Tips for investing in Rental Property in Columbia MO
Investing in rental property in Columbia, MO looks like a good idea on paper. You just buy a place in a nice area of Columbia, find tenants and start cashing checks. However, there are some matters you have to consider before buying a rental property in Columbia, MO and putting a “for rent” sign in the yard. Below are a few insider tips to consider before you start buying rental property.
Advantages of Rental Property in Columbia
The advantages of owning rental property are huge. One that is not listed below is the fact that when you own rental property in Columbia, you own a tangible asset. You can paint it when you’re happy with it and throw rocks at it when you’re not.
Advantage 1: Current Income – This refers to the rent money that is left over after the mortgage and related expenses have been paid. Current income is basically monthly cash that you did not have to work for – your property produces it for you.
Advantage 2: Appreciation – This is the increase in value that properties generally experience as time passes. Appreciation is not guaranteed. However, if you own a property in a stable area of Columbia, the property will likely increase in value over the years.
Advantage 3: Leverage – Rental properties can be purchased with borrowed funds. This means that you can purchase a rental property by putting down only a percentage of the total value. Essentially, you can control the whole property and the equity it holds while only paying a fraction of its total cost.
Advantage 4: Tax Advantages – Your rental income may be tax free if you do not receive net cash flow after expenses are deducted. This means that your mortgage is being paid down and you own more of the total value of the property (rather than just controlling it), but you do not pay taxes on the money that is doing this for you. In addition to this, you can also pull out tax-free money by refinancing your loan if the property appreciates and the interest rates have fallen. Lastly, you may be able to avoid paying taxes on the sale of the rental property if you sell it and reinvest the money in another property.
Disadvantages of Rental Property in Columbia
For every upside, there is a downside, and rental real property is no different. Rental property in Columbia may expose you to the following:
Disadvantage 1: Liability - What happens if a tenant slips and falls on ice? With the increase in frivolous lawsuits and the unquantifiable nature of “emotional distress”, liability can be a scary thing. Providing someone with shelter in return for money puts you and the tenant in a relationship where both parties bear responsibility. You have to be certain that the property you are renting out meets all city codes.
Disadvantage 2: Unexpected Expenses – What do you do when you open a kitchen cabinet and discover mold is growing everywhere? It is impossible to prepare for every expense related to owning rental property in Columbia, MO, so there are bound to be some unexpected ones. Things such as plumbing and fixtures often need to be replaced and are not outrageously expensive. However, faulty wiring, bad foundations, furnaces and the like can be very expensive to repair. If you can’t find a way to pay for repairs, you will be left without a tenant and with the grim prospect of selling the property at a significant loss. Also, as building codes evolve over time, lead paint, asbestos, cedar roofing tiles and other materials that passed inspection in the past may be reevaluated to your disadvantage.
Disadvantage 3: Bad Tenants – No one wants to have to use a collection agency or a lawyer to collect past due rent. Unfortunately, almost every landlord has a story that involves the sheriff escorting his or her tenant out of the property – erasing all hopes of getting the five months’ worth of overdue rent. Bad tenants can also increase your unexpected expenses and even hit you with a lawsuit.
Disadvantage 4: Vacancy – No money coming in means that you have to make the payments out of your own pocket. If you have an emergency fund for the rental property, you will be able to survive long vacancies with little trouble. If you don’t have one, you may find yourself scrambling to pay the rent to the harshest landlord of all – the bank.
Minimizing the disadvantages of owning real estate is actually quite simple. While you won’t be able to eliminate the pitfalls completely, following these guidelines will help you own rental property in Columbia, MO
Tip 1: Keep Your Expectations Reasonable – Have the goal of positive cash flow, but don’t expect to be purchasing a new private jet at year’s end. If you keep your expectations in check, you won’t be tempted to jack up the rent and push out good tenants.
Tip 2: Find a Balance between Earnings and Effort – Are you “hands on”, or should you work with a property management company? Current income doesn’t seem so great if you are putting in another full-time shift working on your rental property.
Tip 3: Know the Rules – Federal and state laws and City of Columbia ordinances outline your responsibilities and liabilities, so you can’t claim ignorance when something happens. You will have to do some reading; nevertheless, it is better to spend 20 hours in the library than in the courtroom.
Tip 4: Have the Property Inspected – One of the best ways to avoid unexpected expenses is to have the property inspected by a professional before you buy it.
Tip 5: Make Sure Your Leases Are Legal – If you make a mistake on the lease, you will find it more difficult in court if a tenant violates the terms.
Tip 6: Take the Time To Call References and Run Credit Checks – This is my personal favorite!! Too many landlords rush to fill a vacancy rather than taking the time to make sure the prospective tenant is a better option than an empty property. If you have time, you may want to drive by a prospective tenant’s current living space – that is what your property will probably look like when that tenant lives there.
Tip 7: Join the Columbia Apartment Association – Joining CAA will provide you with a wealth of experience as well as sample leases, copies of laws and regulations, and lists of decent lawyers, contractors and inspectors.
Tip 8: Create an Emergency Fund – This is essentially money earmarked for unexpected expenses that are not covered by insurance. There is no set amount for an emergency fund, some say 20% of the value of the property, but anything is better than nothing. If you are getting current income from a property, you can pool that money into an emergency fund.
Investing in a rental property in Columbia MO can be an excellent decision if you go into it informed.