Deciding to rent your current home or purchase an investment property can be a difficult decision that will require you to examine a number of different concepts.
Here’s what you should consider before leasing your home or purchasing an investment property: financial feasibility, tenant selection and maintenance.
One of the first topics to consider in this process is financial feasibility.
1. Your level of financial preparedness to own an investment property.
2. The potential cash flow of the property.
3. The establishment and necessity of a maintenance escrow fund.
Conducting a comparative market analysis to determine an unbiased potential rental range for your property is a great place to start. You will need to identify a number of comparable properties in the same area and school district as your property or the one that you are considering.
Once you have the geographic area narrowed down, you can begin comparing the age, condition and layout of the property. Specific items to compare would be the number of bedrooms and bathrooms, the overall square footage, and the level of amenities.
Now that you have determined a reasonable monthly rental expectation for your property, you can develop a budget to determine your expected cash flow. Important expenses to consider in this budget would include: advertising costs, maintenance, insurance, utilities, turnover and leasing expenses. Additionally, the cost of your mortgage, real estate and school taxes and professional fees if you elect to hire a property management company are items to consider.
It is also highly recommended that you establish a maintenance escrow fund prior to leasing your home or purchasing an investment property. Ideally, this fund would adequately cover the cost of a major maintenance issue such as the replacement of a water heater or HVAC unit. This precautionary step will save you a lot of stress down the road if an issue would arise.
A second topic to consider is the prequalification process. You will need to determine the qualifying requirements will you place upon prospective residents. Generally speaking, there are four primary factors that should be considered when reviewing a prospective resident’s application.
1. Employment verification. Is the applicant(s) gainfully employed, and are they earning enough income to adequately afford your property? Industry standards recommend that you verify an applicant’s employment standing by obtaining written confirmation from an employer and reviewing their last two check stubs to account for the income they are claiming. In addition, it is highly recommended that you seek out applicants who have a stable employment history and have made a commitment to an employer for a sustained amount of time.
2. Criminal background check. You will want to conduct a thorough review of a potential applicant’s criminal history to ensure that they are a law-abiding citizen and that they will be an asset to the community around them.
3. Credit report. It is highly recommended that you conduct a credit review of any prospective resident who will be financially responsible for the payment of the monthly rent. While you cannot expect all applicants to have a credit score in excess of 750, you should focus on their monthly debt commitments, history of timely bill payment and verify that the prospective applicant has not been evicted in the past.
4. Landlord reference. If possible, it is very helpful to obtain a prior landlord reference. If the prospective resident is renting now or has rented in the past, it is recommended that you attempt to contact their current or previous landlord. This interaction will provide you with key insights into the experiences that previous landlords have had with the prospective applicant. Questions to ask may include: Did the resident pay on time on each month? Did the resident abide by the terms and conditions of the lease? Did the resident leave your property in an acceptable condition when they moved out? If you were given the opportunity, would you rent to this individual again?
Property management and maintenance
Another concept to explore is the day-to-day oversight of the property. Are you interested in marketing and showing your property, screening prospective applicants, collecting rent, handling after hours emergency maintenance calls and evicting delinquent residents? If not, you may be interested in considering a professional property management company.
A few items to consider when searching for a property manager would be: the number of years they have been in the business, whether or not they are licensed to work on behalf of the public, what their fees are, and what services they offer. It is beneficial if routine maintenance and after hours emergency calls are handled by the property management company you are working with. Selecting a reputable property manager to oversee your property can prove to save you much time and stress.
However, if you elect to manage your investment property on your own, you will need to develop a network of maintenance technicians who can assist you when home repairs and preventative maintenance needs arise. You should identify trusted HVAC, electrical, roofing, landscaping and general contracting vendors who can assist you when needed. It is also wise to identify exactly what their after hours emergency hours, procedures and costs are so that you are prepared in case of an emergency.
Whether you elect to use a property management company or not, it is very important that you account for maintenance repairs as they will happen and will impact your cash flow.
Owning an investment property can be an enjoyable and lucrative venture, but proper planning and advanced decision making are the key to success. In this article we discussed three topics that you should consider before leasing your home or purchasing an investment property: financial feasibility, tenant selection and maintenance. By carefully considering each of the topics outlined above, you will be well on your way to making a sound real estate investment.
Mark Cloyd is vice president of business development for American Heritage Property Management, based in East Hempfield Township, Lancaster County.