Renting properties is a profitable venture even if one has no prior experience in being a landlord. It is a lucrative long-term opportunity that can reap substantial rewards. But for the venture to be successful, would-be landlords need to consider the following:
Have at least 30 percent equity in the primary residence
Lenders need to be sure that you can handle two homes and will impose certain requirements. This includes 30 percent equity in the primary residence, documented future rental income with a signed lease of agreement, and proof of the tenant’s security deposit. If equity is present, home owners can count up to 75 percent of the rental’s future income to qualify for a new home purchase.
Have at least 20 percent down payment at the ready
Putting down at least 20 percent down payment for the second mortgage is the best option. This will considerably offset mortgage payments against the projected market rent. Thus it will be easier to get that second mortgage.
Have at least 6 months worth of payments for both properties
Homeowners with less than 30 percent equity will have to qualify without the rental income. This will need enough savings in the bank for at least 6 months worth of payments for both properties.
Manage on a 25 to 50 percent vacancy rate
Determine the market in the area and the average vacancy rate. If you cannot survive with a 25 to 50 percent vacancy rate during the first few years, the venture may not be ideal for you to get into.
Prepare for ownership costs
Landlords need to be able to pay for the upkeep and maintenance of both properties. Costs such as landlord insurance policies, utilities, yard work, home warranty policies, and other costs should be accounted for.
That said, homeowners turned landlords stand to benefit a lot from the move. Such benefits include:
Cash flow generation
Landlords get to enjoy steady payouts from renting. Income comes in at a steady rate and as long as costs are maintained well below what is earned, a positive cash flow is created.
Get a security blanket
Keeping a primary residence as a rental property is a great way to create a security blanket. Not only is it an income generating asset, it is an asset that can be made full use of again if bad times arise in the future.
Get tax benefits and deductions
Landlords enjoy tax benefits and deductions. These benefits and deductions cover mortgage interest, insurance, repairs and other costs that are tax deductible. Another deduction is the annual property depreciation for 27.5 years.
Building wealth through renting out your [former] primary residence is not an overnight path to wealth. When it comes to investing in rental property, patience is the key to success. Just like in the highly popular board game Monopoly, passive income takes time to grow. Once it starts generating income, that becomes the time to add another property to your assets.
One of the best ways to maintain this growth is to get the services of a property manager. With the services of a property manager, owners are relieved of such tasks as renting out the property, figuring out lease terms, and maintaining the occupancy rate. A property manager does this all and more.
If you’re considering renting out your home and buying a new one, call/text me at (760) 622-5087 or send an email at email@example.com today.