Posts

5 Types of Rental Property Loans: Which One Makes Sense for You?

Whether you’re diversifying your investment portfolio, hedging against inflation and a volatile stock market, or simply trying to establish a passive income stream, investing in real estate offers many key advantages over other investment strategies.

But as the cliche goes, you have to spend money to make money. Unless you’re sitting on a stockpile of cash, you’ll need to borrow capital to get a foothold in the market and start building your real estate portfolio. Fortunately, there are several types of investment property loans available and a seasoned real estate investor will take advantage of all of them as needed, depending on the situation. 

So what are your options for finding financing and which one makes the most sense for you? Here are five possible routes you should understand before making a decision.

1. Conventional Financing

Taking out a conventional mortgage is the most common way real estate investors buy new investment properties. That being said, you should be ready to place around a 20% down payment, which can be hard for people who are new to real estate investments. You will also need a solid credit score (preferably 740 or more) to qualify for affordable interest rates that won’t eat into your profits. Finally, be prepared to prove that you have enough liquid assets to make around 6 months’ worth of payments.

It may surprise you to learn that a standard mortgage is frequently the most cost-effective option – even compared to saving up and purchasing real estate outright. But the sooner you own a rental property, the sooner you can earn passive income – and that extra cash flow will often more than pay for the interest on your loan.

Of course, you’ll need to shop around for a good interest rate and pay attention to the fine print. There are often hidden fees that kick in once you have multiple mortgages, and you want to avoid as many surprises as possible when you’re getting started as a real estate investor.

2. Hard Money Loan

A hard money loan is typically issued by private investors and uses your assets as collateral. Because they aren’t coming from a bank, these loans aren’t as restrictive as mortgages. They’re much easier to qualify for than other kinds of property loans, and they have the advantage of quick approval. The process from start to finish can be done in a day, so they are a great way to beat the competition to the punch in areas with a lot of buyers. If you can provide a 25-30% down payment, you can usually qualify for the loan.

However, these are short-term loans, requiring repayment within 1-5 years, and they can be very expensive. Most people use hard money lending for property investments they plan to fix and flip as quickly as possible. Landlords generally can’t afford to pay off a hard money loan in the timeframe they are meant for. You can still use this option for purchasing rental properties, but you’d need to refinance it as soon as possible.

3. Private Money Lender

A private money lender is, in general, not a professional. Often they are a friend, relative, or business associate willing to take a risk to help you out because they trust you to make good on the loan. It may be a handshake deal, or there may be paperwork in case things go wrong, but there will never be as many formalities as there would be when financing through a bank loan or private lender.

The main disadvantage here is the consequences it could have on your relationship if there are any misconceptions about their return, or if you wind up losing their money on the deal. But if everything works out, a private loan can be the perfect way to enter the world of real estate investing when all the other doors are closed to you. 

The major advantage of using private money lenders is the flexibility you can get with repayment. Your lender may be perfectly willing to wait until you have rental income before you start paying them back, and some of them may not care about interest rates, as long as they get their investment back.

Occasionally, you may be able to find a seller willing to privately finance the purchase of the property. But even the most generous of sellers aren’t usually willing to offer long-term financing like a bank would (e.g. a 15- or 30-year mortgage), so you should expect high monthly payments in the rare instances this option is available. But because you aren’t constricted by banking regulations that set interest rates, this option can help you get far more value for your money.

4. Federal Housing Authority (FSA) Loan

If you’re unable to qualify for conventional financing, either because your credit score isn’t good enough or you can’t make the down payment, you may still be able to get a loan backed by the FHA to finance your purchase. FHA loans can be a perfect entry point for first-time real estate investors. These loans are insured by the US government and require much smaller down payments – sometimes as low as 3.5%. The drawback here is that you’ll have to pay for mortgage insurance as long as you have less than 20% equity in your home. 

There are two main disadvantages with this approach. First, you can only use FHA loans to purchase a property you will reside in for at least 12 months. This may not be an issue if you’re buying a duplex or a multi-family unit, meaning you can reside in one part of the property and have tenants living in the rest. Once you start making payments, your credit score will improve dramatically, and you can start saving money for a down payment using conventional financing for your next investment property. 

The other disadvantage to FHA loans is that the property must be in a good, livable condition before the loan is approved. If an inspector finds any issues, they must be resolved by the owner. This can prolong negotiations if any surprises come up, and the owner may prefer to sell to another investor who isn’t restricted by FHA requirements. You’ll be limited to one FHA loan at a time, but as soon as you have built equity in your property, your purchasing power for future real estate will increase.

5. Home Equity Loan or Home Equity Line of Credit

There are two ways you can use the equity you have on any of your properties to acquire financing. Both are essentially second mortgages, which lets you draw on the equity you’ve built by paying down your home loan. Generally speaking, you can take up to 80% of the value of your home, minus what you still owe on it. This is known as your loan-to-value ratio, and different lenders may determine it differently. Let’s break down these two options.

Home Equity Loan

A home equity loan is a loan that uses the equity of the borrower’s home as collateral in exchange for a loan. The value of the home is determined by an appraiser which sets the eligible loan amount. This does not mean that the collateral has to be on one of your new investment properties. A borrower can take out a home equity loan on the home he or she currently lives in or any other home that the borrower owns. 

The interest rate is generally higher than conventional financing. Like a standard mortgage, you will need to start making a monthly payment right away. If you already have a renter in a property, that means you already have the cash flow paying off the initial mortgage on the house. And if you can quickly get another tenant established in the property you buy with a home equity loan, then the monthly payments are taken care of for you already, and the profit will increase your monthly income almost immediately.  

You can even take out multiple home equity loans on the same property, and use them for down payments on new mortgages – so long as you are not double-dipping by borrowing more than your actual equity in your investment. The risk here is that if your home loses some of its value, you’ll owe more on it than it’s worth. But by buying a property in neighborhoods with signs of growth, you can minimize this possibility.

Home Equity Line of Credit

A home equity line of credit works more like a credit card. It allows you to withdraw money as needed by using your equity as your credit limit, up to around 80%. One advantage of this is that some lenders don’t immediately require you start making payments on the amount you borrow, so long as you pay down the interest each month. This can be a great option for properties you want to purchase that need more work before they can be rented out. 

The disadvantage is that you don’t have a set interest rate. And while they usually start lower than home equity loans, they can rise at any point. This may increase your monthly payments dramatically, which can eat into your projected profit margins. Finding a line of credit that will allow you to convert it to a fixed-rate mortgage is the best way to offset this possibility. 

Both of these options are generally cheaper than other kinds of loans, which are far too expensive to use for a down payment on a home when you factor in the additional interest on the mortgage. And if you’re using them to purchase more investment properties, the interest you pay is tax-deductible.

Although you can have up to 10 mortgages at once, many lenders won’t offer you another if you already have four. But a home equity line of credit bypasses these restrictions (so long as you don’t surpass your debt-to-income ratio) by allowing you to purchase properties outright. 
Of course, you will need substantial equity to do this, which takes time to build. But once your equity is established, this approach is a great way to expand an already-profitable investment portfolio. Bear in mind – you are borrowing against the value of your home, and if you default on it, your lender will take your property to recoup their loss. So don’t overextend yourself, and don’t rush into any new deals.

The Bottom Line

There is no one perfect rental property loan that fits all, and different circumstances will call for different kinds of financing. That’s why it’s essential to take your time and do your research. The more experience you gain buying investment properties, the easier these decisions will become.

It’s also crucial to remember that rental properties require a lot of work to manage. From placing tenants and processing payments to inspections and daily maintenance calls, being a landlord is a full-time job. The more time you spend dealing with your tenants, the less time you will have to focus on growing your assets. 

That’s where Great Jones comes in. Our team of experts can take the hassle of day-to-day property management off your plate – so you can focus on building your portfolio and enjoying your income. Learn more about what we do.

When & How to Refinance a Rental Property

In certain circumstances, refinancing a rental property can be a very smart move. It can allow you to better tailor your mortgage terms to meet your financial goals, whether that’s reducing your monthly payments, saving money over the life of the loan, or accessing cash to renovate or buy other properties. 

