Ask a landlord in San Francisco or New York City how they feel about running their business in their city, and you might hear a long list of complaints. Rent control, tenants’ unions and plenty of regulations make those markets tough for landlords.
But of course, there are other cities that aren’t exactly ideal for landlords, for other reasons. These are the places where buying property and renting it out for a reasonable return on your investment is more challenging. Luckily, there are plenty of markets where it’s possible to buy a home for less than it costs to rent a typical home—so in theory, landlords can buy low and rent high. Of course, if it’s cheaper for landlords to buy, it’s also cheaper for homeowners to buy!
You’d be best off by analyzing your own financial situation and seeking investment advice from a professional before adding any properties to your portfolio.
Based on information from the real estate evaluation site Trulia, the following cities were rated as the “best” and “worst” places to be a landlord.
Best Places: Where it’s much cheaper to buy vs. renting:
||Buying vs. Renting
|Kansas City, MO
Worst Places: Where it’s much cheaper to rent vs. buying:
||Buying vs. Renting
|San Francisco, CA
|San Jose, CA
|New York, NY
|Orange County, CA
|San Diego, CA
|Los Angeles, CA
|Long Island, NY
|Ventura County, CA
If you’re thinking of joining the millions of real estate investors who either make a living or add to their income by leasing property, we’ve got some basic tips for you, suggested by our clients, or based on our own experiences.
Think about your goals: Do you want to secure your retirement by creating wealth or income-producing investments? Are you in it for the short term, or the long haul? Do you want to buy property locally, or wherever the deals and returns are the most favorable? How much time and effort are you willing to put into this venture? Do you want to be a hands-on or hands-off landlord?
- Have a long-term view. Buying and flipping houses for profit is generally a thing of the past. Today’s real estate investors have a long-term plan for growing their portfolios slowly over time. They save money to build up a cash reserve, in case of emergencies. And they plan for making bigger improvements, such as painting, roof replacement and structural repairs.
- Keep it local. Sure, there are bargains to be had in Arizona, Nevada and Florida, just to name a few areas. But unless you already live in these states, it will be difficult to manage your rental property. Hiring a property manager is viable option, but it will cut into your profit. Besides, there is nothing like being able to drive past your property to check on it.
- Do the research. Find out the history of the property you’re interested in. Become familiar with the zoning laws in the town and neighborhood. Find out if there are any plans for development, road construction, or commercial building in the area around it. You don’t want to buy a property on a quiet street, only to find out that it’s been zoned for a strip mall.
- Find out what the local rental market needs. If you invest in three-bedroom, single family homes, but the demand is for one-bedroom condos, you’ll have a problem.
- Keep emotions out of the equation. Don’t fall in love with a rental property. Keep it strictly business. Figure out your costs, including mortgage payments, taxes, interest, upkeep, licensing, etc. Determine the market rent for the unit/s. And then determine if the asking price is a good deal. Don’t pay more than your monthly costs, or you’ll be losing money. That’s not the idea behind investing in real estate!
- Screen every tenant applicant. We can’t stress enough the importance of tenant screening. Too many landlords have regretted the decision to skip this important part of the process. Conducting a background and credit check on a prospective tenant is the best way to protect yourself. Make sure you know as much as possible about the person you are renting to.
The contents of this article are intended for general information purposes only, and should not be relied upon as a substitute for obtaining financial advice applicable to your situation.
If you own rental property in vacation areas, or a second home that you rent out, things may be looking up. According to a report from HomeAway, an online vacation rental site, 72% of vacation rental owners in markets where summer is considered peak season reported summer occupancy rates of 76% or higher. That’s an increase of 8% over the summer of 2011.
Not only were occupancy rates higher, but average weekly rental rates were, too. Average weekly rates were $1,493, or $213.29 per night. And 87% of vacation rental owners said business was the same or better than last summer.
The report also shed light on the importance of marketing vacation rentals. It states that owners on average spend over eight hours per week marketing and managing rental properties, and bring in an average of $26,000 per year in rental income. (The average HomeAway owner rents their property about 17 weeks a year for about $1,493 per week.)
How Vacation Home Owners Use Rental Income
- Like any income – for every day living expenses, discretionary spending, saving for the future: 43%
- To maintain or make upgrades to their vacation home – to purchase furnishings, perform necessary maintenance, paint: 59%
- To pay the mortgage on the property: 47%
Of those who use rental income to pay the property mortgage, nearly half (49%) said they’re able to cover at least three-quarters of it.
