So you've decided to rent out the property you own, now you need to decide whether to take on the responsibilities of being a private landlord or outsource those duties to a professional property manager. We cover the pros and cons of each option so you can make an informed decisions and set yourself up for success.
The legal responsibilities of a landlord extend beyond collecting the monthly rent. Landlord-tenant laws exist to provide a framework for landlord-tenant relationships and are divided into five categories.
- Collecting and managing security deposits and/or prepaid rent.
- Disclosing accurate information about the property.
- Delivering the property to the tenant on time and vacant.
- Maintaining a safe, sanitary and habitable property.
- Adhering to all lease terms.
In addition to the legal demands, a landlord is also responsible for marketing the property, finding suitable tenants and managing legal documents like lease agreements. Whether it's better to handle those responsibilities yourself or seek a professional property manager can depend on a number of factors.
Pros and Cons of Hiring a Property Manager
Professional property management companies deal directly with prospective tenants, market your property and can also collect rent, manage maintenance and repairs, deal with complaints, legal issues and even evictions.
When Should You Consider Hiring a Property Manager?
- You don't live close enough to the property to handle day-to-day demands.
- You have multiple properties to manage.
- You don't have time to dedicate to fully manage the property.
What Are the Drawbacks to Hiring a Property Manager?
- You'll give up some of your rental revenue, typically between 5% and 10% on average, although some companies offer a flat fee for their services.
- You'll turn over maintenance responsibilities to someone else, and this may cost you more if the service they hire is overpriced, or unskilled.
- They may charge fair market rents rather than what your property could command to ensure a steady stream of tenants.
Pros and Cons of Being a DIY Landlord
Becoming a landlord isn't a hobby or a side project-it's a business, and it needs to be treated as such if you want to be successful at it. If you have the time, resources and skills, then directly managing your rentals could be the right choice for you.
When Should You Consider Being a Private Landlord?
- If you're managing a single property or small number of units in an area that's nearby and familiar to you.
- If it makes more business sense to invest your own time instead of hiring a professional.
- If you're interested in running the day-to-day operations, maintenance and administrative demands of a rental.
What are the Drawbacks to Managing a Property Yourself?
- All of the marketing, home showings and general upkeep of maintaining the property and your lease agreement(s) will be your responsibility. If an HVAC unit breaks in the summer or a pipe bursts in the winter, you're the one on call.
- You'll need to be familiar with state-and-local landlord/tenant laws to ensure compliance with the lease agreement.
- The more properties you own, the greater the commitment.
What You Should Know When Buying a Rental Property
Whether you're purchasing an investment property or refinancing a rental you already own, you'll need to keep several things in mind when building a rental portfolio. Mortgage lenders consider rental properties to be riskier than primary homes when it comes to default/foreclosure. Expect to be charged higher interest rates and pay larger down payments on these properties.
For the majority of lenders, the minimum down payment will likely be around 25% of the purchase price while refinances will allow for maximum loan-to-value ratios of no more than 75%. The less equity you hold in the property, the less favorable your terms will be.
If you're planning on using your rental income to qualify for a loan, lenders will require at least two-years of evidence of your landlord experience before they'll consider your projected income. This could complicate things if you're an inexperienced landlord starting out for the first time. Consider completing a market rent analysis as part of your appraisal so you (and your lender) know what to expect.