got started. I was working for an attorney who asked me to help manage his properties as part of my job. He supervised me, but in that early stage of my experience I was definitely not qualified to step into the profession as I had a lot to learn. A number of realtors also contemplate adding property management to their portfolios. They have some advantages, such as knowledge of the market and what is market rent, but a property manager holds a fiduciary duty to the property that goes beyond what is taught in real estate school, because the property manager holds the owner’s rent money when it is paid by the tenant and that requires knowing the laws in a different way than is taught to realtors who are taught to represent the buyers and sellers of real estate. You want an experienced property manager, not a realtor who also manages properties. You may also want an experienced property manager who is also a realtor who can assist you to market and sell the property if that is your purpose at a later time. You want someone who is a property manager first. One with demonstrated experience as a property manager.

Next: Questions 4 through 6, found here

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Why Renters Should Consider Renter’s Insurance

By: Eveline Brownstein (c)

Tenants should know what a landlord is not responsible for, and should act accordingly.

Local regulations differ widely nationwide, but there are some basic requirements of a landlord and there are some areas that leave a tenant vulnerable. Tenants should plan for, and cover themselves, for those things a landlord will not be responsible for, or they risk having losses that they will have to pay for out of their own funds.

1. Theft of a vehicle. A recent article on Heraldnet.com covers one such instance. A landlord is not responsible for a car stolen from the property. As a driver, you are required to carry insurance to cover accidents. In most states it is not necessary to carry vehicle loss insurance. However, if you do not cover your vehicle for theft and it is stolen from the property, you are personally responsible for that loss. Such a theft loss is not the responsibility of the landlord.

2. Theft of personal property inside the home. A landlord is not responsible for a tenant’s personal property, stolen from the home. Renters are wisely advised to purchase a renter’s policy to cover a theft of personal property. These policies are, generally speaking, affordable and they will give a tenant peace of mind. One of my properties has an alarm system that I installed when I was living there. I have had a number of subsequent tenants in that property, all of whom have elected not to activate the alarm system. While this is clearly a choice my tenants make voluntarily, since I have provided access to an alarm and it has not been activated by a tenant, my responsibility for any thefts at the home is greatly diminished. Tenants should especially consider purchasing renter’s insurance that includes valuables, if the renter intends to keep jewelry or collectibles on the premises. A landlord will only be responsible for a theft loss if the landlord is directly responsible for the theft, for example: When giving workers access to the property for repairs and failure to lock the door when leaving the property.

3. Flood damage of personal contents. A landlord is not responsible for damage caused by a flood to the personal contents of a tenant. This means that even if the landlord carries content coverage on a flood policy, that coverage will not cover a tenant’s possessions, should those be lost in a flood. Renters who purchase renter’s insurance will also be able to purchase flood damage coverage to cover their personal belongings, should there be a flood in the home.

4. A guest who experiences a personal injury. While most landlords carry personal liability coverage that covers losses in the case of the personal injury of a tenant or a guest at the property, this does not eliminate the liability of a tenant from being also named in a lawsuit or a claim for personal injury, especially if it can be shown that the tenant negligently contributed to the injury. For example, if the tenant personally places a large rock in a pathway where it can be tripped over. Renters should exercise caution when inviting guests to the home, but should also cover themselves in the event that a guest is injured on the property as a result of an act of theirs and not the landlord’s. Sadly, we currently live in a litigious society and forethought and protection from money judgments and lawsuits must be a part of what we consider when we make decisions about what we need.

These are just four reasons why a renter should consider purchasing renter’s insurance when renting a property. A landlord’s policy will simply not cover areas that a landlord is not responsible for and a renter must decide what losses he or she can comfortably afford and what losses to protect against.

Four Tips For Making Your Rental Stand Out From Others In The Neighborhood

Why you should not neglect the exterior of your rental

By: Eveline Brownstein (c)

Everyone wants a desirable rental property that has tenant longevity. Here are my four tips for making your rental the most desirable one in the neighborhood.

