If your long-range plan is a career in real estate investing, it's likely that at some point you'll own rental properties and be a landlord. It will be up to you to find and screen tenants, collect rents, clean up when they move out, and maintain and repair your properties (unless, of course, you hire a full-time management company to take care of such duties for you). How well you perform these tasks can go a long way toward determining how well you succeed in real estate.
There are a number of clues to look for that will help you to determine whether or not a home will make a good rental property. For example:
- Look in areas that have a plentiful supply of tenants. Good candidate areas are those where jobs are nearby to supply a tenant base. Additionally, the property should be a suitable match for the tenant market. For instance, if you have a low-income property and the local work force consists mainly of highly paid white-collar types, you might have a difficult time finding tenants. Similarly, if blue-collar workers are the area's majority, renting a high-priced property will be a problem.
- Look in areas that have a shortage of rental units. If there are too many rental units for too few prospective tenants, you'll have trouble. Check the "for rent" ads of local newspapers to get a feel for the supply. Also, it wouldn't hurt to visit a few of the rentals you find to get a look at what your competition is. And if all else fails (or even if it doesn't), ask a real estate agent who specializes in rental properties what the market is like.
- Look for modern homes. An older house that needs a lot of repairs will simply be too troublesome. The home you choose should be under ten years old (ideally under three), and it should be in good shape when you buy it (unless, of course, you're in the market for a fixer-upper).
- Don't consider elaborate homes. Don't buy anything fancy as a rental property – light, basic colors and beige carpeting (not white, which is very easily soiled and difficult to clean) is the way to go. Avoid swimming pools and other amenities that have high maintenance costs and lots of potential liability. A smaller lot with less landscaping to keep trimmed is also better than more. You get the idea.
- Look for homes that offer good rental incomes. The property should present a good ratio of rental-income to cost. You want the monthly income from rents to at least come close to covering your expenses – and, ideally, to pay them completely, of course. The only way to accomplish this is to avoid overpaying for the property, which means that you should look for relatively inexpensive rentals.
- Purchase properties close to your home. One of the biggest mistakes that an investor can make is to buy distant rental property. It can make keeping up with maintenance and repairs, not to mention collecting rents, extremely difficult (unless, again, you hire a management company, which is typically out of the question for beginning investors). If at all possible, keep your investment properties fairly local – within fifty miles or so. It's also easier to stay familiar with the rental markets if they're close by.
Some investors complain that it's harder to find a good tenant than it is to find a good property. But that shouldn't be the case at all. If a little due diligence is performed by checking out prospective tenants before renting to them, you'll generally avoid most problems later on. Spend some time talking to them and have them fill out a thorough rental application. The application should include permissions for you to run a credit check, contact current employers, and speak to previous landlords. When renting your property, be sure to perform at least these basic steps:
- Obtain a copy of the applicant's credit report. Don't look for or expect all of your applicants to have impeccable credit. Indeed, if their credit histories were spotless, they would doubtless already by homeowners instead of tenants. Rather, look for a history of making timely payments on their accounts. If you see a lot of late payment entries, chances are reasonable that the rent may be late as well. A copy of the credit report can be obtained by contacting a local credit bureau. Or, have a real estate agent run one for you. But remember, you must have the applicant's permission to do so; it's the law.
- Check with previous landlords. But go beyond just the current landlord, who may be willing to tell you anything in order to get rid of a bad tenant. The most important question to ask is, "Would you rent to this person again?" The answer can often be quite revealing. Again, be sure that you have the applicant's permission to do this.
- Match the tenant with the property. If your rental is a large house, expect to rent to families with children. If it's small, you probably don't want to have as many bodies living there. Additionally, keep track of the number of vehicles the tenants have. Too many can become a hindrance to street traffic, not to mention being an eyesore.
- Verify the applicant's income. It's likely that a tenant who doesn't have a job probably won't be able to make the rent payments – no matter how good the credit report looks. Contact the current employer and verify the applicant's length of employment, the likelihood of continued employment, and his or her salary. Once more, you'll need the signed permission of the applicant to do this. Employers generally will not divulge to you an employee's salary, but they'll usually confirm a number that you give to them (so make sure that it's included on the application).
- Trust your instincts. Finally, when you talk with prospective tenants, pay attention to how you feel about them. Do they seem like people who will likely make the rent payments on time and keep your place in some semblance of order? Or do they somehow instill in you a bit less confidence? Though certainly not scientific, gut feelings can nonetheless be a sound method of predicting tenant behavior.