It is an open secret that many of the wealthiest people around the world are the ones belonging to the real estate sector. Undoubtedly real estate has made a fortune for many of the wealthiest people; thanks to the right investment strategies. There is a reason therefore to consider or aim to invest in real estate property. Renting a residential property is one of the sound investment strategies of this very industry. Below nonetheless is a checklist for what a successful rental property owner or landlord should look like and guidelines for successfully carrying your investment:
1. Do you have what it takes to be a Landlord?
Being an owner to a land property is one thing, but being a landlord for the rental property is a different kind of fish. It requires you to know the whereabouts of your toolbox; how well you are familiar with repairing the dry walls and uncloggings of the toilets; or at the least someone who is good to come at the very first call for such maintenance. Or to avoid all this hassle you may also acquire services from some property manager; however that would definitely be taking a piece away from the cake of your profits. That said owners of one or two properties should prefer involving any property manager. Nonetheless this attitude sure goes away but only after having owned some good number of properties.
For instance, consider Mr. Sajjad Durrani who resides in a well known society in islamabad; nonetheless he has a property for rent in the Defence Housing Authority (DHA) of Lahore. Prima facie, it would seem as if Mr Duraani has acquired services of some active property dealer or he has someone to look after on his behalf. He however has no one to look after his property for rent which is situated at the distance of a city from his current residence neither does he have any property dealer to do the running for him. So how does he manage to keep his tenets satisfied when the latter is being faced with the maintenance related issues which solely are the duties of a landlord to get them fixed? “I put together a solid team of cleaners, handymen, and contractors,” says Mr. Durrani.
However we do not advise taking the same road to the very new investors in real estate as does the person in question does; having land and plots in one city while owning a property for rent in another. Also if you think you are not quite as handy as a landlord is required to be along with having some amount of cash spared for any given scenario, we would advise to give up on renting out your property.
2. Paying down the personal debt first
Investors precisely the successful investors are smart; they use the debt which they are required to pay as one of their portfolio investment strategies however the same cannot be witty for an average person let alone an average investor. Thereby purchasing a property for rent might not be a good idea at all if you own debt whether in the form of the medical bills, students loans of the children, or similar; just give it up already and pay heed towards the dangling sword of the debt above your head. However on the contrary if the expected income from your residential plots would be more than what you are required to pay in the form of loan obligations only then it seems appropriate and feasible.
A top real investor when asked that had he been in the place of somebody who is liable to the debit paying and also plans to invest in the rental properties would he go ahead and make an investment or give up or at least save the idea for some better time said, “Making partial payments for the debt owed in the form of debt paydown is not very much necessary; however only if the investment return from the estate property is more than what the actual cost of the debt is. This is where a little maths is required.” He further went on by saying, “[emphasizing tone] Never should one get into such a situation where the paying-off of the debts is even a little greater than the cash one has.”
3. Finding a fairly right location
No one not in their worst nightmares would imagine ending up with a property at a location which rather becomes invaluable and starts facing a decline towards its value. With that said, such a city or a location within any city which is expected to make a flight upwards and has a great potential in being a desirable area should be invested in.
When you are to choose home properties for sale go for the location area that has: lower property taxes, school systems at an acceptable distance, public facilities which could be public parks, malls, cinemas, restaurants, and similar; however a promising job market within a very location can prove to be a decisive factor in making your investment turn into a cash cow or some failed venture.
4. To buy or to finance?
What seems to be more suitable; which move is worthy enough to be called smart: making a purchase with the cash or acquiring a property with a motive of renting it out with the help of finance? It if to be honest varies; financing can be suitable for one investor while cash could be for another. The latter can generate adequate monthly cash flow while the former can prove to be a greater return as well considering the pertaining mortgage factors as well.
5. Have discretion of the high-interest rates
In the world today borrowing money without a doubt is easier than the gone years. That said interest rates on the money which you are being lended for the investment properties is much higher than the interest rate of a traditional mortgage. Nonetheless if you still opt to finance your investment purchase, be careful of the interest rate so it may not take away all of your monthly profits or incomes. Therefore financing the investment only with a low mortgage payment makes sense; otherwise it does not.
6. Have your margins calculated
Real estate agencies, after acquiring extensively house plots with the aim of renting them out, keep their profits minus the expenses. Owing to this fact an average person or an investor should also be considering the monthly rental income minus the incurred expenses as the property tax, house insurance if any and residential houses’ expenses like pest control, landscaping, and the definite house maintenance expenses.
7. Considering the unexpected costs
In the ‘Have your margins calculated’ subsection we had calculated the expected or definite expense which is inevitable to be incurred. However there are always going to be some unexpected costs in the face of natural calamities. The living style of the tenants also hold a significant importance in this aspect. While some of the tenants can take care of your property as much as they would take care of their own, many of them would be careless as anything. If nothing, the children would be a great risk to the most vulnerable things as the windows, cupboards, wall paints, etc. Therefore keeping such unexpected ‘obliged to be overcome’ expenses should also be kept into consideration.
