Is There Profit in Your Property?
Renting is a critical market today. Why is renting on the rise? For one thing, many people have not been able to buy into today’s sky-high real estate market. Shortages of workers and supplies are intensifying already-existing housing shortages. Decent and affordable places to live could not be more vital.
At the same time, the shift to remote and hybrid work has dispersed workers and opened up opportunities for homeowners to rent out space in various locations. This can create win-win situations for owners and their renters.
Have you thought about of trying your hand at turning your extra living space into much-needed housing — and a business opportunity? If so, here are 4 points worth considering.
1. You Don’t Have to Do It All
Each of us has a unique set of talents and skills. Today, it’s fairly straightforward to outsource professional tasks and do only what you’re good at. Recruiting a property management firm can help you shine as an investor-owner, and keep all the paperwork straight.
Professional management teams have experience in vetting renters. They are trained to use applications and leases in a manner that complies with evolving laws. Good companies have the know-how to exercise discretion in tricky situations. They employ messaging systems, auto-pay features, and online portals to keep accounts in line. They might also know reasonably priced and talented maintenance and landscaping crews in the local area.
If you have people skills, developing relationships with renters and the community might be your own forte. Or you might have other valuable skills. As an independent property owner, your personal style and reputation can quickly set you apart from the corporate rental world.
If hiring a company is impossible at first, today’s property management software can get you started. But you might need expert advice to avoid problems. Which brings us to our next thought.
2. You Don’t Have to Know It All
There are complex housing and business laws related to rentals. They involve zoning, safety and permits, financial responsibilities, taxation, and so on. Laws and taxes can change, and property owners need to anticipate and adjust to the changes.
There are federal, state, city, and county anti–discrimination laws for landlords. Advertising, renter selection, eviction and debt collection are all regulated. You may not discriminate against anyone in a legally protected class when selecting applicants or dealing with renters. The same general rules must apply, consistently and evenhandedly, to all prospective and current renters. Mistakes can bring major penalties, so be sure you read up on the law.
Fortunately, you don’t need a professional degree to deal with the regulatory aspects. A local real estate attorney can guide you. Ask, too, about the business structures available to you, such as the limited liability company (LLC).
Ask your current homeowner’s insurer about how a landlord insurance policy can protect you from liability. Also ask about renter’s insurance, so you can let prospective renters know what they will need to pay to protect their personal possessions.
Talk to your accountant or tax specialist to learn how renting out your property could impact your tax situation.
☛ For investor owners, the 1031 exchange opportunity is available for acquiring new rental properties in 2022. Here’s a how the 1031 exchange process can help you save on your taxes.
And talk to your mortgage pro. Note that Federal Housing Administration (FHA) and other government-sponsored loans are not designed for investor-owners. Yet you can have a residential property (up to a 4-unit home) with these loans if one of the units is your primary residence. No remote landlords. No short-term (less than 30 days) rentals! Speaking of which…
3. To Airbnb, or Not to Airbnb. That Is the Question.
Especially if your property has good access to local attractions, trails and cycle routes, bodies of water, and public transportation, you might be thinking of registering it on Airbnb, Booking.com, HometoGo®, or Vrbo®. Maintaining a short-term rental property in a desirable area can be a money-maker — as long as you can keep the space filled with guests, and afford the repairs and cleaning costs between their stays. Research your area well!
But first, find out if your city or town puts limits on short-term renting. Run an internet search to learn the rules. Some cities set caps on the number of days short-term stays can be advertised, or it may bar them completely. This is the case if the owner doesn’t live on the grounds. More flexible laws and mortgage rules apply when you’re renting out a room in an owner-occupied building.
☛ Heard about house hacking? It’s the fine art of making a primary residence do double duty as an investment property, so rental income covers a homeowner’s costs.
Buying a condo? Special rules apply. If you live in a condo building, the homeowners’ association (HOA) could even forbid renting, so check the covenants and restrictions. And be aware that associations can change their rules, place caps on rentals, and so forth.
If applicable laws and rules give you the green light, you’ll need to build a reputation to earn regular income. So, you’ll need to delight your guests and accumulate good reviews. You’ll also need to invest in the unit to be sure it’s attractive to visitors. That means smartly furnished, clean, and complete with utilities, coffee and basic food items, plus cable and internet.
The online platforms have message boards where you can find property owners doing basically what you’d like to do, so you can learn from their experiences. For example, Airbnb’s Community Center could be a good source of information about homesharing platform fees, short-term rental insurance, local pricing, and expected features and amenities in your area. Keep your ear to the ground!
4. You Do Have to Roll With the Changes
At some point, most investor-owners run into situations that test their mettle. Hardships and uncertainties can strike rental businesses of all sizes. Covid-19 presents a recent example. Job losses and furloughs were widespread in 2020, and the federal government was forced to step in with rental assistance to avert a crisis.
But for those who stick it out, rental income can gradually offset mortgage debt. And the rent payments earned can gradually rise to match inflation.
With the pandemic’s impact apparently easing, investor-owners are getting back to normal operations. That is, they needn’t be concerned with applying for financial assistance for renters while trying to make ends meet for extended periods without receiving rent payments.
This year is a good time to review and update lease documents. Consider inflation, worker shortages, and supply-chain issues as when making changes for 2022.
Best of Luck Out There!
We at Deeds.com wish you well on your investor-owner journey. In 2022, the value of rental properties overall is on the upswing, and that’s expected to continue.
Supporting References
Federal Housing Administration Single Family Housing Policy Handbook: SFH Handbook 4000.1 | HUD.gov / US Department of Housing.
Tim Lemke for The Balance: Pros and Cons of Airbnb as an Investment Strategy (updated Jan. 6, 2022).
Ruben Caginalp for Bankrate.com: How to Acquire and Establish a Rental Property (Feb. 23, 2022).
Peter Warden for The Mortgage Reports: How to Become a Landlord in 2022 – Start Earning Rental Income (Jul. 30, 2021).
Deeds.com: Investing in Real Estate? Five Trends and Themes to Watch in 2022 (Jan. 17, 2022).
And as linked.
Photo credits: Cottonbro and Andrea Davis, via Pexels.