So You Want to Be a Landlord?
One of the more popular ways of generating passive income is by investing in property rentals. These days, it seems everyone has the same idea: invest now, pay off the loan, and coast into early retirement with some extra funds to pay for all of those cruises in the Caribbean. Wonderful! But before you get ahead of yourself, here are some things to consider when entering the world of landlord-ing…
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Get Educated and Get Money
We’re going back to basics on this one: considering the money and effort it takes to lease a property, we strongly recommend doing your research. Get yourself educated! You can begin this process by buying any books, attending any courses, or speaking to friends and advisors already in the business of property rentals. Our best advice would be to reach out to current property owners to gain knowledge and even see sample documents they may use for tenant agreements. For online material, check out investment forums like Forbes or BiggerPockets for resources, advice, etc.
Besides head knowledge, you must also possess capital to even begin considering the lucrative property rental world. Since you are looking for a positive cash flow (or a balanced checkbook at minimum), the more money you can spare for a down payment will help you in the long run with interest and lower mortgage payments.
Be Located Where People Want to Live
This may sound obvious, but you must know the target audience for your property rental. Who would want to live in your neighborhood? Is your property in a location that someone will find convenient for their lifestyle? Some of the most lucrative rental areas are close to downtown or in neighborhoods nearby. If you are in a college town and want to appeal to that specific demographic, buy properties within walking distance to campus that have two to four bedrooms and with multi-family zoning available. Try to set yourself up for the easiest situation to landlord. You do not want to have a property out in the middle of nowhere and hungry for tenants, ultimately to end up with lousy renters because you could not fill the space.
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Create a Policy
To ensure the most successful and consistent business system, create a rental policy that you will not compromise. Be sure you have a clear written policy that helps your tenants understand your exact expectations for the relationship (In case you were wondering, this is NOT a principle we recommend for romantic relationships…).
Clarify Payment Details
Detail the payment process by stating what day of the month it should be paid and in what format (check, money order, etc). This will clear up any confusion about when and how rent is due, ensuring you will receive it the same way every month.
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Include late fees and stick to them. This will show that you are a serious landlord and the extra money that month will be worth the days you went without receiving payment.
Regulate Maintenance Calls
What’s that? Oh, you DON’T want your phone going off at all hours of the night? We recommend arrange non-emergency office hours for when the tenants are allowed to call you with issues...unless you would like to be woken up at 4:00 AM to go fix a broken sink. You also might look into maintenance services that will answer emergency calls and fix specialty issues. Your business hours matter, and should be taken seriously! Being a landlord does not have to be a 24-7 job.
Avoid Family and Friends as Tenants
This one is tough, but it might be in your best interest to avoid tenant-landlord relationships with personal friends and family. Helping someone out is nice, but mixing business with personal relationships can get very sticky. If someone is late on their rent because of their “situation”, it is hard to know them as a reliable tenant. The best option is to be wary renting to people you currently know.
Be Patient...This is Not a Get Rich Quick Game
Owning rental properties is a great way to enter into the world of long-term investments and begin generating secondary income...however, it is by no means a get-rich-quick game. Renting out properties takes a Herculean amount of patience.
First, you must pay off the mortgage of the house. If the “pro” to renting homes is that the tenants pay the mortgage for you, the “con” is most definitely that you won’t see any income for yourself for many years. Other than saving for maintenance, insurance, and any other rainy day funds, you should pour every penny into that mortgage bill until it is paid off. The good news is that down the road, you will have the house paid off and the majority of the rent money goes to paying for your vacations while enjoying early retirement. You are so clever, aren’t you?
Find Reliable Tenants
The task of finding good tenants can vary based on where the property is located. If you have a place next to a college campus, you could be dealing with a younger renter. This portion of landlord-ing has the potential to make or break your sanity during this investment. Set yourself up for success early in the game. Screen potential tenants by reviewing their credit reports, making sure they are employed, and have sufficient income (most landlords prefer the renter earn three times the amount of rent to ensure they are not living paycheck to paycheck), conducting background checks, and calling the references they have listed. A good reference from a previous landlord is the ultimate sign you might have found a winning tenant. You can finally fulfill your dream of becoming a real life Mr. Furley.
Find Reliable Maintenance
A mistake you do not want to make is assuming that your home will withstand any sort of tenant living inside it for any amount of time. Houses can obviously be affected by harsh conditions in weather or faulty construction and wiring, but most often it is the natural wear-and-tear of the tenant that shows up on the next damage report. As a landlord, you will be responsible for major repairs on the house - i.e. carpets, painting, and plumbing. However, major damage like smashing a window or someone punching a hole through a wall would be a responsibility given to the tenant.
We recommend routine maintenance checks on the property every six months (make sure to let the tenants know beforehand) to ensure a healthy home. Don’t be afraid to get your hands dirty! Most home maintenance can be done with common sense and a YouTube tutorial. However, if it is a job you are not confident in performing, have a handyman you can trust on-call for these repairs. It is better to know the person and their quality of work and build a relationship with them to ensure a good job on the house.
Short-term and long-term rentals
If you own a home or condo in a popular vacation spot, your property has the potential to be rented as a short-term lease. If you plan on renting short-term, be prepared to run this property as intensely as any normal business. With constant tenant turnover, be sure you are renting through a reliable business like airBnB or VRBO, who provide background information and reviews of previous rentals for those trying to rent your place. The constant flow of tenants may also be cause for more attention to damage and repairs. A short-term rental situation would be suggested for those who want to make landlord-ing their sole job, as it requires full attention.
With the right amount of preparation, being a landlord can be a wonderful experience. Plan smart and happy investing!