Renting out a property might sound like a good money-making idea. But there are some risks that you need to be aware of before you take the plunge.
Risk #1: Tenants
Probably the biggest risk you face in the tenants themselves. Let’s say you find people to live in your property. You get the rental agreement signed, and they move all of their stuff into the property. Everything seems to be going well until you show up for a spot inspection and find out that they’ve wrecked the place.
If you think this sort of thing is uncommon, think again. Tenants are notorious for trashing their accommodation, forcing the landlord to pay out above and beyond the initial deposit.
What’s the solution? It’s a good idea, according to USAA, to get to know your tenants well before renting out your property. You might want to make money quickly, but you could end up paying out a lot more than you bargained for if you don’t get it right first time around.
Your best bet is to find somebody who you know and can trust, like a family member. But you can also use an agent who will find worthy tenants on your behalf who will pay their rent on time and isn’t a threat to the value of your property.
Risk #2: Lawsuits
Rented properties are governed by different rules to regular, owner-occupier homes. In the latter case, owners themselves are responsible for things like smoke alarm maintenance, but in rented accommodation, it’s the responsibility of the landlord. Landlords who don’t properly maintain their properties open themselves up for legal challenge, and could even be charged with a felony if they fail to adequately safeguard the health of their tenants.
Risk #3: Financial
Figuring out how much rent to charge might seem like a straightforward exercise, but it’s anything but. First of all, you need to know whether you’re going to make a profit from renting out a house or apartment, otherwise all your effort will be for nothing. For starters, work out whether the rental income you’ll receive from the property will be higher than the monthly mortgage payments. Remember to factor in gaps between tenants across the year, meaning that you allow for a couple of weeks where you won’t receive any rental income at all.
Next, consider the costs of listing your property. Is it still worth renting out a property once you consider the listing price and agency fees?
Finally, ask yourself whether rental rates are a good ratio of mortgage payments. Some properties can be very expensive, but only command limited rents. Others can be cheap to buy but provide good rental incomes. The best properties are those which can be divided up into sections for each group of tenants, providing more rental units per building.
Risk #4: Tax
Finally, owners of rental properties need to be aware of tax laws regarding rental income. In most jurisdictions, you’re taxed on the money you make above the cost of capital, something that will need to be factored in when you make the decision of whether or not to buy-to-let in the first place.