However, refinancing (aka “refi”) isn’t the right move for everyone. There are costs and risks, so it’s important to understand what you’re getting into before you commit. You’ll need to know the right questions to ask potential lenders to be sure the cost-benefit factors are right in your particular situation. 

Finally, refinancing an investment property is a bit trickier than refinancing a mortgage for your primary residence, so you’ll want to be prepared for the higher bar you’ll need to clear in order to qualify.

This guide will help you understand:

  • The benefits of refinancing a rental property
  • The risks and costs of refinancing
  • What lenders look for
  • How an investment property refi differs from refinancing your primary residence

When to Refinance a Rental Property

Refinancing means replacing one debt obligation with a new one, with different terms. When you refinance, your existing mortgage will be paid off and you will have a new loan in its place. 

The point of refinancing is to change the terms of your loan to better suit your financial needs and goals. Terms of the loan you may wish to change include:

  • The interest rate
  • Variable interest rate to a fixed interest rate
  • The repayment period
  • The minimum monthly payment
  • The amount of money you are borrowing

Let’s go over each of these items individually to see what benefits a refinance can provide when it comes to each of these loan terms. 

Potential Benefits of Refinancing

Lowering your interest rate

Many borrowers refinance in order to attain a lower interest rate. Interest rates fluctuate with large-scale economic changes – perhaps you took out your original mortgage when interest rates were higher and now they’ve dropped. Refinancing allows you to reset your loan terms according to current, lower interest rates. 

Or, maybe your credit score has improved substantially since you made your initial real estate investment. This might also earn you a lower interest rate if you refinance. 

Converting from a 30-year to a 15-year or 10-year mortgage term can allow you to reduce your interest rate as well if you can handle the higher monthly payments. Shorter loan terms (repayment periods) generally carry lower interest rates. 

Finally, there is a scenario in which the interest rate on your mortgage has gone up if you have a variable-rate loan. Refinancing into a fixed-interest rate loan may lower your interest rate, along with providing other benefits. More on that in the next section.

Converting from a variable to fixed interest rate

If you bought your rental property using an adjustable interest rate mortgage, you may wish to refinance into a mortgage with a fixed interest rate for greater stability. 

Adjustable-rate mortgages are riskier than fixed-rate mortgages. They start off with below-market interest rates and then fluctuate according to the specific loan terms over time. In some cases, interest rates can jump enormously over a short period, raising minimum monthly payments beyond what the homeowner can afford (subprime adjustable-rate mortgages led to many foreclosures during the Great Recession). 

Sometimes a buyer opts for an adjustable-rate mortgage because of the low initial interest rate, expecting their income will increase or that they would sell the property before the interest rate adjusts. If this bet on future circumstances doesn’t pan out as planned, the homeowner may end up saddled with far higher monthly payments than they want or can handle.

In this situation, refinancing may allow a property owner with a variable-interest-rate mortgage to switch to a far more predictable and less risky fixed-rate mortgage.

Reducing the minimum payment amount

As in the above example, switching from an adjustable-rate to a fixed-rate mortgage may help reduce minimum monthly payments or prevent them from increasing dramatically when the interest rate changes.

Property owners with existing fixed-rate mortgages may have the same goal: reducing their monthly payment amount. Refinancing into a new mortgage with a longer repayment period, lower interest rate, or both may help to reduce the monthly minimum payments on the loan.

Just be aware that if you increase the repayment period to lower your monthly minimum payments, the loan will end up costing you more in the end, since you’ll be taking longer to pay it off. For this reason, you should refinance to reduce your monthly payments only if you have a good reason to do so – i.e. if your monthly payments are truly unaffordable, or if you have a plan to use the money you’ll save on monthly payments for another investment that will increase your cash flow, pay down higher-interest debt, etc.

Adjusting the amount of time you have to pay back the loan

Since shorter loan terms generally carry lower interest rates, reducing the term of your mortgage from 30 years to 15 or even 10 years can significantly lower your interest rate. You will also pay off your loan faster and spend less overall with less interest to pay off.

However, the tradeoff for shortening your loan term is higher monthly minimum payments. If you can swing it – for instance, if your income has gone up significantly since you first bought your rental property – this can be a smart move.

Other property owners may wish to extend the amount of time that they have to pay back the loan, thus shrinking their minimum monthly payments and freeing up cash for other things. Again, you should weigh this move carefully, since it will likely increase the overall cost of the loan and it will take longer for you to pay off the debt.

Allowing you to borrow more money

A cash-out refinance allows you to turn some of your property’s value into cash that can be used for other things. Maybe you want to remodel your rental property so that you can charge higher rents, make a down payment on another investment property, or pay down higher-interest debts like credit card balances. All of these may be motivations for a cash-out refinance.

A cash-out refi is similar to a home equity loan or line of credit in that it allows you to liquidate some of your equity in the property. The difference is that a home equity loan exists alongside your mortgage as a separate debt obligation, whereas a cash-out refinance replaces your mortgage with one new, larger debt obligation. 

The interest rate for a cash-out refinance may be lower than for a home equity loan; however, as with your original mortgage, there are closing costs for a cash-out refinance. Lenders are much more hesitant to provide home equity loans on investment properties than on primary residences, so a cash-out refinance may be your only option.

Here’s an example of how a cash-out refi might work. Say you owe $50,000 on a property currently valued at $150,000. That gives you $100,000 in equity. If you did a cash-out refinance for $80,000, you would go from owing $50k on the property to owing $80k on it instead. This means your equity in the property would decrease from $100k to $70k, and you’d receive the difference — $30k — in cash. 

Since a cash-out refinance results in a larger debt obligation than you had before, it’s important to do this only when you have a sound reason to do so.

Recap: the possible benefits of refinancing

To sum up, refinancing your rental property may provide you with the following benefits:

  • A lower interest rate
  • Faster loan payoff
  • Saving money over the life of the loan
  • Reducing risk by switching from an adjustable interest rate to a fixed one
  • Lower monthly payments
  • Turning equity in a property into cash you can use now

Costs & Risks of Refinancing

Refinancing is a tool that in the right circumstances can help you reach your financial goals. However, like any tool, it can also do more harm than good when used carelessly or in the wrong circumstances. 

The following are some of the costs, risks, and potential downsides of refinancing an investment property.

Closing costs

Refinancing carries closing costs that can range from hundreds to thousands of dollars — general guidance is that closing costs on a property refinance represent 3 to 6 percent of the loan principal.

These cover the costs of an appraisal, application fees, and title search, similar to what your initial mortgage required. Some lenders may allow you to wrap the closing costs into the loan, but this approach raises your debt obligation and monthly payments. 

It’s therefore important to be sure that the benefits you will see from refinancing are worth the costs.

Deeper debt

If you are considering refinancing primarily to free up more cash now, either through lower monthly payments or to borrow against the equity you’ve built in your property with a cash-out refinance, then it’s possible the transaction will cost you more in the end. That’s because you’ll likely have a longer repayment term and pay more interest over the life of the loan. 

Whether this move is worth it or not depends on what you’ll be using that additional short-term cash for in the meantime – e.g., investing in another property, paying off higher-interest debt, remodeling, etc. 

It’s important to keep in mind that in any of these cases, your risk is increasing. You’re trading more cash in the short-term for an uncertain future outcome. If your future financial security depends on you making the right bets, refinancing may be too risky.

For example, many people who refinance to pay off higher-interest debt think the move makes sense. They’re trading in higher-interest debt such as credit card debt for lower-interest debt. That being said, it’s often not that simple. 

If your spending habits are the root problem and those don’t change, you may end up back in high-interest credit card debt again following a refinance. This may put you in a worse position than you started with. In this scenario, the refinance may allow you to simply get in more debt than you could have otherwise.

How to Proceed with a Rental Property Refinance

If you want to explore refinancing rental property, be aware that the process can be a bit trickier than with a refinance of your primary residence. 

Lenders typically consider loans for rental properties riskier bets and therefore set the bar higher for borrowers. Your interest rate will generally be higher for an investment property than for your primary residence. 

