At a time when rents are soaring to all-time highs, more people are seriously considering becoming landlords to generate substantial revenue.
One of the biggest reasons that more investors are choosing to become landlords right now is because they like the income potential, says Lawrence Yun, chief economist with the National Association of Realtors.
Investors are seeing serious income potential with rental properties in many markets across the country.
“Rents have been rising, hovering near six-or-seven-year-high levels, and are seeing close to 3.5 percent growth from 12 months ago, Yun says. That means not just getting a steady stream of cash from a tenant, but also the prospect of an even higher income source with each passing year, Yun explains.
With discretionary income being squeezed and savings accounts being drained during this economic downturn – fueled by the global COVID-19 pandemic – Americans are more eager than ever to consider alternative sources of income.
Rental Supply Is Low and Demand Is High
The law of supply and demand is in landlords’ favor right now. With respect to supply, there is a dearth of available rental units in today’s market place. Vacancy rates were at merely 7 percent in the first quarter of 2016, according to the Census Bureau, down considerably from 11.1 percent during the Great Recession, and tied for the second-lowest figure since 1993.
As far as demand is concerned, there are many factors motivating people to rent instead of own right now. Young professionals are more mobile nowadays, with a 2015 survey by Rent.com finding 43 percent of so-called Millennials (people between the ages of 18 to 34) have moved from their hometown in pursuit of work. About 44 percent say they intend to move again in the next year. Many Millennials believe homeownership is out of reach, given the rate that housing prices are rising these days. Younger Americans just don’t have the means or desire to purchase property compared to previous generations of young people.
It’s not just young upwardly-mobile young Americans looking to rent in large numbers. Older Americans are more likely to choose to rent, as well. The population of renters 65 years and up will reach 12.2 million by 2030, according to research by the Urban Institute. This figure is more than double the level in 2010.
The surge in rental rates has been documented in many metropolitan areas throughout the country. In its National Rent Report earlier this year, apartment marketplace Zumper.com identified 10 metro areas, from San Francisco to Miami to New York, where the median rent for a one-bedroom is up to $1,700 per month.
Current trends seem to reinforce the prediction that rents will continue to rise to record levels in the coming months and years.
Tips for Becoming a Landlord
One obvious step to prepare yourself to become a landlord is having the necessary capital.
Here are other considerations to think about on the road to being a landlord:
Think Local: A successful real estate investor will prefer properties within a 30-minute drive of their primary residence, Yun says.
“It’s about the unknown, and a preference for knowing their local market,” Yun explains. Yun went on to add that most people don’t feel comfortable or at ease not knowing the real estate market conditions for where they will be a landlord.
Look into Regulations and Taxes: Be aware that as a landlord, you will have to disclose rental income to the IRS. You will also be eligible for some property-related deductions to offset any taxes.
You would be well advised to understand the tax requirements or acquire the services of an accountant before becoming a landlord. You should also be knowledgeable about local tenant and landlord regulations, according to Walter Charnoff, CEO of Investability Real Estate, an online investment property marketplace.
“Tenant rights vary by state and municipality, so a new investor should be prepared to know what they legally can and can’t do as a landlord,” Charnoff says.
Account for Maintenance and Vacancy Costs: Exclusively looking at your mortgage payment and the amount of money a tenant pays you every month puts you, as a landlord, in a precarious position. There are other considerations that a landlord needs to account for when it comes to assessing income and expenditures.
“It is common for newer investors to underestimate the operating costs, especially the maintenance and turn costs when a tenant vacates,” Charnoff says. And doing the maintenance work yourself may seem like you’re saving money, but your time has value too.
Think Ahead: Think about the following scenarios when it comes being a landlord:
- Is your rental home in a university town where your children may be attending school?
- Is it in a location where you would like to eventually retire? Maybe you will opt for a smaller house that will be easier to maintain as you get older?
If this is the case, there may be an added benefit to owning a rental property beyond the immediate goal of making some extra money. Thinking long-term about your own financial objectives might enable you to rent a property for now before you use it in another way in the future.
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