1. Landscaping. Most rental referrals are from yard signs and people who drive past the property to view the neighborhood and the property itself. Don’t underestimate the power of a pretty yard. Frequently mowed grassy areas, clean flower beds and property trimming of trees and shrubs can go a long way to make a strong and positive initial impression of your property, making potential renters more interested in seeing the interior of the property.

2. Exterior condition. If the paint on the exterior of your house is peeling and faded, the initial drive-past could make a potential renter drive away permanently. Maintaining the exterior of the home by touching up the trim paint and painting the exterior when necessary will make your rental home a place renters want to call home.

3. House numbers. There’s no point in advertising a property if your rental home cannot be found or can easily be mistaken for the property next door. In addition, emergency personnel need to be able to easily identify your property (this is a good tip for owners and renters). Make sure that the property numbers are clearly displayed and easily readable, from the street. This can be achieved by regularly painting your curb numbers and by erecting onto the house some large house numbers that can be seen from the street. Make sure your rental can be found and identified by potential renters and the people they may invite as guests and the emergency personnel, who may need to find the home.

4. Don’t neglect the mailbox. A leaning, missing or broken mail box can send a message to a potential renter that you do not care enough to make minor repairs to the property. After all, new mail boxes are not expensive investments and repairing the posts for them are generally simple and easily done. A sad mailbox could signal to a potential renter that the interior of the house is as sad and that a landlord will be difficult to deal with when it comes to making home repairs.

Don’t neglect the exterior of your rental home. It is the first impression a renter will have of the type of landlord or property manager you are and what they can expect in the future. Sadly, you will never know if a potential renter was disappointed with the exterior of the home as most will not bother contacting the leasing agent if they were put off by the home’s exterior. A renter may even overlook minor imperfections in the interior of the home, if the exterior makes them interested enough to enter the home for a viewing.

What makes a good rental property?

Why what you buy is as important as where you buy.

So you’ve decided to buy a rental property and you are working with an agent to find that “right” property to purchase as a rental for others to live in. What makes a good rental? A lot of real estate agents appear to believe that distressed properties that they are not having much luck selling to others make good rental properties. Even when I worked as a licensed realtor in California, I would never have encouraged an investor to invest in distressed property for a rental, unless that investor was willing to restore the property to pristine condition after a thorough home inspection that identified all of the issues with the property and a commitment to restore and repair those as new.

Any work not done on a distressed property, has the potential to create a habitability problem for a renter which will cause a landlord numerous headaches. Habitability includes heat, ability to cook, hot water for showers and a leak-free, safe shelter, though most local municipalities add substantially to this list and a rental owner must know what the local regulations are before proceeding to list a home for rent. It has been my experience that one of the first major items that is neglected in a distressed home is the roof. Roofs run in the tens of thousands to replace and most owners of distressed homes find that they are unable to pay for the basic repairs and maintenance to a home, let alone a several thousand dollar roof. If a roof is leaking at all, a home is uninhabitable and the roof must be water tight in order for it to meet the habitability requirements of a rental.

Another neglected area of a distressed home is the electrical wiring. As homes age, the electrical wiring often needs updating and repair. Many distressed homeowners neglect the wiring in their homes or can be unaware that there is even an issue with wiring. I purchased a three-floor, Victorian home where the third floor had not been used or lived in for decades. In fact, it had been sealed off to preserve the heat on the bottom two floors. When I opened it up to reveal the most beautiful rooms with authentic, Victorian wood details, I had to remove the old knob and tube wiring in order to make the third floor safe for habitability. The wiring problems were only apparent when we removed the old lathe and plaster (which was falling off the walls in chunks). The rest of the house had been rewired, but since the previous owners had no intention of using the third floor, they had not bothered to remove the old wiring and rewire that floor. Had I not engaged in the renovation of the third floor and left it sealed up, I may never have become aware of the old wiring issues on that floor of the home. Even though it may have been attractive to have tenants on that floor, without engaging in a proper restoration and removal of potentially dangerous conditions, it would have been irresponsible to have anyone residing in that portion of the house, even a family member.