If you’re like most vacation rental owners, you purchased your property for personal use or a long-term investment. About half of owners say they spent from one to 28 days in their vacation homes, while 27% stayed more than a month.
HomeAway says the following markets are seeing a rise in demand and inquiries:
- Balboa Peninsula, Calif. (222% increase in inquiries during the second quarter of 2012)
- Reunion, Fla. (up 137%)
- Aspen, Colo. (up 124%)
- San Diego, Calif. (up 124%)
- Folly Field, S.C. (up 116%)
- Honolulu, Hawaii (up 115%)
- Kissimmee, Fla. (up 114%)
- New Orleans, La. (up 114%)
- Vail, Colo. (up 111%)
- Gulf Shores, Ala. (up 108%)
If you’re thinking of investing in a vacation home to rent out and enjoy for yourself, you might want to look into these areas, with significant increases in traveler interest.
The rental market is seeing some new faces. Rental property investors now include people who, a few years back, may not have ever considered becoming landlords. Income tax records show 9.3 million taxpayers who claimed rental income in 2009, which is up from 8.3 million in 2003.
Several factors are contributing to this trend:
- The rental market is strong, and it keeps growing. More people are choosing to rent rather than buy homes, due to job instability, poor credit, stringent lending standards and insecurity about housing prices.
- Home prices are staying low. Prices have been falling since the bubble burst, and although experts have said we’ve reached the bottom more than once, the numbers indicate otherwise.
- Interest rates are staying low. Near-historic low rates mean taking on a mortgage makes sense for good credit risks.
- Investment returns are lousy lately. U.S. stock funds lost an average of 2.9% in 2011, and safer investments, such as bank CDs are returning rates of 1% or 2%. Investors view real estate as a better opportunity.
- People see tax benefits in owning rental property. According to Reuters, in 2009, those 9.3 million income tax filers claimed about $267 billion in rental income. However, they claimed more than that in depreciation and expenses, for a total loss of $11 billion.
Of course, things can change quickly. Housing prices will eventually recover. The jobs picture will improve at some point. Interest rates will creep back up. And rents will level off. Landlords who enter the business now when demand is high, tenants are plentiful and rents are healthy may find themselves ill equipped to deal with any downturns that will surely come.
Laminate flooring can be easy to care for, long lasting and practically indestructible—which should make it a great choice for rental properties. However, landlords who are experienced in dealing with laminate flooring have differing opinions. If you’re considering using laminate flooring in your rentals, read on for some pros and cons, provided by actual landlords.
First, the Cons:
- Laminate floors are good in moist areas, but won’t tolerate standing water, or you’ll soon have separation in the seams.
- Laminate flooring can be fairly expensive.
- The floors can tear when moving heavy items, such as refrigerators.
- Cheaper level flooring will show wear in heavy traffic areas.
- It cannot be refinished or sanded.
- The surface can be slippery, with a risk of falling tenants or children.
- High traffic homes, like rentals, may not be the best fit for laminate flooring products.
Now for the Pros:
- Laminate floors look great.
- They can attract a higher level of tenants.
- Laminate costs less than hardwood.
- They are easy to install.
- The variety of wood species available is higher than ever.
- Some are warranted for 20 years or more.
- Laminate floors are easy to maintain.
- They don’t buckle, stain or warp.
- The finish is often scratch-resistant.
- Laminate often holds up better than carpet.
So there you have it. Some landlords have installed laminate successfully, while others say tile, vinyl plank flooring or inexpensive carpet work better for their rentals.
Real estate investors have long been active in college towns for a number of reasons. Rentals are often short-term and dealing with younger students as tenants can be problematic, but when mom and dad co-sign the lease, they tend to pay the rent on time every month.
College enrollments are up, and on-campus housing is in short supply. Demand for rentals is high and vacancies low, so rents are generally healthy. All told, college students who need a place to live can be excellent prospective tenants—and rental property in a college town can be a great opportunity, if the terms and price are right for you.
Move.com recently published a list of the best university cities for real estate investment. Here’s how their ratings shook out:
||Median List Price
||Average Rent, 2BR
||Average Rent, 3+BR
|South Bend, IN
|St. Louis, MO
- Boston has over 50 colleges and list prices have dropped nearly 3% since last June. Rents are on the rise.
- Nashville’s average rents are higher than the average mortgage of $770.
- Chicago’s median list price is down over 16% since last June.
