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Elizabeth McDonald, The Rental Girl L.A.
“So, You Want To Be A Landlord” is an informative series brought to you by Elizabeth McDonald of The Rental Girl Los Angeles.
The Rental Girl is a boutique rental agency with neighborhood branches throughout Los Angeles.
Elizabeth has over 10 year experience in the rental business and has put together this informative series to guide you’re your investment clients through the process of becoming and being a landlord.
To start this series, Elizabeth offers her insight on one of the most important pieces of buying and/or managing investment properties – Making Sure the Numbers Make Sense:
Before you or your clients jump into the fast moving world of rentals, they have to be sure they (and the property) are financially fit enough to be successful. Here are two steps every landlord should complete before they decide to jump in:
1. Get the Pre-Approval
Unless you plan to purchase an investment property with all cash, the first step you must make before embarking on your journey of becoming a landlord is to get pre-approved for a loan. The pre-approval process is fairly painless and requires no commitment.
It requires a making quick phone call with a loan broker, answering a questionnaire and gathering of financial information. Don’t worry. Lenders do not bite! Once you have submitted your information to your loan broker, he or she will run some numbers and inform you what you qualify for. For the purpose of this blog post, I will use $500,000 as your pre-approval amount. Once you are pre-approved, you will know in what price range to start looking.
2. Run the Expense/Income Numbers
If a lender says you “qualify” for $500,000 this does not mean you can AFFORD a $500,000 income property. Before you make an offer on a property, you must be sure the numbers work. The biggest mistake new investors make is they only anticipate the mortgage, property taxes and insurance expenses. However, there is also a vacancy factor, routine maintenance and emergency maintenance expenses.
To assist in this process, check out this free Income Calculation spreadsheet at http://www.therentalgirl.com/income . This tool will help you determine if a property’s income will cover expenses.
How to Run the Numbers
Using the Income Calculation spreadsheet, here’s the data you’ll need to make a sound decision on whether you’re ready to take on becoming a properties landlord:
Purchase Price: Enter the list price of the investment property you wish to purchase or the amount you are willing to offer.
Down payment: Be sure to include the total amount if cash you are paying as down payment. You can either enter a percentage or dollar amount.
Loan amount: The loan amount is the list price minus the down payment.
Actual Income: Enter the current rent the property is collecting. Specify whether you are entering yearly or monthly income.
Scheduled Income: If the rents are below market, or the units need upgrading, enter in the rent amount you think the units could get in today’s market. You as an agent can find these yourselves. However, if you’re working with landlord hopefuls, they’ll need your help to determine potential rent amounts. Specify whether you are entering yearly or monthly income.
Mortgage interest: Enter the loan rate from your pre-approval letter from your loan officer.
Property taxes: Enter in the percentage amount for your states property taxes. (Note: The default percentage in the spreadsheet is for California.)
Expenses: Leave this percentage at the default rate of 28% or change the percentage if you have a more accurate estimate.
The amount of maintenance required on an income property varies from property to property, the standard percentage used to estimate maintenance expenses is 28-30% of the yearly income.
Factors that influence maintenance expenses include: age of the building, size of the yard, age of renovations, condition of the major systems like plumbing, electric and roof.
Insurance, vacancy and property management: Again, leave these fields with the default amount or talk with a your area experts to develop a forecast.
Once you have entered all the fields, the results will appear on the right. These results will give you an idea of your monthly and yearly cash flow – both with current rents and with future predicted rents.
These steps should help you figure out if you’re financially ready to become a landlord. If the answer is yes, find out if you’re mentally ready by checking out my next post where I’ll address the two most common fears among new landlords.
The two most common fears we hear from new landlords are tenant and maintenance problems. Everyone has heard a tenant “horror” story. That story about how the tenant stopped paying rent, the tenant who lit the house on fire, and the tenant who would not leave… The tales are truly never ending.
And then there are maintenance horror stories. There’s the mainline that backed up and flooded a tenant’s apartment, the bedbugs that infiltrated the entire building, the 2nd floor pipe that burst and flooded the downstairs apartment, and the constant headache of broken down appliances and other major systems.
Oy vey! With all these horror stories, who in their right mind would even consider purchasing income property? Well, that’s just the thing. Many smart individuals HAVE and DO purchase income property and operate them successfully.
Do your homework.
As with any business decision, there are risks involved in purchasing income property. Before you purchase a property, do your homework. Work with a seasoned real estate agent who specializes in investment properties.
As I mentioned in my first post, make sure you not only qualify for but can afford the property. Knowing there will always be some inherent risk involved with the purchase, determine the level of risk for a particular property and decide if you feel comfortable moving forward.
To determine this, look at the condition and age of the major systems: the roof, plumbing, electrical, foundation and structure. Next, consider the condition of the interior of the units and the condition of the yard.
Utilize resources.
Will you ever be 100% confident in purchasing a property? Maybe not. There are never any guarantees in this business. But there are many systems in place to get you as close to 100% as possible.
For starters, there are property managers who do all the work for you. For a small fee each month, the property manager will collect rents, field tenant maintenance calls and requests, schedule vendors and pay bills. A seasoned property manager knows how to interact with tenants, knows what repairs are urgent and which ones can be put aside for later. For those ‘newbie’ investors who are overly cautious and nervous about their investment, I recommend the services of a reputable property manager.
Many new landlords are cautious, but they still want to remain in “control.” For these “do it yourself-ers,” I highly suggest you find and join your local apartment owners association. For a small yearly fee, your local association offers a wealth of information from monthly magazines, scheduled seminars, free legal advice and more. They will also offer a list of referrals for vendors such as painters, electricians, roofers and more.
Lastly, your local housing authority and state consumer affairs office will offer a “Landlord/Tenant Handbook.” This lengthy handbook covers all the aspects of landlord/tenant relationships and state or local laws pertaining to them.
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