8. Cheap turning expensive
It is indeed very tempting to have some house which is readily available for a purchase on the very economic value in comparison to what you had originally thought or expected. However we are sorry to burst someone’s bubble for this could be a very bad idea as a first property for somebody. The reason why it is a bad idea is that such houses which are sold for a rather lower price have a whole lot of repairing or maintenance relating work to do; in some cases a whole story might require an a to z working; worst scenarios are where the whole house is required to get maintenance. This turns the apparently cheap ‘house for sale’ into an expensive tenure. Therefore until unless you don’t have someone who does and can do the work at such a rate that the house purchase still turns out to be a profitable venture it would remain as a bad idea. Thus making a purchase of some house which has a below-average market value with the maintenance work not very much is a more sensible idea.
9. Never forget the operating expenses
Operating expenses are the ones which inevitably occur over the course some business or system operates or lives in this case however a rental property. Nonetheless the Investopedia defines and explains it as:
“ An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.”
Also bear in mind that the operating expenses on a new property are expected to be between some 35 and 80 percent. For the sake of understanding consider a property rented out for the charges of 2000 dollars will provide an income of 1200 dollars as the rest of the money would be spent on the operational expenses. For a further easier understanding, keep the 50 percent rule in the mind, that is, if the amount being charged against the rent is 2000 dollars expect paying 50 percent of it in the expenses while keeping the remaining 50 percent as the income.
10. Certain the return on investment
Against the money which you have spent for the sake of investment, in lieu of buying some fancy car or depositing it in the bank, what is the investment return invested? For the sake of comparisons consider investing in buying the stocks which could offer a 7.5 % investment return while bonds being second to the stocks with an investment return of 4.5 %. With that said, the risk factors are different in the case of the latter and the former; also there are other factors affecting the rate of investment return when compared the two with the landlords. Therefore though the investment rate against the landlords precisely on the rental property is 6 percent which is lower than the one in comparison to the stocks, it is however considered healthy if it is the rate of investment in the very first year of investment; for this number gets higher with the time.
11. Buying a relatively lower cost home
It should be an understood phenomena that the more expensive a home will be, the more will be the expenses incurred. Real estate investors therefore prefer purchasing homes, the ones with the motive of investment, in some lesser known and thereby inexpensive yet a promising location within a city. An extra piece of advice as per the best of our knowledge and experience is that never to go for a home no matter how nice looking it may be apparently; the same goes for the opposite.
12. Knowing the rights and the obligations
Aiming to invest in the rental sector of the real estate it is of utmost importance to be familiar with the landlord and the tenant laws in accordance with the receptive jurisdiction. To avoid any hassle whether legal or personal it is important for the landlords to know their rights and obligations and for the tenants to be aware of what their rights and obligations entails and requires them to do respectively. A common set of tenant and landlord rules are: security deposits, eviction rules, fair housing, leasing requirements , and much more. The rules and regulations in the longer run benefits the both sides of the parties.
Weighing the Risks and Rewards
Business decisions irrespective of the nature and the investment requires to dot the i’s and cross the t’s and finding out whether or not the venture will prove to be worthy enough of the risks that are potentially involved. We therefore have compiled a list of the risks and rewards in the rental property investment so you may make the last and the final call.
The risks
- Even though the rental income in the form of monthly income is attractive, handling and dealing with the tenants can sometimes prove to be a little too much for many. It, therefore, is also recommended to acquire services of some third party as the Property Buy Rent for better tenant-landlord management.
- With an income exceeding a certain level you will be on the National Revenue Department’s precisely the FBR’s radar.
- If you are of the view that your income from the rental property will suffice for the mortgage payments, you might want to reconsider; for not every rental income is adequate enough for the mortgage payments and not every mortgage payment is large enough to be covered by the rental incomes.
- As opposed to the stocks, your rental property is not immediately salable if you require cash on some immediate grounds neither is the case in the rental property as in the stocks where the latter can be sold when a market crash is being sensed or is sour.
- Existing from a rental property in the real estate is expensive just as entering it; so decide accordingly.
- Last not the least, even without a tenant you still ought to pay the residential expenses in their various forms.
The rewards
- Just because tenants can sometimes prove to be a pain in the head it does means that it should overshadow what it has to offer minus the upkeep costs and the initial investment. When a regular job also requires energy and time to be performed with efficacy then paying a little heed and spending some energy does not do any harm as well in the rental property.
- As with the time, when the real estate values will increase in general, the investment which you had made will also become greater in its value.
- In Pakistan, the property business is booming; even during the pandemic it sustained well. Besides, having an asset such as a property in the real estate in Pakistan implies a financial security.
- More often than not, the interest, if any, you are required to pay against the investment property loan is tax-deductible.
- Rental income is not under the general or any mainstream tax; besides a minimal yearly or quarterly property tax.
- Well, this is where stock investments lag way behind the real estate investments: stability.