These are just two examples of why purchasing a distressed home for a rental may actually be inadvisable. I sympathize with real estate agents who struggle to sell distressed homes, but they do not make suitable rentals unless the investor is willing to invest all of the money necessary to make the home completely habitable. It should also be a concern for an investor that even if a home is brought to code for habitability according to local regulations, parts of the home may become uninhabitable within a very short period of time after the tenant is permitted to move into the home, simply because of the age of the home and the lower urgency of those particular repairs. While the local government has regulations describing what constitutes a habitable home and those do protect tenants, rental income real estate investors should make sure that they always have the financial ability to maintain and repair a home within those regulations. That financial ability can become more challenging when a home is purchased with existing repair needs.

So, here is my list of what to do to make it easier for you to purchase a great rental property:

Enlist the services of a real estate agent who understands what your financial ability to pay for repairs now and in the near future truly is.
Be very clear about what repairs you are willing to make and what repairs you are not willing to make. While a distressed home may seem like a great deal, the longer it takes to repair the longer it will be before you can generate income and, even after the home is generating income, it is more likely that a larger percentage of that income will have to be set aside each month in order for an owner to anticipate and pay for repairs that will need to be made.
If you cannot afford a home in your “preferred” neighborhood, try the neighborhood next door (assuming it also meets the “best places to invest” criteria, of course). A great real estate agent will never allow you to be narrow-mindedly specific about a neighborhood in which you should purchase a rental property, but will go over the pros and cons of investing in a general geographic area. This will help you find the best rental home your money can buy for the best rental return you can expect to achieve and without the headaches associated with major repair costs.
If you are not a contractor, a lack of contractor knowledge can make a distressed home a money pit, rather than an income-generating investment. So, if you are still determined to purchase a distressed property, engage the services of a trusted contractor who can give you realistic and practical estimates for the necessary repair work to the property. Don’t allow the contractor to suggest cutting corners. Most reputable contractors will not allow you to do this, but investors are sometimes so concerned with the cost of repairs that they will ask a contractor if there are short-cuts to the repair issues. Don’t ask. In fact, someone without a construction background of any kind is well-advised to avoid a “fixer-upper,” in the first place.
Buy the most house you can for the dollars you have and be willing to make minor repairs to bring the home up to code and fully habitable. Your tenants will appreciate a clean and safe home. One of the biggest errors a landlord can make is assuming that if the rent is low, a tenant will be willing to live in less-than-favorable conditions. This is not only short-sighted, it is illegal and can lead to a landlord being cited by the local authorities. If a home is cited by local authorities, the tenant may be asked to vacate the property, engage in repairs to the property at the cost of the rental income, or be due monies from the landlord. None of these situations is consistent with rental income property investment goals and should be avoided at all costs.
Always keep in mind that your rental property is your tenant’s home. Yes, it is true that some tenants abuse rental homes and damage them without concern for the cost to the landlord, but if a landlord or property manager has done his or her due diligence with regard to tenant screening, then it is safe to assume that most tenants want a comfortable, clean and safe home for themselves and their families. We tend to have an emotional attachment to that place we call home and we deserve that place to be safe and secure. Great landlords can achieve long-term, tenant retention and timely rent payments by providing a home for a tenant, rather than simply a roof overhead (especially if that roof is leaky!)

Smart Ways to Buy Residential Income Real Estate

By: Eveline H. Brownstein (c)

The real estate market is at a low for prices and a high for inventory. This is, according to many, the “perfect time” to invest in income-generating real estate. Many articles are encouraging people to invest in income real estate, like this Wall Street Journal report which suggests that retirees can benefit from become landlords in owner-occupied rental properties; or this MSN article with five tips to get you started. In all of the articles I have recently read, few have detailed the dangers that may lurk in not carefully planning your strategy.

At the very height of our recent real estate boom, before the start of what is now being referred to as “the Great Recession,” many people looked at the speedy accumulation of equity in their homes as a handy “cash register” for investing. Sadly, many of those same people not only now find themselves without equity in their homes, but many of them find themselves also without those homes. The bursting bubble was predictable if you were someone like me with four generations of real estate professionals in her family and a history of great investments by generations that came before; but it is easy to see how people with very little real estate experience might have failed to see what experience had taught me was coming.

