Real estate has always been one of the most essential methods of building up true wealth. Not only can you financially benefit from the equity that comes with a property, but you can also make profits from one if you’re willing to rent it out. Rental income provides a steady stream of money during a retirement because let’s face it – people have to live somewhere. Who wants to live in a motel room or a small 1 bedroom apartment when they could live in a single family home for a competitive monthly rent?
How to Invest in Rental Properties
There’s a right way and a wrong way to purchase a rental home and find the right tenants. The first thing you’ll need to do after securing the properties that you want to rent out is to familiarize yourself with local landlord/tenant law. If you’re out of compliance of these laws as a landlord, then you could face substantial penalties that could eliminate all of your profitability for a year.
Some retirees choose to use a property management agency to avoid this issue, but that can be costly. It is not uncommon for such an agency to take one month’s rent and 10% of total income received as fees for managing the property. Here are some of the other things that you’ll want to consider if you want to make some cash from rental properties after retirement.
#1. Your tenant screening process is the most essential component of your rental experience. If the world of renting, 98% of households who rent properties are going to pay their rent on time. Another 1% of households might be occasionally late because they’ve encountered difficult circumstances, like losing a job, having a divorce, or perhaps a death in the family, but they get the rent paid. The other 1% will cause problems every month, not take care of your property, and stick you with a ton of costs to repair the property after they move out.
You can avoid the problematic 1% by having a comprehensive tenant screening process that is in compliance with landlord/tenant law. You are not allowed to discriminate against tenants because of their jobs, their ethnicity, or even their religion or sexual preferences in many cases. You can, however, turn tenants down if they aren’t able to meet certain standards.
- They fail a background check that shows multiple evictions, multiple felony convictions, or have law enforcement orders that prevent them from living in your home for some reason.
- They fail a credit check where you have a standardized score that all applicants must meet.
- They have household circumstances that are not allowed on your property, such as the ownership of pets.
#2. Get any financing you need for your rental property before you go shopping. Once you have your tenant screening process setup and in compliance with local laws, you’re ready to go find the right property. Before you start shopping for a home, it is important to determine how much financing you’ll actually have available to you so that you don’t discover the perfect home and find out that you can’t afford it. Speak with local mortgage lenders about what you can get and then check out the real estate market.
#3. The right rental property is going to have some specific features to it. Every community has some real estate that is for sale, but not every property will make a good rental property. You need to look for homes that are in neighborhoods that aren’t dead, which means there aren’t a lot of abandoned homes or foreclosures in it. There should also be a strong jobs market available so that you will be able to have people who will actually apply to be your tenants.
One of the most overlooked features to the modern rental home is disabled access. Most building codes today require homes be updated to accommodate those who have physical disabilities, even though they are rarely enforced. If you have a tenant who is interested in your property, however, and they have a disability, you are putting yourself at risk of a discrimination complaint if you turn down their application OR accept it and put them into a home that they cannot properly access. Improve the property before putting it on the market to avoid any problems in this area.
#4. Make sure that you ALWAYS get a security deposit. Every landlord/tenant law has some sort of stipulation that surrounds the security deposit. You’ll want to know how much that you can legally charge for a deposit before seeking out new tenants. Most jurisdictions allow a landlord to charge an amount equal to one month’s rent as a security deposit, plus an additional amount per pet that is allowed.
Some landlords also request having a first and last month’s rent available at the time of a lease signing. This has an advantage in the fact that it gives you extra income that is immediate, but since the Great Recession of 2008-2009, many families don’t have that kind of money on-hand at any given moment. If you charge first, last, and a security deposit upon move-in and monthly rent is $1,500, that’s $4,500 that a household has to pony up to get into a home.
A lot of good tenants live paycheck to paycheck, so they’ll pay their rent on time, but can’t pay 3x their rent for the month. You might be able to accept monthly payments for a security deposit from a tenant that has reasonably good credit, but don’t eliminate the security deposit.
#5. Consider purchasing a tenant’s insurance policy. Insurance companies today are offering a policy that essentially acts as a surety bond for a rental property. The policy will cover damages that go beyond normal wear and tear for a low monthly payment every month. This completely eliminates the need for high security deposit amounts in most cases. Many retirees have found that including this type of policy as part of their rental process and charging a security deposit for whatever deductible may be required can help to save everyone some money when a tenant is ready to move out of a building.
#6. Remember that everything is negotiable. As you’re finalizing the terms of sale for your new property that will become a rental, it is important to remember that every component of the sales process is negotiable in some way. Many retirees just focus on the purchase price, which is understandable, but this could cost them thousands of dollars by the end of the sales process.
Here are some things to consider bringing up with your realtor or the potential property owner as you progress towards a closing date.
- Who is going to pay for the inspection costs of the property? If repairs need to be made, what will be the time frame to revisit the sales process? Who will pay for the re-inspection that needs to take place?
- Are there any financing contingencies that need to happen? It is possible to directly negotiate with a mortgage lender regarding interest rates, points, and even the down payment amount that is initially request.
- Are there any concessions that can be negotiated from the seller regarding the condition of the property.
It is important to remember that this is a business deal above anything else. Some sellers might tug at your heart strings in an attempt to get you to pay more for their home. Offer what you believe is a fair price, based on what your financing is able to provide, and you’ll be able to get a good deal in the end that works for everyone.
#7. Be proactive as a landlord in everything you do. As a landlord, you are going to be responsible for the repair and upkeep of your property. This means that you’ll need to have emergency repairs performed in 24 hours or less in some circumstances, especially if there is an issue with hot water, sewer access, or property security. Many landlord/tenant laws require all maintenance requests to be handled in 10 days or less.
You can be proactive about this by routinely inspecting your property. You’ll need to give proper notice to enter the property, even though you own it, because you don’t occupy it and that notice is dictated by local laws. Then look for issues that could creep up and get them fixed before they get out of hand.
Being proactive also applies to handling problematic tenants. Send out the proper notices to pay or quit as soon as you are qualified to do so in order to evict tenants that aren’t paying their rent. It usually takes 3-4 weeks for the eviction process to complete and that’s time when you aren’t making any money after retiring with rental properties.
How to Make Money With Rental Properties
Sometimes you can even purchase rental properties from your 401k. You’ll need a custodian to manage the property and you can’t occupy it, but this can be another great way to build up a retirement income. Consider these tips today and you’ll be able to have a great passive income and tangible assets that can all contribute to a comfortable retirement.