Posts Tagged ‘landlords’

Rental Properties Make Good Investments, But Come With Risk

Maybe your financial house is in order.

Your debt is manageable or paid off. You have an emergency fund and now you’re looking for ways to grow your wealth. Or, perhaps you’re planning ahead by learning about different investments options. Have you considered becoming a landlord?

Rent prices tend to rise over time, providing an inflation-protected income into your retirement years. You also might be able to cash in big later if the unit’s value increases. It doesn’t always work out that way, though. Some landlords wind up with a trashed property after evicting a tenant or lose their savings in a natural disaster. In between the extremes of easy, hands-off income and total ruin are the everyday concerns, benefits and risks that most landlords face.

Landlord Risks

Investment property mortgages tend to be a little more difficult and costly to secure than primary residence mortgages. It can also be harder to take cash out of investment properties – either with a cash-out refinance or a home equity line of credit. In other words, you might not have access to the money during an emergency.

Owning a rental property outright can be risky as well. Especially if you’re placing a significant amount of your savings in a single investment, the lack of diversification could put you in a precarious situation.

Those aren’t the only risks you could face when owning a rental.

  • Finding and keeping good tenants. Landlords learn from experience that it’s worth leaving their rental empty for a month or two rather than pay for an eviction or expensive repairs later. You can pay for professional tenant screening reports or credit reports and call applicants’ references before offering a lease.
  • Covering your expenses. Between taxes, insurance, repairs, maintenance and mortgage payments the monthly and one-off costs can quickly stack up. Some landlords lose money because their rental income doesn’t cover their expenses, but they won’t be able to attract tenants if they raise it. If the housing and rental markets drop, you could be stuck losing money each month or selling the property at a loss.
  • The time or cost of managing a rental property. Becoming a landlord is often far from a hands-off job. When the phone rings in the middle of the night because the roof is leaking, you’ll need to figure out how to solve the problem. You may be able to hire a property management company to take on this work for you, but they often charge about 8 to 12 percent of your rental income or a flat monthly fee.

Even with the risk involved, there are countless examples of successful landlords. Many find the experience so rewarding that they purchase additional investment properties.

Financial Success

What separates the successful and sorrow-filled landlords? Luck certainly comes into play, but you can also take steps to get started on the right foot. Try to determine a property’s capitalization rate, the estimated annual return, before making an offer. To calculate the capitalization rate, divide the annual net income by the property’s purchase price.

Your net income will be your rental income, which you can approximate based on rental prices for similar properties, minus your costs, such as maintenance, upgrades, vacancies and emergencies. You may need to consult an accountant to understand how your new tax situation can affect your costs.

Cap rates tend to change depending on the area and type of property. But regardless of what’s considered “good” in your area, you can use this formula to compare different investment opportunities.

Bottom Line

Many people focus on the positives of owning investment property. An extra income and potential to build equity with their tenants’ money seems too good to be true, and it just might be. If you’re going to be successful, you should acknowledge the risks that come with the territory and plan accordingly.


Source: The Gilmer Mirror

Details Can Be Weighty When Renting Commercial Space

Renting a commercial space is a move many entrepreneurs postpone as long as they can, because it’s one of the biggest expenses and most consequential commitments a startup or young company faces.

A commercial lease binds landlord and tenant to a variety of promises. A well-executed lease can benefit both parties, but a hasty, vague arrangement can break an embryonic enterprise.

Commercial Versus Residential

When someone rents an apartment or home, consumer protection laws dictate many terms of the landlord-tenant contract. Not so with commercial leases, which have few of the privacy protections and other regulations afforded residential rentals.

A renter rarely performs a radical makeover on a new home, but commercial renters often need to customize a space to accommodate offices, retail operations or assembly lines.

Because they’re tailored to meet the business’s requirements while respecting the owner’s property rights, commercial leases are negotiated from scratch. This lack of standardization means business owners and landlords need to exercise due diligence before signing a contract that can bind them for years.

Coming To Terms

The renter’s monthly payment must be affordable, and the contract should state what that payment covers. Some landlords include the cost of property insurance and taxes, utilities and maintenance in a commercial lease, while others bill tenants separately for these expenses. In the latter case, the landlord should explain how these costs are calculated.

The amount and frequency of rent increases, or escalations, should be addressed. Some landlords specify dollar amounts, while others tie hikes to an objective yardstick like the Consumer Price Index (CPI).

The lease term needs to be long enough to provide stability, but be short enough to free the business if it outgrows the space or finds it unworkable. The contract should list all necessary improvements to the commercial space and identify who’s responsible for doing and paying for buildouts and who owns permanent fixtures when the business leaves. If renovations are required to make the space accessible to disabled customers or workers, the contract should state what they are and who pays the bill.

The contract also needs language that clarifies

  1. That the incoming business is compatible with the property’s zoning classification.
  2. Who’s responsible for maintenance and repairs of the grounds, building and important systems, such as heating, air conditioning and ventilation.
  3. What common areas, such as lobbies, restrooms and meeting rooms are part of the rented space,
  4. Specifications and allowances for exterior signs designed to attract customers.
  5. The security deposit amount and provisions for its return.
  6. The tenant’s right to sublease and procedures for terminating the contract.

A commercial real estate broker can help business owners understand and negotiate the details of a lease. An experienced broker can also assist with property search. One of the most important functions a commercial broker can perform is helping to identify the best location for a business — especially if the business is in retail.

Defaulting on a lease can be catastrophic for a business and costly for a landlord, which is why both should review the lease carefully and consult a commercial real estate attorney before signing.


Source: The Taos News