In determining whether you qualify for a rental property refinance, a lender will likely want the following information:

  • Your credit score. Generally, a minimum of 620 is generally needed to qualify for an investment property refi. A higher credit score will earn you a better interest rate. 
  • Proof of income.
  • Your debt-to-income ratio. Forty-three percent is the maximum most lenders will allow for a rental property refi.
  • Documentation of your current mortgage.
  • The loan-to-value ratio. A lender will look for a minimum loan-to-value (LTV) ratio, referring to how the loan amount you’re asking for compares to your equity in the property. 25 percent equity or an LTV ratio of 75 percent is a typical minimum for investment property refinancing. (An appraisal is required to determine the property’s current value.)
  • Recent bank statements. A lender may want to see enough money set aside to cover several months’ worth of mortgage payments in the case of a rental property vacancy or tenant nonpayment of rent.
  • Recent tax returns.
  • Documentation of rental income, including leases and proof of payment.
  • Proof of homeowner’s insurance.

Gather as much of this documentation as you can as early as possible in the process, and be prepared to respond to other requests for information quickly from lenders. 

Shop around to find the best deal. You may want to start with your current mortgage lender, but also check credit unions and other banks. Be sure to ask detailed questions about closing costs.

The Bottom Line

Refinancing your investment property may be the right move in some cases, especially if it lowers your interest rate or allows you to pay off your mortgage faster. If it doesn’t, proceed with caution and ask yourself whether the long-term bet you’re making is worth the risk.

As with any major financial move, be sure to shop around to find the best deal, ask detailed questions, and read the fine print before committing.

6 Benefits of Long-Term Rentals

People considering their first investment property are often drawn to the idea of a vacation home they can use for themselves while reaping the benefits of intermittent short-term renting. Who can blame them? A vacation home that pays for itself and earns you money on the side sounds like a dream. Equally attractive could be the prospect of flipping houses. The idea of buying a place cheap and selling it at a huge profit is a DIY lover’s dream. 

The reality, however, is that – while lucrative – these short-term strategies require a lot of work and time commitment. That’s why so many property investors end up choosing long-term rentals. A long-term rental property is a reliable way to increase your cash flow and protect your assets against inflation. If you find a decent neighborhood, you’ll have a steady passive income for years to come. Here are 6 of the core benefits to long-term rentals:

1. Fewer restrictions

In response to pressure from hotels and community groups alike, many local governments are passing more and more restrictions on short-term rentals. For example, in New York City and San Francisco, laws now require owners to be full-time residents to rent out space to short-term renters. These cities also have a cap of 90 days per property for rentals and require a thorough registration process.

Additionally, unless you have the cash to buy a house outright, you’ll probably need to get an FHA loan to purchase property to flip. That means you have to wait at least 90 days to sell it again – and if the value of the property has doubled, there is even more red tape to get through to prevent property-flipping scams. Long term rentals simply aren’t affected by as many regulations. The process of establishing a rental property is simple in comparison.

2. No seasonal fluctuations

While short-term rentals cycle through periods of high and low demand, long-term rentals generally remain unaffected by the season. If you buy property in an area with high demand and plenty of opportunity for growth, you can ensure a consistent cash flow from the rental income that’s unaffected by seasonal ups and downs. 

Assuming that you have long term tenants occupying your home, you’ll be receiving income year-round, while income from short-term or vacation rentals are much more affected by seasonality and demand. In other words, if you’re looking for a ‘set it and forget it’ approach to property investment, long-term rentals are a much more promising avenue.

3. Protection from market fluctuations

People are less likely to take a vacation when they’re pinching pennies, but renters will need a place to live regardless of how the economy is doing. Since long-term rent is typically fixed for the year, there are fewer surprises about how much income you’ll make in the coming months. With short term rentals, you’ll constantly be resetting the rates to draw customers to avoid losing money to the competition.

People aren’t usually looking to buy homes when they’re worried about money. But even when the stock market is down, homes will still be valued at their appraisal rates, which has more to do with the local market than the national one. Purchasing property in growing areas means your assets are protected and can even increase when stock values are falling. 

4. Reliable property value

Because investors buy short-term investment properties with the intention to rent them out at double or triple the rate of rent divided daily, these properties are often bought and sold at an inflated value. That means you’ll owe a lot of money on a property that may only be occupied for a third of the year. It may also mean selling the property at a significant loss if factors outside your control affect the draw of the destination. 

On the other hand, if you purchase long-term investments in areas where people want to live, your property value will rise steadily for years, and you could sell it fairly easily should you want to. The longer you hold on to it, the more it is likely to be worth in the future, so the prospect can end up being much more lucrative in the long run.

5. Better tenant screening

In many short-term rental situations, you never even meet the person who will be staying at your property. Renting out a property long term allows you to be much more discerning without losing any income. If you buy your rental property in the right neighborhood, the demand for a place to stay means you can be as selective as you want.

Of course, there’s no overstating how much peace of mind this affords you. A problematic tenant can be a financial and logistical nightmare, so feeling confident about your residents is incredibly important.

6. Cheaper overhead 

Short-term rentals need to be fully furnished and guests expect a certain level of quality from the amenities. They will also demand more of your time to handle bookings, listings, and communicating with potential guests – or more money spent on someone to do this work for you. You’ll also have to pay a lot more fees, including credit card processing fees and listing fees.

Similarly, flipping a house requires additional money for materials and labor, plus extra taxes on your income and closing costs when it’s time to sell. On paper, it looks like you’ll be making a lot of money, but by the time you’ve finished, you may come to realize that a lot of the income being spent on taxes and fees.

Long-term rental properties solve all of these problems. You generally don’t have to worry about furniture or utilities as most units are expected to be unfurnished and the rental income will be enough to cover the mortgage, taxes, and insurance with plenty leftover for your profit.

The Bottom Line

Short-term rental investments attract many property investors with the promise of high cash flow,  but the strategy has a number of hidden costs – from higher overhead to greater competition and regulation. 

For many property investors, long-term rentals are the more preferable solution, especially when you can also partner with best-in-class property management companies. Partnering with a property management company not only allows you to reap the benefit of long-term rentals but also helps you to make your income truly passive.

Short-Term vs. Long-Term Property Rentals: Which is Right for You?

New rental property investors have more options now than ever before when putting together their investment strategy. 

This change is largely thanks to the rise of short-term listing sites such as Airbnb. In the past, long-term property rentals were the only realistic and scalable option available to most landlords. But now, many more landlords can consider competing with local hotels for the higher rental rates that the short-term housing market often provides. (A rental unit that’s offered for less than a month is generally considered a short-term or vacation rental.)

Whether a short-term or long-term rental strategy is best for you depends on a variety of factors that you should consider carefully as you develop your residential rental property investment strategy. While a short-term rental strategy can be a lucrative route for some landlords, it often requires specific market conditions to be successful and places different demands on the landlord and the property itself compared to a long-term rental strategy. 

Let’s take a closer look at the potential risks and rewards of long-term vs. short-term rental strategies and how to determine which approach is best for you.

Location Matters

Everyone knows that the location of a property is always an essential factor in all things real estate. That being said, it’s all the more important in the short-term rental housing market. This factor alone can often determine whether a short-term rental strategy is feasible for a given rental unit. 

Cities with very tight rental markets and expensive hotels that draw many visitors for business or vacation are prime short-term rental markets. Many tourists have come to prefer the experience of a well-furnished, nicely decorated private apartment or house over a hotel experience that’s likely to be both more generic and pricey. This can leave smaller landlords well-positioned to compete successfully with local hotels. 

Additionally, the closer your property is to amenities that visitors want, the more likely you are to find success with a short-term rental strategy. These amenities can include cultural attractions like local museums, theaters, and parks, as well as hot entertainment districts with distinctive shopping and dining options. It may also include hotspots that attract frequent visitors, like a convention center, sports arena, university or hospital, while proximity to public transportation is also often a must-have. 

Although the potential profitability of short-term rentals may sound appealing, it is important to note and consider that many of the hottest cities for short-term rentals have also become the earliest to regulate this activity, in an effort to keep rental housing more affordable for long-term city residents and to protect the traditional hotel business. This has led to local laws restricting short-term rentals by, for example, limiting the number of days per year a unit can be offered on a short-term basis. Some municipalities also require listing services to collect taxes on their behalf. 

