Ready to get rich quick, with zero down, and just a few easy payments? You should probably find another infomercial and skip investing in real estate altogether. Being a landlord is like working a part-time job or side hustle, not swinging in a hammock full of rent checks at the beach.
Property owners who treat their rentals like a business are more likely to turn their invested time, money, and effort into successful cash flow and long-term wealth. This guide can help you avoid hassle and headaches while deciding if investing in rentals makes sense for your lifestyle, finances, and risk tolerance.
Check out these 12 important steps to becoming a successful landlord:
Before you scour the internet for the right investment or decide to turn a current property into a rental, calculate if the property can create enough cash flow to make it worthwhile even amidst the uncertainty of the COVID crisis. Ask your self three questions to find the right property:
1. Does it fit your budget?
2. What's the property's condition, and what will it take to make it move-in ready?
3. Is there a high enough return on investment to justify the purchase in both rent and potential appreciation?
Here's a quick shorthand calculation called the 50% Rule. It helps you estimate the cash flow and tells you if a potential property deserves more research. The 50% Rule has three simple steps:
1. Use comparable properties to guess the monthly rent
2. Subtract 50% for expenses.
3. Subtract the principal and interest, and the rest is the cash flow.
For example, your three-bed, two-bath single-family home could rent for $2,100. Subtract 50% for expenses leaves you with $1,050, and the principal and interest was $900, so you'd be left with a potential cash flow of $150. If your monthly goal was $300 a month, you know this property doesn't deserve further research.
Once you have a few properties that meet your criteria, you can narrow down the search with more questions:
· How close is the property to your home?
· Does the neighborhood feel safe?
· How close is it to the city's center?
· Does the neighborhood have walkability? Are there footpaths and sidewalks that make it appealing to prospective tenants?
Landlords can choose from single-family homes, condominiums, or even multi-family buildings. The property type will help you navigate finance and lender options, maintenance budget, and your potential profit. First-time landlords should probably start small and leave the multi-unit buildings or more extensive projects to experienced investors.
Your financial projections should include a certain percentage for emergencies such as a busted pipe or a missed rent payment. When your life savings and more than one mortgage is on the line, you're motivated to "expect the unexpected." Budget for the following expenses:
· Bookkeeping/Accounting fees
· Landlord insurance
· Legal fees
· Maintenance and repair
· Marketing/Advertising fees
· Mortgage payments
· Property Management
· Property taxes
· Registration fees
· Rental Income Taxes
Didn't know you were going to law school? You won't need a degree to become a landlord, but understanding the local, state, and federal laws that apply to your property will help protect your assets. You'll also screen potential tenants better and realize when you should hire an attorney who understands your state laws.
Try to develop a working knowledge of:
· Fair Housing Act. Prohibits discrimination based on race, color, national origin, religion, sex, familial status, and disability.
· Fair Credit Reporting Act. Requires you to send rejected tenants a letter notifying them of refusals you based on their credit score.
· The Lead Disclosure Rule. Protects families by ensuring landlords disclose possible lead-based paint and other hazards for homes built before 1978.
· Your State's Eviction Rules and Procedures. Guides landlords on how to conduct a lawful eviction and helps you avoid pitfalls.
· Your State's Landlord-Tenant Laws. Determines both sides' rights and helps you manage essential matters such as rent increases, security deposits, and time frames for notice.
Landlord insurance protects the property you rent out to others and your assets from liability claims related to the home. Contrast that with your homeowners insurance, which protects your primary residence and personal liability.
And your tenants' belongings are not covered by your landlord insurance. They'd need renters insurance for their stuff. Your landlord insurance policy will cover:
· The physical structure
· Liability for property damage claims and tenants' or guests' medical expenses
· Legal defense for claims
· Loss of rent for covered losses such as a fire, freezing pipes, or water damage
You can learn more from The Ultimate Guide to Landlord Insurance.
Some landlords settle on a "livable" home to maximize profits, while others get properties to good condition to focus on long-term value. Think about your ideal renter before making any upgrades. A common mistake is to over-improve a home for the neighborhood.
At a minimum, you should:
· Get the home up to code. All doors, windows, gates, and other entries and exits should latch and function properly. Smoke and carbon monoxide alarms should work, and an electrician should check the home.
