Follow These Blueprints For Rental Units That Pay



Follow These Blueprints For Rental Units That Pay

By CHRIS CONDON

The ideal rental property is different everywhere. In my town, it's a 1,200-square-foot house in a good school district with three bedrooms, two baths, a garage and a decent yard. A fenced backyard is a plus but not required.

The ideal monthly rental rate also varies. Above a certain amount per month, your pool of potential renters drops dramatically. Where does one learn this? Ask local property managers and other rental investors. Ask them what the "perfect rental house" would be in your market. Ask where that rental should be located. Also make sure the property and home you build it on will sell well when the time comes.

Why worry about selling a home if you plan to rent it? Rental properties also need to have the best possible chance for a quick and profitable sale if needed. Sometimes a dynamic in the market will justify the sale of a rental home. Maybe school districts change or a highway is being built nearby. Keep in mind that not all houses that sell well rent well. Answer the question about what rents.

It's important to keep your emotions out of the decision-making process. Don't focus on rental properties that reflect your lifestyle, taste, needs and economic position. Remember that you are not the renter. Keeping your ego in check will allow you to build the houses that the renting public wants. It also will help you make the most money possible with each opportunity.

At Least Break Even

Many rental investors have told me that their goal is to break even on rent and mortgage. They say that taking a loss on the maintenance is acceptable and that building equity is more important than making money each month. When renting homes in some markets, this may be all that's possible.

My strategy is to build houses that cost so little that you also can make money every month. Make sure you examine this issue closely before you build. It's important to have enough rent left over after paying the mortgage to provide an income.

Who Rents and Why?

All kinds of people rent for many reasons. The three most common include:

Renters who have terrible credit and cannot buy a house. Late payment and missed payments are obviously not desirable. This is why a credit check is mandatory.

Renters who have an old bankruptcy or other credit problem from which they're recovering. If the problem is behind them, they could be good long-term renters for you as they restore their credit.

Those who are just not ready to buy a home. If they rent yours long enough, they may want to buy it.

Property Management

In the beginning, it's easy to manage your own rental properties while working full time. At some point, however, you may need to hire a property manager. For a fee, a property-management company will coordinate maintenance and repairs, handle leasing and evictions, collect rent and pay bills. That fee may be 10% of the monthly rent. This can add up quickly, so do it only if you can't manage your property on your own. Property managers also offer a la carte services. They can find and qualify tenants, conduct credit checks and write a contract for a fixed finder fee, which might be a one-time charge equal to about half the monthly rental rate.

Finding tenants is 80% of the headache in renting property. Depositing rent checks is easy. Repairs are fairly infrequent if the house is new. Many property managers hire a handyman for maintenance and repairs. If you send property managers enough finder fees, they may share the help they use. If not, find an apartment-maintenance person who wants side work. However, rely on subcontractors for major work. They can complete big projects for much less than a property manager.

Cash Flow

Good property managers have little patience with late payments. Evicting a tenant is made easier in many states through good laws and help from law enforcement. Understanding the eviction process and filing for eviction quickly can save you from costly delays. Filing a notice gets a late-paying tenant's attention and may resolve the problem promptly.

Saving money for maintenance and vacancy will prevent cash-flow problems. Obviously, the goal is to keep a tenant in the property at all times. In between tenants, you may need to make a payment or two. You'll need to add new carpeting, landscaping, painting and caulking from time to time. Save enough money from the rent to pay for these repairs.

Set Up an LLC

Ask an attorney how to protect your personal assets in the event that you're sued. Mine suggested setting up a limited liability corporation. In an LLC, homes are owned in the name of the LLC and not deeded personally. Taxes are filed separately. A separate bank account keeps the money separate.

Ask your attorney about any other laws in your state that may have an effect on how you run your business. In addition, find out if you need to be licensed.

Get Started

Building a new home as a rental investment creates instant equity. Once you get a taste of success, it will be easy to build a number of rental homes that will significantly increase your wealth. Start pursuing your financial dreams today and let the equity build or use it to fund other investments.

-- Mr. Condon is author of "Building Real Estate Riches: How to Invest in New Homes for Maximum Profit" (McGraw-Hill, 2004) from which this article has been excerpted.

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