To prepare to become a landlord there are a few things that you should consider. It’s not something that you just jump into and hope to get it right.
So today I am going to outline some things you can do to be ready. Preparing in a way that ensures you are successful, without the stress.
There is no doubt that property investments are more popular in most parts of the world for inexperienced investors than a stock exchange portfolio. The real estate market provides a tangible investment, one that people can see and touch if they want to.
Unlike the stock exchange, which can fluctuate depending on market needs, it’s fair to say that everyone needs a roof above their head. As such, letting a property is seen as a more accessible investment strategy. It is something that you can see. Prices don’t fluctuate like the stock market and therefore many amateur investors believe it is easy to manage. But is it really the case?
Investing in real estate requires that you understand some new responsibilities in order to protect your investment.
These include simple things like screening potential tenants, understanding the difference between an investment loan and a normal mortgage, tenant expectations, and property valuations. So how do you best prepare for these challenges?
Understand the Loan Process
As a landlord, it’s important to understand how investment loans work.
Indeed, while you may be familiar with the eligibility process for your primary home, obtaining a loan for an investment property is a different kettle of fish.
Some property loans have unique eligibility requirements. For starters, you can use this hle calculator to figure out how much your loan is going to cost to repay. But as you will know, the calculator doesn’t guarantee your application will be accepted, it’s just a guide at this stage.
Some of the differences between a home loan and an investment loan include:
- the lender requiring mortgage insurance in some cases,
- the consideration of a potential period when the property is not rented,
- ongoing costs to maintain the property, and
- the lender’s own risk criteria.
These factors can often result in the amount you can borrow being significantly less than you first thought.
When I was purchasing my second investment property, which was in a different state to my home, I learned that in this particular state, the lender took a much more conservative view of rent. They discounted my potential rental income significantly more than I had expected. As a result of this ‘lender term’ I ended up missing out on the first property I wanted to buy. The rent adjustment was just too much for the loan I wanted.
Another factor to consider in the loan process, especially for investment loans, is whether you want to pay interest only. This is my preferred method. Simply because it means I can borrow more, and the repayment amount is 100% tax-deductible here in Australia.
If you are paying both interest and capital, it is important to know that the capital component of your repayment is not tax deductible. The larger repayment will also reduce your borrowing capacity. Just a couple of things to consider up front.
Prepare to Become a Landlord – Consider Your Long-Term Strategy
What is going to happen to your investment in the long term? It is an important consideration to make before you buy.
Ultimately, you can’t purchase real estate without a clear investment strategy. Unfortunately, many new landlords assume that all it takes to drive profits is to define the right weekly rental to charge.
You need to answer a lot of questions to figure out how to make the most of your property:
- How long do you plan to keep your property?
- How much do you plan to invest in the real estate market?
- What other assets do you plan to include?
- Are you expecting rapid or slow returns?
- What are you trying to achieve?
These questions can help define your portfolio, which acts as a map of your investments. If you don’t have a clear long-term view of what your real estate investment should achieve, you could find yourself wasting money.
Managing the Property
The responsibilities of a landlord don’t end when you’ve signed up the tenancy agreement.
Indeed, as a landlord, you need to make sure your tenants are safe. Providing essential repair works and maintenance as required is to be expected.
Typically, tenants get in touch to inform the landlord about issues, which need to be resolved as quickly and effectively as possible. When tenants move out, you need to be available for visits and queries. Ultimately, landlords need to make time for their tenants.
However, when you’ve got a tight schedule, you may need to entrust professional property managers to manage repairs, maintenance, visits, and other property-related situations. A professional management agency can help you tackle tenants’ issues and protect the value of your investments.
While I am a big fan of taking control of your investments and your money, this is one area where I highly recommend that you pay for support. You don’t want the phone call from your tenant at 1 am to tell you the water system blew up. Pay an agent who specialises in this stuff to do it for you. It’s worth the cost.
Understand the local community plans
Rental costs vary a lot over time as properties gain or lose value.
A cozy apartment in a busy part of town can be a profitable investment. However, skip forward a few years, and your investment could be losing value if the local community fails to preserve local businesses and infrastructure.
What used to be a trendy location could lose its appeal depending on community projects. Therefore, landlords need to understand what the local community is planning long term. You can discover this information by doing a little research of the local council website.
When you are preparing to become a landlord, it is important to do your research up front. It could be the thing that helps you decide between one property and another. If one is in an area that has big plans for improving local facilities over one that doesn’t, it becomes an easier decision, right?
Staying on top of this stuff for the duration of your investment can help identify any issues that can impact the value of your investment. These can influence if you need to be a seller at some time to avoid loss of value. Obviously, this can also work in your favour when plans show massive development that will make the area more attractive to buyers and tenants.
Stay in touch with modern lifestyle needs
Seasoned landlords are the first to notice changes in trends and expectations. Nowadays, the rental property is expected to provide tenants with a self-sufficient environment. Therefore, it should provide direct and easy access to services in the property, in a communal area in the building, or the same neighbourhood.
A rental property that does not guarantee access to laundry services, a fitness area, reliable Wi-Fi, and social community spaces face the risk of becoming unappealing. Tenants prefer to pay a little more to secure their comfort and quality of life, so it’s worth seeking to invest in property with the latest standards.
As you prepare to become a landlord, knowing what tenants want in the area that you are looking to invest will help your decision making. Knowing that they want access to certain modern lifestyle features means you can narrow your focus when searching for your investment property.
For new investors, real estate strategies can be a more manageable approach to building a portfolio compared with other investment asset classes.
However, becoming a landlord doesn’t come without challenges and risks. Understanding what those are, before you invest, is crucial for the success of your investment.
If you want to learn my property investing strategy, which includes my selection criteria and buyer tips, for a short period of time you can get access to my Investing Bootcamp course before the price goes up. Check it out here.