· Make necessary repairs. Fix or replace appliances, holes, fixtures, flooring, railings, stairs, and water leaks.
· Clean up the rental. Wipe down cabinets, counters, floorboards, and walls. Sweep and vacuum floors. Get rid of odor, junk, and trash. Manicure the lawn and landscaping.
Ideally, you've made this decision as part of your investment calculations, but now it's time to put it in black and white. If you go too low, you'll miss profit, but if you go too high, you'll miss renters. Don't worry. There's no perfect answer, but there's a number that will make sense for both you and your tenant.
First, research similar rentals or "comps" and add in your utilities and maintenance budget. Then think about how the Coronavirus crisis will affect your rental market. What price would make your property attractive amidst the competition? While you're thinking about standing out from the competition, maybe offer your renters the chance to pay online.
You have the good rent amount, and now you have to find the good tenants. You can create ads, host an open house, and use good old-fashion word-of-mouth to attract prospects. The internet has made it easier to get your property in front of the right eyeballs.
You may want to invest in professional photography before advertising on property listing sites such as Zillow, Craigslist, or HotPads. Many of these websites will let you advertise open houses. When you hold one, you should:
· Stage the rental. Let prospective renters picture how to use space. Forbes says staged homes sell for 17% more and up to 87% faster, and the same principles apply to rentals.
· Supply applications. Bring your iPad or paper copies so that people can complete a quick application.
· Hand out flyers. Display your contact info and link to apply, so people can have a second chance to become a tenant.
Seasoned landlords say most of the tenancy nightmare and horror stories you hear about can be avoided with a tighter screening process. Tenant screening will put your knowledge of Fair Housing Laws and Fair Credit Reporting to the test. On your rental application, you'll ask for:
· Personal contact info such as name, address, phone number, email address
· Other occupants and pets
· Address and eviction history
· Employment, income, and bankruptcy history
· Permission to run credit and background checks
Experienced landlords say you should also speak to previous landlords or at least get references. After an applicant meets your requirements, you can run a background and credit check to verify their information. You can do this online with Experian Connect, RentPrep, SmartMove, or many others. For a detailed walkthrough, check out An Overview of the Landlord Background Check Process.
The lease agreement describes the rules, rights, and responsibilities of the landlord-tenant relationship. Your rental agreement should follow all federal, state, and local laws. You can change this six-step process for your needs:
1. Customize the lease
2. Go over the lease with an attorney
3. Walk your prospective tenants through the lease
4. Make sure they sign and date the lease
5. Give a copy of the lease to the new tenants
6. Store physical copies securely and back up to the Cloud
You can buy lease agreement forms for your state on the internet, generate one with an online tool, or have a lawyer or property manager draft a template lease for the rental.
Maintenance and general upkeep may cut into your short-term profit, but it pleases current renters, lowers vacancy rates, and attracts better tenants in the long-term. Many landlords use above mentioned 50% rule and save half the rent for maintenance and the unexpected. Place the following periodic items on your list:
· Gutter cleaning
· HVAC servicing
· Landlord insurance review
· Pest control
· Property inspections and walkthroughs (move-in, yearly, move-out)
The first-time renter must tame the tornado of tasks between finding a property and finally collecting a rent check. Find calm during the storm with these quick pointers:
· Employ a filing system for advertising, receipts, tenant reimbursement, and utility bills.
· Keep records of all communications with renters, handypersons, service professionals, property managers, and anyone else living in or working on the home.
· Give receipts for security deposits and rent payments.
· Save printed and digital copies of all documents.
· Store applications, lease agreements, insurance documents, repair bills in a secure location, and backup online.
These methods will make your accountant or bookkeeper, and ultimately the IRS happy if they audit you. They also help you manage expectations and resolve disputes with renters and contractors.
Does all this sound like too much work?
Hire a property management company to streamline the process and skip the time-consuming tasks. Of course, a property manager will eat up some of your profit (around 8-12% of the rent), but for many landlords, the saved time, reduced hassle, and professional expertise more than justify the cost. Not to mention, property management, like depreciation, is tax-deductible.