Due to continuously changing laws and regulations, it’s important to check existing local laws in your area and be aware that the regulatory environment can change. Even factors such as the number of international investors and local investors can have different short-term and long-term regulatory effects, so it’s crucial to do your research and consider a more stable and proven out city / county if you choose to go the short-term route.

Practical Considerations

Even if you determine that your rental property could be a good candidate for short-term tenants and your local laws allow for it, there are still other factors to take into consideration. Operating a short-term rental unit requires many different responsibilities than managing long-term rentals. You almost have to treat short-term rentals as a business, while long-term rentals more times than not require less day-to-day management. 

If you keep in mind that short-term rental units are often competing with hotel rooms, many of the practical differences compared to long-term residential leasing become clear. Your property is no longer just real estate; it’s also hospitality. You’ll need to manage everything from marketing to housekeeping to logistics. Due to the constant inflow of different short-term stayers, vetting these individuals and making sure that the quality and state of your unit is kept in consistent and top shape from one person to another will require constant upkeep and attention if your unit is in an area with high demand.

Here are some of the areas where managing short vs. long-term rental property differs the most:

Turnover

Tenant turnover creates high demand for a landlord’s time, including the need to clean and market the property, make repairs, respond to inquiries, and more. With a long-term lease, this happens much less often. Short-term listing services require very frequent and rapid marketing and communication. Poor management of communication is likely to lead to poor reviews, which can impact your bottom line. Since you’re competing for all of the other short-term rentals in your area, you’ll need to make sure that your unit stands out in terms of service, amenities, and experience.

Vacancies

Your property’s vacancy rate is likely to be higher with a short-term rental unit. To reduce vacancies, you will likely need to more actively manage your listing, reducing pricing in the off-season and offering special deals to entice renters when needed. Seasonality is much more of an effect on short-term rentals, as long-term rentals in most cases have a six months to one year lock-in. If there are any sudden changes to your location, this may either increase or decrease the demand for your short-term rental.

Utility bills

Long-term rental housing is much more likely to have the tenant responsible for most, if not all of the utility bills. Short-term rentals generally include utilities (water, sewer, gas, electric, plus wifi, and cable TV or streaming services). With these costs included in the rental rate, short-term tenants are less likely to restrict their usage. A short-term tenant might keep the tv on all night or keep the lights on even when they’re not in the home.

Furnishings

Most long-term apartments are unfurnished. With a short-term rental, you will need to provide basic furnishings, including furniture but likely also basic kitchen essentials, sheets and towels, soap, shampoo, and more. 

You’ll also need to decorate the home with some attention to style, and update furnishings and decorations over time to keep things looking new as well as on-trend.

Tenant attitudes & behavior

Your tenants will likely have different attitudes toward both you and your rental property depending on whether they are short-term or long-term renters. 

Good longer-term renters tend to be more invested in the condition of the property since they consider it their own home while they’re residents. This means they are probably more likely to notice and alert you on issues like small plumbing or roof leaks, running toilets, etc. before they become major problems. Additionally, a long-term tenant is more likely to treat the home with more care, balancing the fact that they want to maintain a positive relationship with their landlord, as well as not wanting to cause additional inconveniences on themselves. A short-term tenant is less likely to notice or care about these issues since they are not as attached to the property and often just occupy a home for a single day to a couple of days.

Short-term renters are also less invested in relationships with you and neighbors, meaning they may be more likely to cause annoyances in the form of messes, noise, etc. This can add time to your cleaning schedule and cause friction between you and other nearby property owners or renters, especially if your unit is one of the only short-term rentals in your community.

Customer service

Short-term tenants are likely to be out-of-town visitors unfamiliar with the area with more questions and needs compared to long-term tenants calling a rental unit home. You may be their only or primary local contact for a variety of questions from how to get around to what to see during their stay.

Short-term renters may also expect a higher level of service, similar to the treatment they might receive from the staff at a hotel. A successful short-term rental real estate investor will ideally enjoy and excel at customer service and communication or may need to hire someone to do this on their behalf if they own multiple short-term properties, as deficiencies in this aspect of the job are likely to lead to poor online reviews, which can be a demand-killer.

Flexibility

Long-term tenants can allow for more stability, but little flexibility. If you screen poorly, you can be stuck with bad tenants for a long time. Long-term lease agreements mean you can’t increase the rent suddenly if rental market conditions change (especially if your municipality offers more tenant protections). 

In the best cases, though, a thorough vetting process that only needs to be done once in a while means that long-term rentals have good tenants that stay put and offer reasonable and predictable cash flow to the residential rental property investor.

Proximity

Because short-term rental units require a much more hands-on approach, they’re generally much harder to manage from a distance. This strategy likely requires the landlord to live nearby to care for the property and respond to renters’ needs. Although both the short-term and long-term rental investors can hire someone to do this on their behalf, the difference is that long-term rentals provide a consistent income. If there is volatility in the demand for your short-term rental, you might find that there are some months when the management fee for your short-term rental outweighs what you profited from your property. 

Longer-term rentals are generally less time-intensive on a regular basis than short-term rentals. However, unexpected needs do arise that can be time-consuming and also require immediate local attention. For investors interested in buying rental property outside of where they live, partnering with a property management company can not only make this possible but also make your income completely passive.

The Bottom Line

You should consider a short-term rental strategy if:

  • Your rental property is located in a vacation destination or in a hot neighborhood
  • You live nearby
  • You enjoy customer service & hospitality
  • You have the time to devote to your rental business
  • Your local laws allow for a successful short-term business model
  • You want flexibility in the use of the property
  • You can tolerate a less predictable cash flow and seasonal fluctuations
  • You are motivated to go after specific opportunities to increase your rental income, such as marketing your property around special events and seasonal market conditions

You would probably do best with a long-term rental strategy if:

  • Your rental property is in a more typical residential market (not a vacation destination, not a super-hot neighborhood of interest to visitors)
  • You don’t plan to use the property yourself and don’t need flexibility
  • You prefer a slower but steadier cash flow model

Homeowners Insurance vs Rental Property Insurance: What You Need to Know

If you own a home, you know you need to keep it insured. But what if you’re renting out the home to tenants? Should you opt for rental property insurance or does standard homeowner’s insurance cover all your practical needs?

The two types of coverage are similar, but there are a few key differences. In this guide, we’ll contrast homeowner’s insurance and rental property insurance (or landlord insurance) so you can make an informed choice based on your needs.

The Basics

Homeowner’s policies are designed to cover your home and your family while you’re living there. If you rent a room out to a tenant, some homeowner’s policies can be adjusted to extend to situations where the home is damaged or a tenant is injured. But for the most part, normal homeowners insurance isn’t designed to cover tenants

That’s what rental property insurance is meant to do. It protects you and your property, as well as income associated with it.

Both of the policies can protect you from events such as fires or natural disasters, but only landlord insurance can protect you from the risks of renting out to tenants. This means that if you’re renting out your property, a homeowner’s policy may refuse to cover damages to your property if you yourself are not living in the property.

If you’re looking to purchase your first investment property, the best way to get the coverage you need is to talk to your insurance agent about landlord’s insurance. Not only will it protect your investment from damages, but it will also protect you if something unfortunate were to happen to your tenant.

What does each policy cover?

Homeowner’s insurance and rental property insurance may look similar, but they have some key differences which reflect the particular risks of each situation. A single-family home with renters in it more times than not, has higher risk for damage than a home with the owner living in it. 

The higher cost of landlord insurance reflects that greater risk. But unlike homeowner’s insurance, the premiums on all your insurance policies are tax-deductible. Renting out a home is considered a business, so tax law works in your favor here.

Homeowner’s Insurance

The Building policy covers damages to the house, as well as any detached structures such as a garage. Unless you have an open policy, it will only cover damages from named events. 

The Personal Property Coverage covers your furniture, appliances, and personal items from any damages your policy covers. It also covers the property of guests so long as the policyholder is presently living there (that means if you rent it out, your policy won’t cover things owned by your tenant).

Liability covers you and family living in the house if you cause damage to someone else’s home or injure someone else unintentionally, and it results in a lawsuit. This policy follows you and your family wherever you are.

Medical Payments can cover the medical costs of minor injuries that happen on your property if you’re not at fault. This generally has a much smaller limit than your liability coverage and is meant to avoid the possibility of litigation.