- Washington DC’s average mortgage for a median-priced home is around $1,530.
- Houston has low-priced inventory and some top-ranked colleges. Average mortgage is about $710.
- South Bend is home to Notre Dame and the average mortgage payment is around $990.
- Atlanta’s median list price is down 13.68% from last June, and lower than the national median.
- Baltimore is home to Johns Hopkins University, with median prices down 7.72% since last year.
- St. Louis, MO ‘s median list price is also lower than the national average, and mortgage payments average around $670.
- Syracuse is home to Syracuse University, as well as several other colleges. Median prices are down and the average mortgage payment is around $630.
College towns have a ready-made pool of renters, and generally, the rent money is not a problem. Manage the property correctly, and you could have a successful investment for years to come.
Even though the rental market is strong, you still want to do all you can to fill a vacant rental unit—while attracting the best possible tenant. Here are six tips to help you write a more effective rental listing that can accomplish both of these goals:
- Write a Great Headline. Instead of the boring basics, like “3BR 2 BA Home for Rent” try getting more creative: “Dream House. Great Neighborhood.” “3 BR Home, Walk to Trader Joe’s.” “2 BR New Upgrades, Pets Welcome.” “3 BR 2 BA, Fireplace and Big Sunny Rooms.” Get noticed!
- Target Women. That’s right—if you know how to catch a woman’s attention, you’ll have a better chance of closing the deal on a new lease. Studies show that women are signing home sales and rental contracts in larger numbers than ever. What do women want to hear that you can include in your rental listing? Walk-in closets. Security system. New appliances. Stainless steel appliances. Quiet appliances. Extra-large tub. Sunny patio. Close to trails. Plenty of storage. Light-filled rooms. Hardwood floors.
- Include the Walkability Rating. Have you ever heard of WalkScore.com? It’s a site that scores a property’s walkability, including how close it is to shops, grocery stores, libraries and other amenities renters want. Just enter the rental property’s address and you’ll have a score that will appeal to potential tenants who want to avoid the traffic, congestion and parking problems that come with driving a car.
- Describe the Neighborhood. include the area’s best qualities, like cozy coffee shops, parks, bus stops, Laundromats and bakeries. More and more tenants will be choosing their next home based on the proximity of all the places they want to be. Just be careful about pointing out churches to avoid the appearance of limiting tenants to a certain religion, which violates the Fair Housing Act.
- If You Allow Pets, Say So. Don’t wait for a potential tenant to call and inquire. Many pet lovers will skip your ad if it doesn’t state that pets are welcome.
- Use Over-the-Top Terminology. For example, why say, “clean” when you can say immaculate? Why not tell folks your place is ready to move in and a must see? And if it’s quiet, lovely and charming why not say so? Sell it.
Taking the plunge into rental property investment? Here are some tips to consider when searching for your first property.
- Know how long you’ll own it. If you’re in for five years, you don’t want to invest a ton of cash into big-ticket items, like a new HVAC system, roof or major structural repairs. On the other hand, if you plan to own the property for 20 years, you’ll most likely need to make some major improvements. But that’s okay, since you’ll be holding a longer-term investment and will have a chance to recoup the costs.
- Know the type of investment that fits you best. Is it apartment buildings or single-family homes? Do you want to be a long-term landlord, or buy and resell quickly?
- Location is crucial. Just like when you open a business, you want the best location possible. Well, your investment property is a business, so the same thinking applies. A large pool of potential renters, such as a college town or higher-population area, is the first indicator of a great location. Next, look for nearby public transportation, recreational opportunities, shopping areas and a low crime rate.
- Leave emotion out of the equation. Most investors don’t fall in love with rental properties. The only thing that should matter is how the numbers shake out.
- Plan, plan, plan. Get your finances in shape long before you’re ready to buy. Meet with your financial advisor, lawyer and insurance agent to carefully scrutinize the assets you can devote to this investment, as well as the protection from risk and liability you’ll need.
- Don’t pay too much. Negotiate for the best price you can get up front. If you overpay for an investment property, you’ll never recoup your money. Again, the numbers are the only thing that matters when buying investment property. If they don’t work on a particular property, walk away.
- Learn your market. How does an investor know when the numbers make sense? It depends on your market. There are formulas you can try, such as paying no more than six to eight times the first year’s rents. Another formula we’ve seen is to pay no more than 70% of the price the property would be worth after making all the necessary repairs and upgrades after purchasing it.
