8 Tips to Create Income From Rental Property

As winter blustered through his Cleveland hometown, Steve Novotny may have been a world away, pulling his sailboat up to a dock in sunny Florida on his way to the Bahamas.

Four years ago he plunged into the rental business as a handyman by buying a house that had a decent location but needed huge repairs. "It took all of my savings to buy it," he says. "I actually lived in my truck while I was renting houses out for the first two years."

Now he looks for so-called "handyman specials" – houses with at least three bedroomsthat are in nice locations but need repair. He now owns nine houses and the rental income allows him to sail around the country.

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Many investors like Novotny are seeking to get into the rental market to create passive income to fuel their lifestyles, and the rental market in the United States is still rising.

Since 2005, the number of households that rent has hiked to 37 percent, a jump of 9 million and the largest increase by decade since 1965, according to a December study by Joint Center for Housing Studies of Harvard University. This is on track to be the "strongest decade of renter growth ever recorded," according to the study, and hikes in rent are outpacing inflation.

Traditionally, investors have looked for quick returns by flipping houses after a swift remodeling. "While flipping can be lucrative, it can also tie up your money if the home doesn't sell immediately," says Corey Brinkman, market vice president of Renters Warehouse, a property management company in St. Louis.

"Plus, it's a one-time benefit once the house sells. Renting out a property can provide income month after month and free up your cash flow to invest in other places," he says.

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But investors should enter the market with caution because it is easy to underestimate the costs of repairs and upkeep on your rental unit. "A good rule of thumb is to calculate anywhere from 7 to 15 percent for these unforeseen repairs, depending on the age of the rental property," Brinkman says.

Here is some advice from experts to keep your rental money flowing in the right direction.

Keep your goals in mind. Investors need to know why they are in the rental market and what they want to accomplish financially, says Wendell De Guzman, chief executive of the real estate investment firm, PCI in Chicago.

If the goal is to live passively off the rental income, then investors should know how much income they'll need. The tax rate changes as income becomes passive, says De Guzman, and "your tax rate can be zero percent" because you can deduct the depreciation from your taxable income.

For example, an investor who pays $275,000 for a house would divide it by 27.5 (years) for depreciation and shield $10,000 in income annually.

Put your financial house in order. Knowing your income and expenses will help you get loans and, subsequently, buy more property, De Guzman says. Don't forget to include taxes, insurance, maintenance, management, utilities and the reserves for major repairs, like a new roof.

It also pays to learn financing and talk with mortgage brokers to find programs to buy the property with as little money down as possible. First-time homeowners might buy a four-unit apartment building, get an Federal Housing Administration loan with a 3.5-percent down payment, collect the security deposit and, if you close early enough in the month, use the first month's prorated rent toward the down payment, De Guzman says.

Learn your market's vacancy rates and property ratings. There are areas rated A through F, and they all sell and rent for different rates. Keep your vacancy rate to 5 percent or less, De Guzman says, so you won't be stuck with an unrented property for months at a time.

If you don't want to be a property babysitter, avoid the areas with the lesser ratings. Areas with F ratings often have the most violent crimes in the neighborhood. "It's tough being there. You have to watch your investment like a hawk," he says.

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A-rated areas often mean higher sales prices but lead to higher rents and more regular tenants. "You'll have fewer headaches if you're dealing with renters who can afford a more expensive rent. You don't want to be dealing with the bottom-of-the-barrel (properties) if you plan on being an absentee landlord," Novotny says.

Look for real estate with great potential. Properties that tend to do well are near schools, expanding retail or trendy points of interest, local transportation, or surrounding malls, says Daniel Sanchez, commercial associate partner of Partners Trust Commercial in Beverly Hills, California.

Once it's yours, maintain the exterior and keep your costs down with desert landscaping, low-flow toilets and tankless water heaters, he says.

Keep your options open. Consider smaller markets within secondary markets, how well the house was built and how much people are paying rent in the neighborhood. "I want to be in the $800-to-$900 range in the secondary market," says Yariv Bensira, owner of Hyde Capital in Memphis, Tennessee, who came to the country to attend college and now who owns and handles 4,000 units with a private investment fund in Israel.

Before buying, he checks how well the house was framed, who the tenants would be and what he can add to the property to reasonably increase the rent. "You're not going to change the demographic or bring in completely new people. The question is whether the existing tenants can pay a little more for a better product," he says.

Don't be lured by low interest rates. If a property is already 30 years old and would cost the same to build it, then don't buy it, Bensira says. Make sure your home has enough value to get the returns you want when you eventually sell the property.

Renovate the kitchen and bathrooms to get higher rent. Quality granite in the kitchencould save you resurfacing costs, and bring in an extra $50 to $90 per month, Bensira says. Be sure to know how much renovations cost so that you know if you're getting a fair bid.

Screen the tenants. Have an application process and use a service such as National Tenant Network to look for civil and criminal lawsuits, recent collection activity and credit scores above 600, says De Guzman. "Look for people who were down financially, but now are on their way up with a good job and some savings, who have been paying their bills for the past four years," he says.

via U.S. News.

