Perhaps you've considered venturing into the world of real estate investment yourself, and are drawn to the idea of becoming a rental property owner. With homeownership rates at their lowest levels in 50 years, now might be good time to explore that opportunity.
The national homeownership rate has dropped 9% since 2004. There are several factors that can explain this major shift away from homeownership. Home values have risen faster than incomes and are therefore less affordable for many renters. Additionally, younger Americans appreciate the flexibility that renting offers, and tend to delay life decisions that may precede buying a home, such as marriage or starting a family.
The resulting trend is that millennials are staying in the rental market through their 20s and mid-30s. The number of renters in the baby boomer generation has also increased, by 4.3 million in the past ten years. All of this adds up to the fact that the U.S. rental market is booming. And for many Americans, renting is a more viable option than buying.
With renter households growing at a faster rate than owner households, landlords are at an advantage in the rental market. With the current investment potential of real estate, you may want to take a good look at the benefits.
There are several benefits to owning a rental property, one of the main attractions being that it can provide a source of passive income. For some landlords, pride of ownership may be part of the allure. It can be rewarding to be able to confidently manage and make decisions concerning the property you own. Others may be more interested in the monetary benefits as well as the security of owning rental property.
The key to success as a beginner rental property investor is learning how to assess the value of properties, choosing the right location, understanding market conditions, and most importantly, finding great tenants. If you meet these criteria, you can be better prepared to reap the benefits of owning rental property.
Here are a few perks to becoming a landlord:
1. Passive income source
Perhaps the biggest benefit to owning rental property is that it’s a passive income source. This means that it is recurring income that requires relatively little effort to maintain. It can be an attractive option for people looking to make some money on the side, or even as additional financial security during retirement. Additionally, rental income may be taxed differently than employment income.
Of course, you’ll want work out all the cash flows before investing in rental property. In order to better ensure that being a landlord is more likely to be profitable for you, you’ll need to factor in all your expenses. Once you have an idea of your cash flow, you’ll want to assess whether the numbers suggest you’re likely to be able to make a consistent income on the property before purchasing.
2. Greater security
Some people have to make a temporary move for work. Others inherit a family home that they don’t want to sell for sentimental reasons. There are a variety of reasons that people may find themselves with an empty property. A vacant home is potentially left open to vandalism and squatters, and maintenance issues gone unnoticed that can quickly escalate into larger problems. It’s hard to always keep an eye on a home you aren’t living in. Renting the property out to tenants can give you greater peace of mind that the home is being maintained and watched after.
3. Flexibility to sell at the right time
Say you’re ready to move, but the market conditions aren’t the best. Rather than selling your property for a loss, you can rent out your property until market conditions improve. Renting out your property gives you the flexibility of selling once you’re in a better position to make a profit off your property.
4. Option to move back
You may find yourself unable to stay in your current residence due to financial or other reasons. If you need to make a temporary move for a job, it’s nice to know you’ll have still have a place to live when you return. Of course, you’ll want to check your state and local housing laws and respect the terms of your lease with any current tenants.
5. Property value appreciation
Renting out your property now allows you to hold onto your property in case it appreciates, giving you the option to sell when the time is right. The amount of appreciation is going to vary by market. Research the appreciation potential of different cities and neighborhoods to see what you might be able to expect.
6. Diversification of investments
You may already have money invested in the stock market. According to a recent blog post from BiggerPockets, owning rental property allows you to diversify your portfolio, which can serve as an added layer of protection against risk. It can also potentially help you take advantage of positive market swings.
What to look for in a rental property
If you’re thinking of investing in rental property, it’s important to know which features will boost your chances of finding an excellent tenant and help make your rental stand out from the rest. There are several features you should consider first:
Location can often impact your quality of tenant, and therefore your revenue. While you research potential rental property locations, be aware of factors that are important to tenants. A great tenant is willing to pay more or overlook less desirable aspects of the rental unit if the property is in a great neighborhood. School and neighborhood quality (which often go hand in hand), walkability to grocery stores and parks, and close proximity to major employers (no one likes a long commute) are key features that attract great tenants. A real estate agent can help you identify neighborhoods and homes with the best rental potential.
It’s easier to rent property that is close to public transportation and major highways. Most people don’t stay home all day, and prefer access to routes that get them to work, shopping, and entertainment in a timely fashion.
In some areas, off-street parking is a requirement for rental property. Even when it isn’t, it’s a desirable feature that attracts a higher quality of tenant. This may be harder to find in an urban environment, but you can still look for property with a parking garage within five or six blocks of the property.
If the building has separate units, it’s much more convenient if there are separate utilities associated with each unit. That way, you won’t have to break down these costs yourself and worry about whether or not you are charging renters fairly or shouldering the burden of the expense yourself.
As you can see, owning rental property can be advantageous both financially and personally. Of course, any real estate investment comes with risks. And rental property is no exception. However, there are ways to mitigate these risks, especially those involved with renting to bad tenants.
Implementing a thorough tenant screening process is the best thing you can do to protect yourself and your property. Checking tenant credit with a landlord credit check, criminal and eviction history gives you a well-rounded view of who they are, their ability to pay, and suggests whether renting to them is a risky move. And you should have a good idea of what information should concern you and what constitutes a deal-breaker when appraising a rental applicant’s history.
TransUnion SmartMove offers great reports that help you pick great tenants. SmartMove combines the powerful data and analytics of TransUnion to provide you with a quick and reliable tenant screening service. You get all the information you need to make more informed screening decisions in less time, including a leasing recommendation† tailored to your particular property. SmartMove also gives you a ResidentScore that is tailored for rental screening. It is designed specifically for the unique needs of landlords and built to predict evictions more accurately than a typical credit score.
†The SmartMove recommendation service (a credit score based recommendation) may not be available in certain jurisdictions, and is subject to laws that may limit or otherwise prohibit your use in certain jurisdictions, including but not limited to Washington D.C.