Loss of use policies will pay for temporary accommodations if damages to your home make it uninhabitable, as well as things like restaurant bills, either up to your maximum limits or through the specified time frame, depending on your policy. It might also cover rent a tenant owes you if you rent out a room of your house, but that depends on your policy. (Always talk to your insurance agent and accountant before you rent out a portion of your home!)

Rental Property Insurance

The Building portion of the policy covers the house itself, but unlike a homeowner’s policy, it generally doesn’t include other structures on the property – unless you specifically pay to add them. General maintenance isn’t covered under this policy, although you can add emergency repairs coverage to some policies. 

The Personal Property Coverage is meant to cover any appliances, tools, or furnishings you leave on the property for the tenants to use. This can include lawn maintenance equipment or washers and dryers. If you furnish the property before renting it out, you need to let your insurer know. It will cover your property, but the premiums will be higher. 

Liability will pay medical expenses and legal costs if someone is injured on your rental property and you’re found at fault. Unlike the homeowner’s version, this policy only extends to incidents that happen on the property insured. 

Loss of Income will make up for the rental income you lose if the house becomes uninhabitable due to damages, as long as the event causing the damage was listed on your policy. (So for instance, for fire damage to be covered, your policy must specifically list fire damage coverage.)

Level of Coverage

Landlord insurance comes in three levels of coverage. The lowest level of coverage, DP1, covers only named events, which are relatively limited in scope. You can usually add Vandalism and Malicious Mischief coverage, which can occur if you ever have to evict a tenant, but you’re still exposed to a lot of risks that you’re not covered from. It also only covers the actual cash value of your property. So as your property ages and depreciates in value, the policy will cover less. 

A DP2 insurance policy is also called peril coverage, but it has a broader scope than the basic DP1 policy. It will also pay the replacement cost rather than the actual value, as long as it’s within the maximum limits of the policy. Additionally, it will cover loss of rental income if your tenants have to move out due to damages. However, it will not offer coverage if the property was vacant during the period that damages were incurred. 

A DP3 insurance policy is truly comprehensive and is considered an open peril policy. Unless the cause of damage is specifically excluded from your policy, your property will be covered – even if there’s been a temporary vacancy. This is the recommended policy for landlords who desire to fully cover their rental property investments.

Homeowner’s insurance policies have similar levels of coverage, but none of them will protect you if you have long-term tenants and you’re not residing on the property yourself. If you’ve purchased an investment property, you need a landlord insurance policy to prevent total loss on your investment. 

What your policy doesn’t cover

Your landlord’s insurance doesn’t cover your tenant’s property, nor does it cover them if they are found liable when someone is injured on the property. In order to protect them and to minimize possible lawsuits you might be caught up in, the best practice is to require that tenants maintain renter’s insurance as long as they live on your property. 

None of these policies will cover general wear and tear of personal property or the dwelling, but routine maintenance is essential – both to protect the value of your home and to avoid making claims that will raise your rates. 

If you ever have damages that exceed your limits, you’ll have to pay the balance out of pocket. The more houses you own, the more likely this is to happen. An umbrella policy can cover the rest of the damages, as well as offer you personal liability if you’re caught up in a lawsuit or are responsible for property damage or injury.

There are also less common scenarios that can leave you on the hook for damages. For instance, in the unlikely event that the police raid your property, your insurance will probably not cover damages.

You can’t predict the future, but a thorough tenant screening can help minimize worst-case scenarios like these, and ensure that you have quality residents who care for your property and pay rent in a timely manner. 

The Bottom Line

If you’re buying property to lease out, it is highly recommended that you purchase rental property insurance. This will protect your investment and make sure you don’t miss out on rent due to unforeseeable circumstances. When you’re looking to purchase a new investment property, consider whether you’ll be able to afford the cost of an insurance policy and still turn a profit.

Rental Property Insurance: 5 Questions Answered

When you buy a house, homeowner’s insurance seems like a no-brainer. A fire or natural disaster can do serious damage to your investment – or worse, leave you without anything to show for it. While homeowners insurance might provide adequate coverage, if you’ve purchased residential property to rent out, there are a lot of risks a standard homeowner’s policy may not cover. 

That’s where rental property insurance comes into play. Also known as landlord’s insurance, these policies are written specifically for the property owner, and are designed to cover things beyond the concerns of a homeowner living in his or her own property.

The ideal insurance policy will leave you covered for just about anything, including total loss of the house. That means your investment property is protected and you can continue to earn rental income and grow your real estate portfolio with reliable equity. In order to help guide you through the process, here are the answers to five important questions people have about rental property insurance:

1. What does landlord insurance cover?

Similar to a standard homeowner’s policy, your rental property insurance will cover property damages from causes listed on your insurance agreement, up to the maximum limits listed on the policy page. The key difference is that it’s written to protect your long-term rentals against damages you’re more prone to as a landlord. Generally speaking, that means higher property damage limits and more thorough injury liability policies.

Loss of rental income in cases where damage to the house prevents you from renting it out is an additional coverage included with a landlord insurance policy. Additionally, some policies can help pay for the costs of moving your tenant back in if they had to vacate the property temporarily. 

While rental property insurance will cover the personal property you leave there – such as appliances or lawn maintenance equipment – it will not cover your tenant’s possessions or your tenant’s expenses if they need to stay in a hotel. A good safeguard against situations like this is requiring your tenants to hold their own renter’s insurance policy.  

Otherwise, if the kind of damage isn’t spelled out in the policy, you aren’t covered. For example, if your property is in a flood zone, you’ll need to add flood protection to your policy. Damage caused by vandalism and liability policy for maintenance professionals who are injured while working on the property are additional options to consider.

2. How much will your policy cost?

Renting out a home generally has more risks than living in it yourselves. Tenants are more likely to ignore smaller problems with the rental property that might lead to larger ones later on and have a tendency to be more lax with the property than the actual homeowners. Additionally, you may be liable for injuries that happen on the property. Because more money in claims is paid out each year to landlords than homeowners, insurance companies charge higher premiums to reflect that.

On average, homeowner’s insurance costs around $1,200 a year. Of course, the price is dependent on the appraisal value of your home, where your home is located, and the level of coverage you select. For example, Florida had the highest average homeowner’s insurance cost at around $1,993, while Oregon had the lowest at $643. Rental property insurance will usually cost 20-25% more than a homeowner’s policy. You can use that information to estimate the cost to insure real estate before you decide to buy. 

Knowing the price of insurance, the amount you will pay on the mortgage, and the average rent prices in a neighborhood will help you determine if an investment property is worth your time and money. The best way to save money is to compare rates from multiple insurance carriers and look into customer feedback to see which insurance company is right for you.

3. Are you required to have landlord insurance?

There’s no law that says you need to have insurance on a house to rent it out. Your mortgage lender may stipulate that you carry it until you’ve paid off the loan, but otherwise, you’re free to own your assets uninsured. That being said, you’ll really want to consider if that’s the route you’d actually like to take.

If you don’t insure your investment, a natural disaster could wipe out your house and all the equity you have in it. If you have a reckless tenant who doesn’t take care of your property well or if a tenant is injured on your property and sues you for negligence, you’ll be on your own to pay legal fees and damages, which can add up to a lot. 

The best practice is to make all the safeguards you can on your property and to carry an insurance policy that leaves you protected. Even a small claim can raise your rates by a lot, so this small investment will save you money in the long run. 

4. Do you need rental property insurance for short-term rentals?

If you’re planning on renting out your primary residence for a weekend or a couple of months, you can usually notify your homeowner’s insurance provider, and they extend the policy to cover the house for the duration of the rental. However, your policy won’t suddenly cover flood damage or vandalism if it wasn’t covering it before.

If one of the tenants gets hurt and you are found liable, you want to be absolutely sure your insurance will cover the cost of their medical expenses before they move in. If you don’t plan on purchasing rental insurance, ask about it when you notify your insurance company about short term tenants. 

If your property is subject to frequent short term renters, like a bed and breakfast or an Airbnb listing, then an insurance company will view it as a business. You will need a commercial insurance policy to protect yourself from damages and loss of rental income.