Many buyers no longer see marriage as prerequisite to a mortgage

In more than two decades as a real estate agent, Marc Tahler has seen his client base of would-be buyers shift.

He used to see a lot of younger couples, married, maybe with a kid in tow or one on the way.

Lately, though, his buyers are trending a little older, and, kid or no, a lot fewer of them sport a wedding ring.

"I'm seeing more people who aren't married," said the agent with Rodeo Realty in Woodland Hills. "Sometimes, it's a couple where both have been divorced, buying as partners. Or one buys and the other puts some money in. It's all becoming more common."

A generation of young people who are getting married later — or not at all — are also taking a different approach to one of the biggest financial decisions most of them will ever make. They no longer see marriage as a prerequisite to a mortgage.

"These key life-stage things impact when we buy, what we buy and where we buy," said Mollie Carmichael, a principal at John Burns Real Estate Consulting in Irvine. "But ... young people today aren't living by the same rules as 20 or 30 years ago."

Unmarried couples, same-sex partners, even pairs of roommates going halvesies make up a much bigger chunk of the housing market than they did a generation ago, said Rachel Drew, a researcher at Harvard University's Joint Center for Housing Studies.

"The decline in married couples, among younger buyers, is almost entirely offset by growth in unmarried couples. You're not actually seeing a decline in two-adult households," she said. "[Unmarried couples] are much more likely than a single person to buy a home. They're acting like married couples."

That's what Krystle Mangaccat is doing. She and her boyfriend closed this week on a house in Northridge, a single-family home with three bedrooms, 2 1/2 baths and plenty of room for their dogs — and maybe someday their kids.

They're not married yet, but after four apartments in three years, they were ready to settle in a place of their own, Mangaccat said. And, she said, the choice between using their savings on a down payment or a wedding was kind of a no-brainer.

"We're practical people," she said. "A house is a long-term thing. We'd rather spend our money on that than on throwing a big party."

That's a choice more couples are making lately, according to a study last year by real estate website Redfin, which notes that the average wedding and honeymoon costs about $35,000, enough for a down payment for many home buyers.

Other would-be house hunters plan to buy regardless of their marital status, like Yvonne Carrasco. The 33-year-old public relations professional has been saving up a down payment for years now. She figures she's a year or so away, and hopes to buy something in 2016.

A house will be something of her own that she could bring to a marriage someday, or an asset for herself.

"I think a lot of people my age have come to the realization that marriage is almost like a bonus. If it happens, great. If it doesn't, great," she said. "But it's important to put yourself in the situation to feel safe and secure."

And for some, the outlook is that homeownership remains a long way off, marriage aside.

Carlos Garcia is a 31-year-old law student at Santa Clara University. He and his girlfriend are thinking about whether to move back to their native Southern California or stay in the Bay Area after they graduate in 2016.

Either way, Garcia notes, they're looking at "literally the two most expensive parts of the country."

With six-figure law school debt and sky-high home prices, he worries that even two attorneys' salaries may not qualify them for a mortgage in a neighborhood where they want to live.

"I really have no reasonable aspirations of being able to buy a house for probably 10 years," Garcia said. "It's disheartening."

Whatever the reason — fewer marriages or more challenging finances — younger buyers are waiting longer to buy homes. That helped slow the housing market in 2014.

In Southern California, the number of homes sold through November was down 9.8% for the year, to its lowest level since 2011, and well below long-term averages. That's despite near-record-low interest rates and an improving economy.

Though unmarried couples may be more willing to buy houses together, some still see a marriage as a key driver of homeownership.

"It's a pretty straightforward link," said Richard Green, director of USC's Lusk Center for Real Estate. "Married people buy houses. Single people rent."

Just 48.7% of California households were headed by married couples in 2013, according to Census Bureau figures, down from 51.1% in 2000, a difference of more than 300,000 households. And those married couples are far more likely to own their house — more than two-thirds do, compared with about 40% of non-married households.

That's partly a matter of money, he notes. A married couple with two incomes is far better equipped to buy a home in Southern California at a time when the median-priced home in Los Angeles County costs nearly nine times what the average job pays in a year. Marriage makes the math work.

The math can work just as well for unmarried couples, but many continue to grapple with employment and income uncertainty, said Daniel Sanchez, a real estate agent with Partners Trust in Beverly Hills.

Sanchez works with a lot of 30-something buyers who are trying to sort out life changes, moves and jobs that they're not so sure will last forever. They're establishing careers later, getting married later, buying houses later.

"The dynamics have completely changed," said Sanchez, who at 35 is himself a renter and in "no rush" to buy. "Buying a home makes sense if you know you're going to stay put, but we're in a totally different time."

For some, it makes sense whether they're married or not — though negotiations over whether the house or the ring comes first can be tricky, real estate agent Tahler said.

He knows from personal experience, having just bought a house with his girlfriend of six years. They have a son together and wanted more space. But she hesitated.

"It became a little heated. She almost didn't want to, specifically because we weren't married," Tahler said. "She settled — for the moment. She's still pushing the marriage, though."

via the LA Times.