- Make sure rents will cover your out-of-pocket expenses. Mortgage, insurance, taxes, maintenance repairs and a percentage to cover vacancies must be paid out of the rental income so that the property at least breaks even.
This site is intended to provide useful information. It is not intended to provide professional financial or legal advice and cannot substitute for professional advice. Seek independent professional advice from a competent licensed professional before acting upon any information contained herein.
Where are landlords required to place security deposit funds in FDIC-insured institutions? Are you allowed to earn interest on your tenant’s security deposit, or must you turn interest over to the tenant at the end of the lease? How long are you legally allowed to hold the deposit after your tenant moves out?
Every state has its own laws regarding how landlords handle security deposits. As a rental property owner, you must be familiar with your state and local regulations.
Here are some general guidelines that can help keep you on the up-and-up in most states. Dealing with your tenants as fairly, openly, and honestly as possible is the first step to keeping security deposit headaches to a minimum.
Interest: In many states, landlords with a minimum number of units are required to place security deposits in interest-bearing savings accounts. Some require separate accounts for each tenant; others allow one account, but no comingling of the landlord’s own funds. If you reside in one of these states, you have the choice of paying the interest at the end of the lease, or for long-term tenants, paying the interest once or twice a year. With interest rates currently low, the total interest earned is not much. We know a landlord who gives his tenants their interest checks each year in December—just in time for the holidays.
Rent vs. Deposit: Do not confuse the two, nor allow your tenants to do so. Rent is rent. The security deposit is meant to cover the property owner’s expenses if the tenant fails to keep the property in good working order or to cover tenant damages. If a tenants gives notice and expects you to keep the security deposit as last month’s rent, you may have grounds for eviction. Clearing up the tenant’s misunderstanding is probably a simpler way to go, however. Tip: be sure to include clear language in your lease about the amount of the security deposit, when and under what circumstances the tenant will receive it after the lease ends, and that it may not be used in lieu of rent payment.
Deductions: A move-in inspection and checklist, compared with a move-out inspection and checklist, will likely dispel any conflicts over deductions for cleaning, repairs, and damages. Conduct the move-out inspection with your tenant. Point out items that must be replaced or repaired. Obtain their signature to prove they were present and agree to the list of damages. Then, be reasonable about costs—recover your expenses, but don’t gouge your tenants.
Time Limitations: Landlords must deal with security deposits in a timely manner after the tenant moves out. It’s not fair to drag the process on indefinitely, keeping the tenant’s money tied up. Do the right thing and deal with damages, send an accounting of what was deducted from the deposit, and include a check for the balance to your tenant as soon as possible. Besides, most states require landlords to supply an explanation within a certain number of days.
Second Chance: Times are tough for almost everyone. Why not be an exceptional landlord and help your good tenants keep more of their hard-earned money? After the move-out inspection, set up a second walk-through to give the tenant a chance to right the wrongs you point out. Most tenants are capable of performing minor repairs and giving the unit a good scrubbing. Clearly communicate your expectations and give the tenant a chance to meet them.
We recommend you also automatically screen all tenants as part of your application process. For more landlord resources, including forms and information on tenant screening, turn to E-Renter.com. .
If one of your New Year’s Resolutions is to increase your cash flow, one way to do so is through application fees. Landlords and property managers use these fees to recover their expenses for background screening, credit checks, and the time it takes to vet a potential tenant.
If you’re really lucky and have several applicants for the same unit, you may opt to screen the best (on paper) applicant first and, upon approval, refund the fees to the remaining applicants. Or, you can screen all at once and choose the strongest applicant. In this case, the other applicants would not receive refunds, since the background check on each was conducted.
If you decide to keep tenant application fees to cover expenses, avoid issues with applicants by stating very clearly both verbally and on the written application that fees are non-refundable. You’ll also want to determine your policy for refunding fees in the event the tenant changes his or her mind about going through with the rental agreement.
Obviously, a landlord would want to avoid accepting any deposit funds until all background screening has been completed and the tenant’s application approved.
Check your state and local laws for guidance—laws vary greatly and you could face limitations on keeping fees and/or time constraints for returning them. If your application fee policy is questioned, be ready to prove expenses with accounting records. Keep the application fee on a different line item from security deposits and rents in your books.
Smart—and honest—landlords also avoid questions of integrity around fees by only accepting applications for rental units that are truly available, and by doing some initial screening prior to running the tenant background check. If the applicant’s income is below your minimum, do everyone a favor and just turn down the application.