5. Is your landlord policy enough?

If you own a lot of properties, having policies on all of them is the smart choice. But there are ways you can go the extra mile in instances when your coverage alone isn’t enough. We’ve already discussed the importance of a renter’s insurance policy, which will keep your tenants covered in instances when their property is stolen or damaged. This will ensure your payouts are limited to damages that directly affect you. But what if your coverage maxes out? 

Your other policies will only pay for claims made on the property they cover, but an umbrella insurance policy isn’t limited to one specific property. Unlike an LLC, it can protect your investments no matter what state they are in.

An umbrella policy will cover costs beyond your maximum limits, as well as protect you from any number of circumstances, including unfortunate instances in your daily life that result in lawsuits. It can also work with your homeowner’s policy if your primary residence is damaged or a guest is injured on your property. Talk to your insurance agent to see how an umbrella policy might meet your needs.

The Bottom Line

If you’re in real estate investment for the long haul (and you should be!), you’ll want to carry rental insurance on all your properties and look into other ways to protect your investments in the worst-case scenarios. 

Being a landlord is a lot of work, but a solid property management team can help you keep all your rentals in tip-top shape, help you place top-notch tenants, and handle many other stressful tasks of daily maintenance. If you’d like to partner with someone so that you can keep your focus on the big picture, learn how Great Jones can help.

Are Short-Term Property Rentals More Profitable? Investor Pros & Cons

If you’re a residential rental real estate investor, chances are that the premium nightly rates that you see on short-term rental listing sites such as Airbnb make you wonder whether or not a short-term rental strategy (less than one month) could be a more profitable path than that of a traditional landlord with long-term tenants.

Property investors of all stripes deal with this question. Maybe you’ve worked in long-term property rental so far and are considering trying out short-term rentals. Or perhaps you’re considering getting into rental property investing and are just trying to learn more about the different investment strategies.

Either way, it’s important to understand what’s different about short-term property rentals before you dive in. Read on for more on the risks and rewards of short-term rentals, plus insight into the market conditions and skills required to be a successful residential rental property investor.

Benefits of Short-Term Property Rentals

To begin, let’s review some of the advantages of short-term rentals. These include:

Higher rental rates

Typically, the shorter the stay, the higher the nightly rate is for any rental unit. Compare the nightly cost of a hotel stay to a long-term apartment lease.

Of course, a higher level of service generally goes into showing visitors hospitality and meeting all of their needs than is required for acting as a traditional landlord to long-term residents of your area, who will usually furnish and decorate their own home. Still, once a short-term unit is furnished, if market conditions are right, the higher nightly fees may make a short-term rental unit highly profitable.

Flexibility with tenants

Short-term rentals are flexible in two ways thanks to their higher tenant turnover.

First, you have a much shorter relationship with renters, so if bad tenants occupy your rental property, you won’t have to deal with them for a long period of time.

Also, with short-term rentals, you can set “blackout dates” and use the unit yourself or let family and friends use it if you choose. This may be especially desirable if your rental property is in a hot tourist market or vacation destination that you want to enjoy yourself.

Peak season rental boosts

Short-term rentals also offer greater flexibility in terms of pricing and marketing to seize specific opportunities. 

If there is a special event bringing many visitors to your area or if there is a reliable peak season for tourists in your city, then a short-term rental will allow you to go after premium rental rates when opportunities arise. If you have a very entrepreneurial spirit, this investment strategy may appeal to you.

Risks of A Short-Term Rental Strategy

A short-term rental strategy can be riskier in some ways compared to the traditional annual lease or even month-to-month leasing to longer-term tenants. Additionally, short-term rentals are generally far more demanding of a landlord’s time. The challenges of short term rentals include:

Higher overhead

Long-term tenants are more likely to pay their own utilities, but short-term rentals almost always include utilities in the rental fee. This means you’re on the hook for basic service charges even when your unit isn’t occupied, and when you do have renters, they won’t have any incentive not to be conservative with any electric, gas, or water use. 

Short-term tenants also generally expect wifi to be provided with their accommodation and you may want to offer other subscription entertainment services as well to be competitive in your market. 

The unit must also be furnished, which can include dishes, linens, and towels – all of which will require regular replacement. Most short-term rental units also come with basic household supplies like dish soap, hand soap, shampoo, toilet paper, etc., which all need to be consistently replenished.

Less cash flow stability

While you may be able to charge premium rates during peak tourist season, what about the off-season? 

Short-term rentals often have higher vacancy rates than long-term rental properties, which can mean irregular cash flow. Obviously, this depends on the location, but in general, shorter rental periods mean less predictable income. 

In other words, you have the chance to compete for premium rental fees when opportunities arise – but you’ll also have to hustle to keep revenue flowing in slower seasons.

More regulations

Many local governments have already enforced strict regulations and various laws on the short-term rental market in some of the hottest locations. 

For example, there may be an ordinance limiting the number of days per year a property can be rented on a short-term basis or a ban short-term rentals unless the owner occupies the unit as their primary residence at the same time. 

As property owners in competitive markets start catering to wealthier business travelers and tourists, long-term residents of a neighborhood or even a whole metro area can be squeezed in the process, with fewer long-term rental units becoming available. This often exacerbates an existing affordable housing crisis in the community. 

Learn about any local laws and regulations – including occupancy tax and licensing obligations – and what compliance involves. Additionally, keep in mind that the regulatory environment can change at any time.

Heavier workload

The higher turnover rate, a greater range of furnishings and services required, and the element of hospitality involved in short-term property rental all add up to more work. 

You’ll be held to a much more exacting standard as well, as anything a guest doesn’t like will probably show up in an online review (and these can make or break your business). Tenants are more likely to see short-term rental units as similar to a hotel, rather than a residential unit, and will expect a higher level of customer service as a result. 

Cleaning and maintenance needs between tenants can range from scrubbing to washing laundry and changing bed sheets to repairs — and it all must be finished before your next guest arrives. 

You’ll need to stay up to date on certain short-term renting trends and demands while making updates to stay competitive. You’ll also have to communicate frequently with potential guests making specific inquiries and requested on your unit.

The Bottom Line

You might want to consider short-term property rental if your property is in a highly desirable market, your city’s laws and regulations are not prohibitive, and your unit has the potential to yield higher returns compared to long-term renting. 

Even if you check off all of the above, you’ll want to carefully weigh whether the profit you’re likely to generate from your short-term rental will be worth the time investment. Also bear in mind that there are relatively few property management companies willing to manage short-term rental units, so finding good support may be difficult.

For most rental property investors looking for passive income, a long-term rental strategy is a better bet. The income may be more modest on a nightly basis, but it’s generally much steadier, with a lower vacancy rate, greater predictability, and lower workload.

You can further optimize all of these factors by working with a professional property management company, for greater stability, returns and peace of mind over the long term to make your income truly passive.

How to Legally Evict a Tenant: Everything You Need to Know

Eviction is a worst-case scenario and the toughest part of doing business for many residential rental property investors. It can consume a lot of a homeowner’s time, energy, and money and is not a pleasant experience for anyone involved.

There are some best practices landlords can follow to make it less likely they’ll end up having to evict a tenant (thorough tenant screening is a big one). But unfortunately, sometimes unpleasant surprises do arise and it becomes necessary to force a tenant to leave a rental unit.

In these cases, a formal eviction process should be carried out to protect both yourself and the investment. As with any process, you need to know how to go about evictions properly to ensure a successful outcome and to avoid causing further damage or risk to you or rental properties.

We’ve come up with the essential guidelines to keep in mind to legally evict a tenant and to help make the eviction process as smooth as possible. Please note, however, that this article is for general informational purposes and is not an official legal process, which may vary depending on your circumstance. We highly recommend consulting an attorney for any and all legal questions regarding evictions.

Understanding your state’s eviction laws

State or local level laws govern the eviction process. These laws lay out the legitimate reasons a landlord can evict a tenant and the specific process a landlord must follow in order to carry out a successful, legal eviction. The laws usually make clear many of the landlord’s and tenant’s rights and responsibilities during the process.

The details vary by state but the eviction process usually involves many similar elements, such as official written notification for the tenant, a court proceeding, and a method for getting the police to assist in actually removing the tenant from the property, if they don’t leave on their own after a court has granted the eviction.

