When it comes to direct investing in residential real estate and becoming a landlord, you should ask yourself: “What am I getting into?” You’d have to understand your flexibility, your risk tolerance, your financial cushion and so on and so forth. Investing in real estate is much more involved than investing in the stock market but if you’ve got the chops and the patience, it can be worth your while. Here are basic actions to take when deciding to invest in real estate.

Before You Buy:

Do a Self Assessment
Are you okay with being on call around the clock? If a tenant doesn’t pay the rent, are you comfortable handling the situation? Being a landlord is just like being self-employed. You have to know how much you can take on emotionally and business-wise to give you a good sense of your compatibility with the investment.

Assess your Finances
Buying an income property is very different from buying your own home. Making sure you have enough money/revenue to cover losses in the event of vacancy or non-payment of rent is essential. In addition, tenant-landlord laws in many states usually favor the tenant, meaning an eviction can be a very expensive and long process. Being prepared with information and funds can help alleviate these potential problems. 

Check the Neighborhood
Neighborhood is not only important to property values, it’s important to your management. Although renters can be unpredictable and there’s no way of guaranteeing a great tenant, the kind of neighborhood you invest in can determine some habits of potential renters. For example, if you’re buying in a college neighborhood with student renters, you’re going to have to prepare for high annual turnover rates, subletting policies and co-leasing agreements with parents.

Determine the Cap Rate
The cap rate (or capitalization rate) is the most important calculation you can make in determining whether you should purchase an income property. To get a cap rate, divide net operating income by price/value of the property. For example, if you plan to buy a duplex for $100,000 and estimate that the rents from tenants (after expenses) would net you $10,000 for the year, then your cap rate would be 10%. Cap rates can be compared to bond yields or even dividend yields on other investments.

After You Buy:

Build a Dream Team
Making sure you have access to an immediate team including handymen and plumbers on your go-to list can save you a lot of time. Get recommendations from friends and websites like ServiceMajic to make sure you are giving consistent business to someone reliable and within your price range.

Keep Good Records
Running any business efficiently requires meticulous record keeping. Luckily, there are many software programs like Quicken Rental Property Manager to help you with accounting and tracking your expenses.

Outline Clear Lease Agreements
Although it goes without saying that tenants need to make sure they read the fine print, landlords also need to be clear on what they are signing off on as well. With many generic lease templates out there for landlords to use, it’s important to be clear on all the conditions of the agreement and also make amendments of your own before having the tenant sign. You are just as liable as the tenant for upholding the agreement.

Maintain the Property
Making sure you maintain the property, through prompt repairs and general improvements, will not only promote a good and healthy relationship with your tenants but also help increase property values.