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Buying rental property

Rental property may be a way to earn long-term profits from real estate. The historic average returns on single-family rental homes is approximately 9 percent each year from rental income and price appreciation. But, owning and managing rental property takes time, planning and a bit of savvy.

Being a landlord is not for the introverted or impatient. Landlords must act lawfully and with tact when dealing with tenants, repairmen and cleaning crews. They should act with discretion and calm when facing unexpected repairs and tenant behavior. Hiring a professional property manager can eliminate some of this burden. However, these managers generally take 10 percent and may not share the same enthusiasm as the property owner.

Rental properties, especially at first, do not always generate profits or even cover expenses, such as mortgage payments, insurance, property taxes, routine maintenance and larger or unexpected repairs. Landlords should have sufficient assets to help cover expenses and times when there are vacant units. They should also keep a couple thousands of dollars, excluding tenant's security deposits, in reserve for each property to cover unexpected expenses. Each rental home should also have a separate checking account.

Landlords must also have the financial ability to take out a mortgage, especially since interest rates on rental properties are higher than owner-occupied residences and require a larger down payment. Mortgage payments, in fact, hamper the ability to make any money from the property.

It is important, accordingly, to buy well-built units in affordable neighborhoods that have been or will be improved, part of gentrification or where younger residents choose to live. Rental units should be as attractive as other neighborhood dwellings, but should not be overly-trendy.

Properly screening tenants is also essential to prevent criminal activity, skipping rent or damaging the property. Landlords should use credit and criminal-background checks and verify information on applications. The National Tenant Network can also help.

Finally, rental owners must understand and comply with zoning laws and other federal and Arizona laws addressing discrimination, sales taxes and tenant rights. An attorney can help with these issues and prepare documents, such as real estate agreements and leases.

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