It’s important to know the specific legal requirements for your state, to follow proper procedure, and to know what behavior on your part is not permitted (more on that below).

The more carefully you understand and adhere to the proper eviction procedure, the more likely you are to be successful and to avoid unnecessary — and costly — extended legal battles with your tenant.

Ensure you have legitimate cause to evict

Your state’s landlord-tenant law will list legally justifiable reasons for eviction. For evictions prompted by tenant behavior, legitimate reasons typically include:

  • Failure to pay rent on time
  • Failure to comply with lawful lease requirements (clauses barring pets or smoking, for instance)
  • Causing major property damage
  • Engaging in illegal activities on the property
  • Health or safety violations

Even if your tenant is paying rent on time and complying with the lease agreements and laws, there are some circumstances in which a landlord can legally require a tenant to leave. These may include:

  • End of the lease term
  • Sale of the property
  • The owner or a family member plans to move into the unit

Some municipalities, especially those with very tight rental markets, may offer more protections for tenants and make it harder for a landlord to make a tenant leave. 

That being said, in general, if a tenant has a month-to-month lease, a landlord can end the lease agreement by providing a written 30-day advance notice. This is not an eviction. An eviction process may be needed, however, if the tenant refuses to comply with a legitimate legal notice to vacate the property. At this point, the tenant becomes an “unlawful detainer” and a formal eviction will legally the tenant to vacate the property.

Know the reasons you can’t give for an eviction

It’s also important to know what reasons for eviction are prohibited by law. 

The Federal Fair Housing Act prohibits discrimination on the basis of race, color, sex, national origin, religion, familial status (whether a tenant has children, or if a woman is pregnant), and disability. State and local laws may include additional protections, for example covering LGBT tenants, seniors, tenants who have lived in the same rental unit for a long period of time, etc.

It’s also generally illegal to evict a tenant as retaliation against them for exercising their protected rights. For example, if your tenant has made maintenance requests, reported illegal conditions in the apartment to authorities, or has deposited their rent with the court until repairs are made, quickly attempting to evict them is likely to be seen by the court as retaliation. 

Even if you have a valid reason to evict a tenant, citing an additional, prohibited reason for eviction or acting in a way that makes it appear you are retaliating or discriminating could seriously complicate and delay the process. It’s important to be sure to respect tenants’ legal rights as you go about eviction in order to achieve your intended outcome as quickly as possible and protect yourself from lawsuits in the process.

Give required notification

States generally require you notify your tenant of your intent to evict before filing an eviction lawsuit with the court. An eviction notice may take several forms depending on the situation and state law.

Some states require that you give the tenant a window to make up late rent payments or remedy a safety violation or other problems before you can proceed with a formal eviction. In this case, your notification generally must state the problem and how long the tenant has to either remedy it or move out, and assert that noncompliance will result in an eviction lawsuit. (This may be called a “cure or quit” notice.)

Some states do not require the landlord to offer time for the tenant to remedy the situation. This can vary not only by state but also depending on the issue involved — late rental payment or criminal activity on the property may be treated differently than a health or safety violation — so be sure to check local laws for specifics. If no remedy period is required, your notice will just state that the tenant must leave by a certain date or face an eviction lawsuit, and cite the reason (this type of eviction notice may be referred to as a “notice to vacate” or a “notice to quit”).

Template legal documents may be available online that will give you an idea of state and local requirements for your notification document. Check state requirements for the delivery of the notification. You may be required to post it on the front door of the unit, deliver it by certified mail, or through a different means.

Document everything

Be prepared to provide a judge with evidence that your tenant has actually committed whatever you are alleging — failed to pay rent on time, causing serious damage, etc.

Your notifications are part of this evidence and also prove that you followed the required procedures before moving forward with an eviction suit. Having proof that you did this will prevent your tenant from being able to delay the eviction process. Take a photo of the intent-to-evict notice posted on your tenant’s door with the address visible if possible. Send it by certified mail as well if you’d like to be thorough and keep the delivery confirmation. Keep a copy of the notice itself so you can show that you included all the required elements.

In general, it’s wise to put all communication with your tenant in writing. If you have any in-person conversations about problematic behavior, late rent, etc., follow up with some form of written correspondence reiterating what you discussed and keep records.

Know the risk in partial rent payment

In some states, accepting a partial rent payment may take away your legal right to start an eviction proceeding. If you accept a partial payment, you may have to wait until a tenant is late with a full rent payment in order to move forward with an eviction.

You are generally not required to accept a partial rent payment. If your tenant tries to pay a portion of the rent, be sure to return the money or the check to them, along with a written explanation that you cannot accept partial payment (and keep a record of this, of course). You can proceed with the intent-to-evict notification process as if they had made no rent payment.

Don’t do anything outside the legal process

The only legal way to get a tenant to leave your property against their will is by following the eviction process laid out by state law. Assuming a court rules in your favor, your tenant will face a court order requiring them to vacate the property by a specified date or face physical removal by the police. 

Anything you do to try to force a tenant to leave earlier is likely to be illegal. Generally, it is illegal for a landlord to do any of the following:

  • Change the locks when a tenant is away
  • Shut off the utilities
  • Remove a tenant’s belongings
  • Physically remove the tenant
  • Harass the tenant in any way (verbal harassment or actions that make the rental unit uninhabitable or bothersome to occupy)

Any illegal actions you take to try to carry out the eviction process yourself instead of going through court and police channels are likely to get you into serious legal trouble. 

Changing the locks or similar measures could give your tenants legal ammunition to use against you in court to delay the eviction process, and could also result in civil penalties or criminal charges.

Proceed with an eviction lawsuit

You will need to file the lawsuit and likely pay a filing fee to the court. A court date will be set and the court will notify your tenant.

While you wait for the court date, gather as much relevant documentation as you can — the lease agreement, evidence of lease violation, your eviction notice, any other written correspondence, photos of the damage, etc. Review relevant laws so you know your rights and your tenant’s rights and are prepared to answer any questions from the judge.

The Bottom Line

Landlord-tenant interactions can be tense and unpleasant, especially when serious disputes arise, as in an eviction process. It’s easy for emotions to run high when your property is being damaged, when a tenant owes you money, or, in the tenant’s case when they are about to lose their home. 

It’s crucial to remain calm and professional in your behavior, even if the tenant does not. Whatever the tenant may have done wrong to warrant an eviction, keep in mind that your residential investment property is their home, so the stakes are very high for them as well. 

If this process still sounds stressful, consider another option: professional property management. Working with a great property management company can greatly reduce the likelihood you’ll face the need to evict. Thorough tenant screening helps bring in high-quality tenants and if the need does arise for eviction, they will handle everything on your behalf.

If the need does arise, a quality property management company will ensure smooth, efficient, expert compliance with relevant laws and procedures, reducing your legal risk, ensuring a faster process and shorter vacancy, and keeping your professional reputation intact. 

Passive Real Estate Investing: What It Is & How It Generates Income

Residential rental property investing is on the upward trend, driving people to purchase property to rent out and collect rent from their tenants, while others are buying and renovating homes to resell at a higher-than-purchased value. For many real estate investors, one of the main attractions to real estate investment is what’s known as passive income – i.e. money that you make without having to work. While there is no completely full-cycle source of passive income as even real estate investment takes some initial research and time put in, the long term resource and time allocation can be much less than a lot of other forms of investment.

If you yourself are interested in the concept of passive income through real estate investment, we came up with a list of how you can invest in real estate and the benefits and risks of passive income through them.

Investing Through the Stock Market

The easiest way to begin real estate investing is to buy shares in a publicly-traded Real Estate Investment Trust (REIT). The concept is similar to mutual funds, and it will pay dividends based on the earnings. By buying shares in a REIT, you are not directly investing in real estate. You are investing in a corporation that makes money from a variety of commercial real estate properties, as well as apartment buildings. They are also reasonably easy to sell out of, so in some ways, they offer more liquidity than the other options. 

While you can profit by selling higher than the price at which you bought, the only source of passive income is the dividends these investments pay. You aren’t able to collect rent or control the value of the investment properties the company buys.