Despite many articles being written, to the contrary, now is not the best time for everyone to buy rental income properties and, for some, it may never be appropriate. There are, nevertheless, some smart strategies for buying rental properties. Here are my strategies:

Start with a plan. As mundane as it sounds, having a written plan for purchasing rental income property is essential. Your written plan should detail your strategy for acquiring the property, renting it and paying all of its expenses. It is (and it will become) a business, like any other. All good businesses start with a business plan and rental income real estate is no different.
Purchasing rental income property is not the same as flipping houses. Some people decide to buy distressed properties, renovate them and then instead of selling them, decide to rent them out. This is not a plan to own rental income property. A plan to own rental income property should include the realization that even in the best of circumstances, the return on such an investment will not be realized for at least ten years or more. You will be committing yourself to owning a rental property for a minimum of ten years and to managing and maintaining it for this period of time, or longer.
Don’t use the equity in your home to buy a rental income property. Assuming you are fortunate in this real estate climate to still have equity in your home, that equity is part of your good credit. Actually, it always has been; however in the recent real estate boom, lenders seemed quite uninterested in credit worthiness and some were lending without proof of income or ability to pay. I believe that the equity in your home is better used as a short-term loan, that you can quickly and easily pay off, should you need it for emergency repairs to a property, or to cover a mortgage payment or two in the event your rental is vacant for a couple of months. Read the terms of your home equity loan very carefully for restrictions regarding what is possible and seek the advice of a loan specialist.
Don’t buy rental homes in wealthy neighborhoods. There are two reasons why this is a poor decision for the average rental property buyer.

Most people who live in wealthy neighborhoods own their homes. Neighborhoods where there are a majority of owners are highly desirable and, as a result, the price of these homes is usually high. Therefore, the price of the home you will be buying will be very high, in relation to the monthly rental that you will be able to charge. Two fairly-priced homes in a middle-class neighborhood, when combined, will often generate the same (and sometimes more) income than the single home in the wealthy neighborhood. Always keep in mind the risk of vacancies which will result in you needing to come up with the mortgage payment. While it is possible, it is less likely that both homes will be simultaneously vacant, meaning you will only have to come up with 50% of what a more expensive home will require.
Higher rental homes can stay vacant longer due to the high cost of moving into them (first month’s rent plus security deposit can run tens of thousands), forcing you to come up with a very high mortgage payment to cover payments due during vacancies. Once again, purchasing two homes in a less expensive neighborhood will spread your risk and help minimize the length of your vacancies.

