November 1, 2009

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Home Leasing 101

Considerations Before Wearing the Landlord Hat

By David Kennard

November 1, 2009

Falling home prices may have many thinking opportunity, but investors considering the rental market should proceed cautiously, according to some local experts. Danny Gutierrez, a realtor with TruNet Real Estate LLC in Salt Lake and a landlord, says he sold nearly all of his rental homes when “the market was tanking.” Like many rental property owners, Gutierrez witnessed the simple principle of supply and demand; as more rental homes became available, landlords needed to lower their rates to stay competitive. As real estate prices have dropped, however, rental investments have become attractive. “Investors have come into the market and snatched up deals over the last year,” says Andrew Oliverson, director of REO (Real Estate Owned- property that goes back to the mortgage company after an unsuccessful foreclosure auction) sales at Green River Capital LC in Salt Lake. “While at the time the prices were good, we believe (and national contacts have advised) that we are in for a second, larger, more sustained surge of REOs.” Buy Low, Rent High As in any investment, rental properties can be more profitable if the initial investment can be kept as low as possible. Like owner-occupants, investment buyers should consider properties with a low cost per square foot and location, location, location. “Think about where tenants want to be,” Gutierrez says. “If you are the cheapest house in the area, you are always going to be able to rent it.” There are no real secrets to finding a low purchase price, Gutierrez says, but he has bought more than 50 homes at foreclosure auctions. “The downside to buying homes that way is you rarely have time to do a walk through and you usually have to pay cash within 24 hours of winning the auction,” Gutierrez says. Homes going to auction can be found through legal notices published in local newspapers or online at Realtors who specialized in bank-owned or REO properties can also help you locate rental properties. Realtors often know when a bank-owned property is about to go on the market and can help investors make an appropriate offer. And if the timing is right, sometimes a deal can be struck before the listing hits the Multiple Listing Service. Buried in Maintenance One of the hidden costs to rental properties is what many property managers call deferred maintenance. Manufacturers know that postponing equipment maintenance to reduce costs often leads to much higher costs down the road. Investors should look at their properties the same way, Gutierrez says. Landlords are usually in the business for the long term and want to have homes that will provide a good return for more than the first few months. So, landlords should also be responsive if a problem with a property arises. A quick response to a tenant’s call can mean the difference between a $20 dollar leaky faucet and a $2,000 bathroom floor replacement. Landlords should be willing to do handyman-type work, or have a budget for repairs when they need to be done. And owning a rental property in Utah also means having seasonal tasks such as lawn care and furnace and air conditioning maintenance. Finally, like any owner, rental properties should be inspected before any leases are sold. The Lease Document The document you use to enter into an agreement with a renter serves as a full-disclosure tool between you and your tenant. It can be as specific or vague as you like, but remember that you both will sign the document with the full intention of honoring the agreement. The lease should include an outline of who pays for what utilities, who is responsible for lawn care, when the rent is due, and how much you will charge for a late payment or bad check. It should also include a detailed list of things that the renter is responsible to do to the home before moving out, such as cleaning and repairs, and what the fee will be if those tasks are not done. The Long Run Turning your home into a rental property may be a viable option to selling at a loss, but if you become a landlord with the intention of making a large profit, you need to commit at least five years to your new investment. After some calculations—which should include taxes, insurance and maintenance costs, as well as a value for your own time—you might find that your profit margin isn’t as great as you originally hoped. If it is, you may have what it takes.
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