This investment strategy can add diversity to your portfolio, but publicly-traded REITs are more affected by the stock market than the real estate market. One of the main reasons buying real estate is a good investment is that it has a low correlation to the stock market. Across the board, real estate tends to gain value in line with inflation, and if you buy in the right area, it can appreciate in value even faster than the rate of inflation.

Private REITS & Crowdfunding

A private REIT is a private group that owns and operates money-generating properties. Private REITs have the advantage of being immune to market trends, but they historically earn less in dividends than their stock market counterparts. They also have an entry barrier: only institutional or accredited investors can buy into REITs. In recent years, dividends have been declining as they buy up investments at record low caps. Still, they are considered a stable investment and relatively low maintenance. 

With a REIT, you don’t ever have to worry about the day-to-day operations of property you’re investing in. However, there are many fees associated with them. A publicly traded REIT doesn’t charge any commissions, while private ones can cost as much as 12%. Since they are private, there is virtually no transparency or oversight, which means you risk buying into a scam. Sometimes, even the legitimate ones don’t make it easy to get investment redemption when you’re ready to back out. So while this qualifies as a source of passive income, the only cash flow that’s readily available from them is through dividends.

A Crowdfunding platform is like a hybrid between a REIT and direct purchase. The JOBS act was signed into law in 2016, which allowed anyone to buy into a crowdfunding platform. It takes a lot less money to become an investor (as little as $500 sometimes), and it isn’t limited to accredited investors. While the field has proven lucrative for many people – who sometimes see gains of 10% or more – it is a new frontier with unforeseen risks. 

That being said, the investor often has more of a say in these risks than one would with a REIT. By managing your own portfolio, you choose where to buy and how much to invest, and can pay as little as 1% in fees. They also generally have thorough exit plans for investment redemption, so within a couple of months, you can buy out.

Direct Purchase

There are ways to directly own property without having to be active in the day-to-day management. You can act as a silent partner with an active real estate investor who will handle the day to day management. You can benefit from their experience and expertise and make a proportionate share of the profits. If you’re buying into residential real estate, you can start seeing rental income as soon as there are tenants. Additionally, with a well-informed purchase into thriving areas with lots of growth potential, the property value and rent amount collected will usually appreciate over time.

You could also take charge and become the sole owner. This will generally require a larger down payment than any of the other options. However, by becoming the direct owner of your investment properties, you will have much more control over what and where you buy, as well as when to sell if desired. On a side note, the opportunity to renovate at your convenience or desired timing can immediately increase the value of your investments. 

An added long term benefit is that directly owning property lets you leverage your assets to acquire new ones. With tenants, the debt you took out begins paying for itself steadily, and every month you have more and more equity in your property. By taking out loans with your equity as collateral, you are able to buy more property. Even if you stick to safe bets over areas with quick appreciation, you’re building your net worth from that first down payment. 

Over time, your investments will become passive in two ways—by appreciating in value (i.e. building equity that you can leverage) and by earning rent. This will require work and smart investing upfront, but eventually, this income alone can become a livable source of income.

Making Your Investment Truly Passive

As every new real estate owner eventually learns, being a landlord can feel like a full-time job. That means your work as an investor or your own responsibilities might be put on hold every time a tenant needs something.

If it’s your desire to just be an investor and collect monthly consistent rent, there are other options for management. The right property management company can take care of the day-to-day management which includes finding & placing high-quality tenants, collecting rent, handling maintenance, and dealing with evictions if needed. This means you can get the benefits of passive income without sacrificing control for a small monthly management fee.

The Benefits of Investing in Real Estate

How should you invest your money?

In this digital age, it seems like there is an endless number of ways to invest your money. Since we hear success stories from every type of investment, it may seem like a challenge to figure out the right type of investment for you. You might even think that you don’t know enough to be able to make any type of investment. That being said, keeping your money in a savings account may be safe, but with negligible interest rates, a savings account will never actually make you money. If you want to grow your money, you have to start investing.

This goal of this article is not to say that investing in real estate or residential rental properties is the best type of investment. Investing is personal in the sense that it very much depends on the short-term and long-term goals you have and the resources available to you in both time and money. In the case that you’re considering investing in rental properties, we compiled a list of benefits of real estate investment.

Pro Tip:

While we all want to increase our wealth and assets quickly and often have this lofty view of “get rich fast” investing, most people benefit from long-term investing. “Get rich fast” investing often has much higher risk involved and if your goal is to be able to go into retirement feeling secure about your investment portfolio and assets, long-term investing might be the right track for you.

So why invest in real estate? It’s simple. It has a high potential of providing for you steady, passive income that can lead you closer to financial freedom. There are a lot more benefits to owning rental property than you may think. Let’s take a look at some.

1. Passive Income

This is often the first thing people point to when discussing the value of real estate investing. Passive income allows you to earn money, while not needing to put much time and energy into the investment after getting things up and running. It’s a great way to invest if you don’t want it to affect your day-to-day. As soon as you have a tenant paying rent, someone is paying your debt down for you and anything that doesn’t cover your mortgage or expenses becomes profit for you. As long as you have things running smoothly, all you’re doing is collecting checks on a consistent monthly basis.

That being said, purchasing investment rental properties requires a little bit of foresight. You want to make sure that you choose the right location and units that will yield you high-quality tenants and constant demand from those looking to rent.

2. Hedge Against Inflation

History is on your side here. While there may be the fear that a recession can lead to a decreased value of your property, the real estate market has always managed to bounce back, giving you the security of staying on track to increase your initial investment. Additionally, given that your goal is renting out instead of flipping or selling home, finding an ideal location in terms of population and workforce growth will help ensure that your rental properties stay occupied even during a recession. 

On the other hand, residential rental properties actually benefit from high inflation, as your property value increases in correlation to inflation, thus increasing your rental income. This creates a hedge against both the short-term and long-term effects of inflation, as a rise in the cost of living in your property’s location will generally translate into an increase in your cash flow.

3. Flexible Equity

Unlike stocks, rental property is a tangible asset that grants you a lot of flexibility with what you want to do with it. You have the ability to let your property mature and increase in value over time or sell the property whenever you want to. Smart investing will mean that you’ll be able to build equity quickly, meaning that you now have the additional resources to purchase new investments and further increase your cash flow. 

No other investment strategy will give you the kind of leverage that real estate investment will. A loan using your stocks as collateral typically maxes out at 50% of their value, but a loan taken out on a rental property can be anywhere from 75-90% of the total cost. With that kind of money at your disposal, it’s a lot simpler to pay the purchase price on more property, and your income can continue to rise as your investment portfolio grows.

4. Increasing Value Through Renovation

While choosing a prime location can lead to your rental property’s value increasing over time, you can also choose to have a direct effect on its overall value by making renovations on your unit. While it does require more money upfront, you’re able to justify a larger rent charge, which will accumulate and lead to an increase in your cash flow at a faster rate.

There’s volatility in a stock market and when the market is down, many people sell to cut their losses and wait until the market picks back up to invest again. Your investment options are very much dependent on the state of the market, but with a rental property unit, you can find ways to increase the value of your property regardless of the state of the housing market. Not only does this increase your monthly rent charge, but the value of your rental property when you’ve determined it’s time to sell.

5. Tax Benefits

There are several ways real estate investors can benefit when tax season comes around. It can get complicated, so you should always consult a tax agent to make sure you qualify for the various tax benefits before you file. But overall, investing in real estate has more tax benefits than a lot of other investment strategies.

Put simply, one of the key benefits is the tax exemptions that you are able to receive from being a rental property owner. Since income from your residential rental property is not subject to self-employment tax, many investors purchase real estate to benefit from this. Additionally, you also have the potential to be eligible for tax breaks depending on your property’s depreciation or cost towards property taxes, maintenance repairs, or insurance.

The Bottom Line

There is an appeal to rental property investment as it grants you consistent passive income while allowing yourself to be your own boss. Although it may require the need to attend to tenant requests regarding maintenance, you also have the option of making the income completely passive by hiring a property management company that will take care of finding tenants, handling maintenance requests, collecting rents, etc.

If you’re okay with accumulating wealth over a longer period of time, residential rental property investment may be right for you. Regardless, research and planning out what this might look like for you personally is crucial to increasing your chances of finding a successful investment.

Suggested: Hiring a Property Manager Property Maintenance Rental Income