Buy income properties in family-oriented neighborhoods. It has been my experience that family-oriented neighborhoods offer amenities that appeal to the widest variety of renters, regardless of whether they have families or not. The populations in these neighborhoods also appear to be much less transitional, leading to community continuity and some predictability regarding neighborhood desirability over the long-term.
Buy properties in neighborhoods with lots of opportunities for work. If I had to choose ONE tip for where to buy rentals, this would be it. A few years ago, someone suggested to me that I invest in a neighborhood, “because it is growing.” Never one to pass up the chance for a new investment opportunity, I traveled to the area to take a look for myself. I spent a number of days there, speaking to the locals, visiting the neighboring areas, speaking to realtors and looking at houses. Finally, in bewilderment, I asked the realtor what jobs there were in the area. All I had seen were a number of service-related jobs and lots of restaurants. The realtor responded that there was a university nearby. Needless to say, despite the growth that was going on, this community did not fit my requirements for a good place to purchase rental income real estate. People will always move into an area where there are jobs and no more so than right now, when our unemployment rate is so high. You want to rent to gainfully employed individuals and they are where the jobs are. A university is a great place to work, but I don’t know of any university that can employ everyone in a neighborhood. A desirable neighborhood has many different industries represented in it and offers job opportunities to people in all strata of the worker population, not just one or two.
Research the neighborhood diligently. With the internet being a primary source of information, it is very easy to research a neighborhood before you buy. Know what the neighborhood offers to residents, but also know what might make it undesirable. Know what the market rate is for rents in the area. Make sure that the property you buy is properly priced so that the rent you receive represents a good return. There are several formulas for determining this. Most involve figuring out how many years it would take for you to realize a break-even return on your investment. Sperling’s BestPlaces.net is one of the sites I frequently use to research a neighborhood, but don’t forget that a visit in person can tell you what an online website cannot.
Two homes are better than one, and three is even better. All investors and their advisers will tell you to spread your risk among investment opportunities. The same can be said for real estate. I am not an investment adviser, so I am not able to give investment advice, but spreading your risk when buying residential real estate makes sense. If you are able to buy two properties, instead of just one, then two will spread your risk. The odds of both being simultaneously vacant are lower than if you have a single home. The strategy that worked for me was to buy one home free and clear and take out a small mortgage on a second home. The first home covered the deficits created by vacancies in the second and had the ability to save for itself, should it have a vacancy.
Don’t be afraid to buy in affordable areas outside of the state you live in. Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby. This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county. They may indeed be in another state. Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.
Be committed to maintaining your property in tip-top shape. So you’ve bought a property and you have a renter. Now you just collect rents and pay the bills? No. A rental income property must have the same attention from you as the home you live in does. It must be properly maintained and not be permitted to go into a state of disrepair. A home loses its equity and its value quickly, when it is not well taken care of. To me, collecting rents from tenants obligates a landlord to maintain the home. When I was a realtor I often heard other realtors say, “You can tell this was a rental.” It meant that clearly rentals were not as well looked after as owned homes. It didn’t need to be a truth. Rentals can be looked after just as well as owned homes and can command the same price if the time ever comes to sell or finance it. Don’t lose valuable equity in your rental home by not taking care of repairs and maintenance, freshly painting it, keeping a pretty garden for great curb-appeal and tending to repairs promptly.
Research your property thoroughly. The realtor you are working with may not know everything about the property that you will find important. Always verify what the realtor tells you (the contracts you sign with the realtor say as much) by doing your own research. Tax rolls and home values are available online on websites such as Zillow.com. You can also get a lot of information from the local City, either in person or online. Most of this information is publicly available. Spend the money to get a thorough home inspection done . Knowing what repairs will have to be made now, or in the future, will help determine if the purchase is a wise one. Look at the local flood map. Research the weather patterns for hurricanes, tornadoes, earthquakes, etc.
Don’t forget to diligently do the math. There is more to rental real estate than just paying the mortgage and collecting the rents. Don’t forget the other expenses that will be incurred:

Insurance. Rental properties must be insured, especially if you have a mortgage (the mortgagee will require it). A good policy will cover the loss of rents in the case of damage to the property and other unforeseen disasters. Set up the payments online to come out of your rental property account each month to ensure the policies stay in force.
Repairs and maintenance. Depending on the age of your property, this will vary. Setting aside ten percent of your collected rents for repairs is a good policy. Don’t forget to add in the cost of normal maintenance for the property, for example, gardening (if the tenant is not responsible for it).
Utilities. Renters typically pay for utilities, BUT don’t forget that you will need to pay for the utilities during the times that the property is vacant and being shown. Utility companies generally require a deposit from you to maintain an account in your name as the landlord for the property. When a tenant moves into the property, a utility will transfer the service to your tenant, but when the property is vacated, you will once again have to turn the utilities on in your name. Besides water and electricity, there are sometimes city expenses, like sewer and trash pick up charges. A diligent realtor will be able to get this information from the prior owner, so that you can properly plan.
Property Taxes. Know your obligation BEFORE you buy. Understand the tax collection policy for the neighborhood, when taxes are due, how and when they are billed. When I lived in Los Angeles, taxes were billed April 1 and December 1. They were due in full, December 1. They were very easy to forget. In Arkansas, my taxes are billed once a year and are due the month of the anniversary of when I purchased the homes. They are also easy to forget, if I am not diligently putting the money aside for them. In New Jersey, they are billed yearly and due quarterly…not so easy to forget. Make plans to set the taxes aside from the collected rents from every collected rent payment. I have found that the best way to handle this is to set up a separate bank account from where the taxes are paid and into which anticipated tax monies are regularly deposited.

Buying rental income real estate can be very rewarding and for many it is a passion and a full-time job that they love. Careful planning and attention to some of the more frequently overlooked details can make it a successful business venture, as well.