Are you planning to buy a property that you intend to rent out? Did you know that you can get a more affordable home financing plan for your would-be rental property? Do you know how to prepare yourself as a first-time landlord?
Before you start with anything, you must make a budget with regards to the operating costs and consider future expenses, including the cost of either upgrading or replacing appliances or cleaning expenses once messy tenants leave the premises. So, here are some tips that you can follow as a first-time landlord. The solutions discussed below will certainly help you out in case you are buying a property to rent out.
1Find Affordable Home Financing
In case you are looking for more affordable home financing, you should exert some effort to shop around and compare what's being offered by different lenders. Lenders are not all the same. Some of them charge very high interests on loans, while others charge lower rates. In order to draw in more clients, some are willing to reduce loan interest rates.
It's also possible for them to waive some of the fees they usually charge from their customers. Lenders set interest rates after considering a few crucial factors. One is the credit score. People with poor credit are typically given higher interest rates, and those with good scores are often offered lower rates. Second is the ratio between the total amount of the loan you get and the property value. If the total loan is significantly less than the property value, the interest rate will be lower.
2Obtain Cheap Financing
Mortgage interest also varies, and such is usually dependent on what type of property you are buying. In case a lender believes that there is no or less risk in lending you some money, he could offer a lower interest rate. Cheaper financing is also possible if the loan amount is lower than the total value of the property that you want to mortgage.
Other factors that influence the interest rates include the following: type of property, the condition, and age of a property, your income, and your credit score. In case you offer your property as collateral, the lender is also investing in it by letting you borrow some money. The lender will then prefer for the property to be maintained well and it must be worth the money that he is investing.
3Consider How A Property Will Earn
A lender will definitely be more willing to let you borrow some money and approve your mortgage application if you can give him proof that the property will surely earn a regular income in the near future. People are also aware that refinancing debt is one way to get a reduced interest rate. In case your current rate is 8%, and you can lower it to 6%, there won't be any need for you to refinance.
There will still be a huge difference in your total payments if you can reduce the rate from 8% to 6% on a $200,000, 30-year loan. The total of a 6% payment is $1199.10, while an 8% payment is $1467.53. The total difference is $260. In this case, refinancing is not a very smart option.
4Think About When To Refinance
You don't necessarily have to wait until your rate goes down below 2% before you do decide to refinance your loan. Carefully consider several factors. One consideration is the reduced rate on the new loan. You should also calculate the costs of processing a new loan and the equity of your rental property to determine if it's a wise move to refinance. Before going forward with refinancing, you should also take into consideration how long you wish to keep the property, which is likely to change or vary.
Do a simple calculation using a regular spreadsheet. Don't forget to include other factors, like business phone and internet lines, accounting services, and others. You should also come up with a three-year plan and identify factors that could be your largest expenditures, and then create a realistic budget based on that. This does not have to include real estate investments, but it must list items that cost $500 and up particularly if such had been bought for the business.
5Create An Operating Budget
During the three-year period, you must get a computer set and related software too. Developing an operating budget can be very challenging. A lot of beginners often come up with estimates that are usually lower than actual costs. Certain expenses should also be held out.
To explain, some money should be allotted for seminars and conferences, or schooling. Omitting travel expenses related to these is possible. The following must also be taken into consideration: additional phone or internet lines, professional dues, car expenses, subscriptions, office supplies, and others. Be aware that there is no set life expectancy for appliances too, so there is no specific range for that.
6Note That Gas Ranges Last Longer
According to the National Association of Home Builders, the longest lasting appliance is the gas range, which could last for up to fifteen years. Other appliances can be used for up to ten years. Some examples are dryers, washers, and refrigerators. There are also appliances with a shorter lifespan. Compactors and dishwashers, for instance, rarely make it to about ten years or more, but they can remain useful for six to nine years.
In general, the lifespan of appliances heavily depends on how they are used. In case an appliance is continuously used and even abused, then it won't last that long compared to the one that is not frequently used. Some people also replace their appliances if they prefer something more modern or something that looks better even if these are still working well.
7Know When To Replace Appliances
Landlords are not in the habit of replacing appliances that aren't broken, and these rarely get upgraded too. To landlords, appliances are a source of stress at times because these have to be maintained after they are purchased and installed. As a landlord, you could save some money if you ask a tenant to bring his own. Perhaps you can ensure that your tenants can readily hook up their appliances, like washers and dryers, in case they choose to buy their own things.
In this scenario, the repair and maintenance of the appliance will be the tenant's responsibility. Sometimes, landlords buy common appliances for their tenants, but these are often second-hand and bought with dents, scratches, or minor damage. Slightly damaged items also have guarantees, similar to new ones, but the former types are more affordable, and this is what appeals to the landlords.
8Set Rental Fees Based On The Appliances
There are rental units that come furnished; but, more often than not, the appliances installed are used, and the landlords have bought at deeply discounted prices. Also, landlords commonly choose appliances that are no longer in style to save some money. In case you prefer to furnish your rental property with new and modern appliances, you can bump up the rent to cover the cost.
Nonetheless, you should also be mindful of the detailed guidelines that you need to follow. For one, a rent hike must be 1/40 of the cost of the new item. To illustrate, let's say that you bought an appliance for $400, which means that you can only add $10 to the monthly rent.
9Handle A Messy Tenant Properly
It's but natural for tenants to behave in different ways. Some, for instance, will take care of your property like it was their own, and they are usually the ones who will clean up properly before leaving their rental units. Then there are more careless and messy tenants who can't be bothered to clean up after themselves. With such types of tenants, you will inevitably face mountains of waste and litter once they vacate, which is a difficult cleaning task.
In such cases, a landlord can ask the tenant to shoulder the cost of cleaning. To explain, let's say that a carpet cleaning company was hired to get rid of all the stains left behind, which means that the cost of such services will be deducted from the tenant's security deposit. As a landlord, one way to protect yourself from these types of issues is to clearly state in the lease that tenants are obligated to clean their units before the lease ends.
Use correct and readily understandable terms so that your tenants will be aware that cleaning and removing everything that wasn't there when they moved in are their responsibilities. Once the tenant moves out, do a walk through and take photos of areas that you consider trashed or unclean. You might require these as evidence in case things go to court, which is why it's better to use cameras with film than digital ones. It is possible to lose in court if you are unable to provide these kinds of evidence.
Hopefully, all these facts have helped you in considering whether or not you are ready to become a future landlord. In case you are doubtful about being able to handle all the duties of a landlord, you should consider hiring a property manager who will be responsible for repairs, or perhaps get a lawyer who can do all the legal duties for you. Whatever you decide, you should realize that there is so much more to being a landlord; it's not just about purchasing a property and then renting it to tenants. Good luck in your future endeavors!
Jackie Wing is an Alaska native who enjoys snowboarding more than is probably socially acceptable. She lives in Anchorage with her two dogs Reese and Peanut or as she likes to call them Thing 1 and Thing 2.