Risks & Benefits of Renting vs Selling in Charlotte
Risks of Renting Your House Out
People often have a lot of concerns about becoming a first-time landlord. They are right to be concerned, as there are a lot of moving pieces that could go wrong and become very costly. Here are the Top 5 Risks of Renting:
- I won’t find tenants quickly enough. The formula for this problem is Price + Condition = Success.
- Price: You may be tempted to price your property too high in an attempt to maximize your income. Ironically, this usually backfires and decreases your income by having your property sit vacant for too long; always remember, there is no greater cost than vacancy cost. But, of course you also don’t want to price too low and leave money on the table. You need a property manager with an expert tool and local expertise to accurately price your property.
- Condition: You need to present your property in its optimal condition to attract the most qualified tenant in the shortest amount of time. But, you need to be smart to spend your money in the right places and not waste your money on unnecessary improvements. 70% of tenants already know which house they want to rent before they ever go see it. For this reason, it is imperative that your property manager use a professional photographer and videographer, experienced in marketing houses.
- Success: We rent our houses out within 2-3 weeks of being on the market by correctly nailing Price + Condition.
- My tenant won’t pay the rent. This problem starts when your property manager is screening the tenant. Not only should they be reviewing a credit check, criminal background check, eviction history check, landlord references and income verification, but they should also be checking social media accounts, using tricks of the trade to figure out if they are talking to a fake landlord reference or a real landlord reference. Furthermore, they should do this for every adult that will be living in the property. However, it is really easy to accidentally break Fair Housing Laws if you self-manage, which could cost you up to $16,000 on your first offense, plus attorney fees; be careful or use a professional property manager. Even the best screened tenant might end up slow-paying the rent from time to time. Your property manager should use a carefully crafted custom lease that is designed to protect your interests. We treat your property like the business that it is and it is our business to collect the rent for you accurately and on time every month. With our practices in place we only file evictions on less than 1% of our tenants, and over half of those work things out and are able to stay before we actually get to the court date.
- My tenant will trash the house. Once again, this starts with properly screening the tenant before your property manager ever decides to rent to them. From there, they should be conducting regular visits to the house to make sure the tenants are properly caring for the property throughout the year. With proper attention, it is extremely rare for any of our tenants to trash a property more than their security deposit will cover. The bigger concern that most landlords don’t actually consider is that, unintentionally, tenants wear out a house more than a homeowner does. For this we recommend landlords proactively hire preventative maintenance services to maintain the curb appeal and equity appreciation of their property, such as: gutter cleanings, HVAC coil cleanings, lawn care beyond simple mowing, chimney sweep and pressure washing. These are all things that will help maintain the best long-term value of your property, keep your current tenants happy and help you to attract the most qualified tenants in the future.
- I will lose money. This risk largely depends on your expectations. The five main costs associated with a rental property are: taxes, insurance, management, maintenance and vacancy. We can help you come up with an accurate budget for your property, but a quick rule of thumb is that these five costs will usually come to around 40% of the max potential gross rental income. If you have a mortgage, you are likely already paying the taxes and insurance through your mortgage payment, so if you only want to factor the other three expenses, they are usually going to be around 28%. So, if your property should rent for $1400/mo, then you should expect to net around $1,008/mo on average over time (even though most typical months your net income would be closer to $1300). However, picking the wrong property management can make this risk a reality. Just ask and we will prepare a budget for your property and go over it with you to make sure renting is right for you.
- I might accidentally break the law. This is a real risk to consider. There are so many laws on the books and they are regularly changing, we cannot possibly all know all of them. If you plan to be a DIY Landlord, please take the time to carefully study all of the laws and regulations at the National, State and Local level that apply to renting out your property. If you accidentally break any of them, it could end up being the most costly mistake you make. Otherwise, consider hiring a professional property management company with property accreditations such as, licensed with the state, NARPM membership, BBB affiliated and the like.
If you properly manage these risks, owning real estate rental property can be a very lucrative and rewarding investment. Especially if you make it Effortless Property Ownership by hiring the right property management company to handle all associated tasks on your behalf!
Benefits of Renting Your House Out
All of the risks of owning a rental property can be easily handled by a professional property management company. Turn over all of the headaches and just receive all of the benefits:
- Cash Flow: Have your property manager prepare a budget that properly anticipates the cost of management, maintenance, vacancy, taxes and insurance. The goal is for the net operating income to at least cover your mortgage (if you have a mortgage) with some cash flow. Some landlords also put monthly principal pay down in the category of cash flow.
- Build Equity: In addition to paying down your principal each month, you are also increasing your wealth through real estate appreciation, which has historically beaten the stock market.
- Tax Advantages: There are many tax advantages to owning real estate which you should discuss with your tax advisor.
Risks and Benefits of Selling
The risk-benefit analysis of selling is rather simple.
- Benefit: You would like to liquidate the equity in the property at its current day value so that you can do something else with those funds and simply be done with the property forevermore. If you would like to discuss selling your house, we can help with that, too!
- Risk: The risk is that when selling you undervalue the long-term value of owning real estate investment property. The actual asset appreciation of real estate values has historically outperformed the stock market and this does not even factor in the cash flow that your property will yield each year, when properly managed.