Becoming a landlord can be one of the smartest moves you make for your wealth management plan, but don’t be fooled into thinking it is an easy transition. There are quite a few things that go hand and hand with becoming a landlord that you want to consider to ensure that you are well-prepared to take on the role.
Becoming a landlord is a process, becoming a great landlord that is earning profits from their property involves a bigger learning curve. Whether you are looking at a commercial property or you just have a single-family home you want to rent out, the process of becoming a landlord is very similar.
What is a Landlord?
A landlord is any person that owns property and rents it out to a tenant. The word itself comes from medieval times when the “lord” of the “land” would rent out parcels of land to the “serfs” who would pay in food not cash for the use of the land.
Today a landlord is anyone that owns any type of property including single-family homes, apartment buildings, condominiums, condos, townhouses, or commercial property. In other words, you no longer are required to be an aristocrat to rent out the land. Of course, today’s currency for landlords is cold hard cash.
Getting Started On Becoming a Landlord
If you want to park some cash in real estate before you buy be sure that you are making a sound investment by learning how to calculate rent prices in the area. Sure, it is a great idea to buy in up and coming areas, but not if you are going to have to carry the property for the next five years while the rent prices come up some.
It is your responsibility to take care of due diligence, that means know what you are getting into. The devil is always in the details. Take a good look at the income and expense report for the property and look to see if the details like garbage pickup, cleaning service, and other monthly costs are represented in the statement. You would be surprised how much those services can tack on to the monthly expenses.
Once you are satisfied with the income and expense report, hire a certified property inspector to take a good look at the property. An appraiser is not there to inspect the property they are just there to check things out for the bank and make sure a roof is in place. An adjuster does not necessarily care if the roof in place is in good shape.
Hire an inspector it is well worth the investment. The inspector will get up on the roof, check the condition, he will look at all the little things like whether gutter maintenance needs to be done right away, and the big things like whether your heating system is in good shape.
The goal of hiring a property inspector is to protect your interests. You need to go into becoming a landlord with your eyes wide open or risk buying a property that is going to cost you a ton to repair.
Once you have done your due diligence and had the property inspected and received the report then you can make your decision about the property. One of the critical mistakes that first time investors make is that they leap before they look.
There are a few things that you can do to ensure that your building stays profitable. Most of those things come down to ensuring that you are getting the best pricing for all your services and considering some ideas that are outside the box to cut the fat from operating expenses.
Residential solar panels are a great way to conserve energy, make your building more attractive to qualified tenants, and cut costs. While most landlords make tenants responsible for their own electricity costs, they are still responsible for building lighting and other electricity used to run the building.
It may seem a little radical to have solar panels installed on your rental property but they can be very affordable with solar financing options and you could receive quite the nice ROI on this investment. it is something to think about.
Corralling costs can be as simple as comparing homeowner insurance quotes, and service quotes. Becoming a landlord means dusting off those negotiation skills and finding the best value for the best price. You can find a great deal of savings when you compare your options.
Don’t be afraid to ask for discounts or if the service provider can offer a better rate. Offer to sign year-long agreements with service providers if they will consider offering you a discount. There is always wiggle room with every service provider you just have to find the sweet spot where everyone in the deal is happy.
Enough cannot be said about having the right insurance policy for your property. You may have to pay a little more than you want to, to keep deductibles low, and to get the full coverage that you need, but it is a worthy investment. When you have tenants in your property it is important that you reduce your level of personal liability.
Becoming a landlord means that you have a very high level of responsibility to yourself and any partners that you have to get highly qualified tenants to move in. This is not the time to be charitable or compassionate.
The fact is bad tenants can be a nightmare to get out of your property. Bad tenants know the rules and they know how to bend them to their favor. Luckily if a tenant breaks the rules of their lease you can start proceedings to get them out in as little as 30 days, but if they are making lists of what needs to be done in the space by you, the judge will delay the proceedings until you hold up your end of the deal.
It is important that you get good tenants in your property from the beginning. Here is what you will need to do to ensure that you are getting the right tenants:
- Check their credit report
- Check their references
- Collect work history
Checking potential tenant’s credit reports is perfectly permissible. While a credit report does not reveal a person’s complete history, it does give you an idea of whether or not they pay their bills. Many utility companies will put negative remarks on a credit report when a bill is left unpaid from their previous residence.
Many landlords require a minimum credit score to rent the space to a tenant. It seems that a minimum of 620 is the magic number. You can use that minimum as part of the application packet and use it to make decisions about potential tenants.
Ask for 3-5 references, then be sure to check them. Be sure to request 3-5 references that are not family members. A former landlord would be a good reference to request. It is important that somebody actually checks the references. It is simply amazing how many people never check references.
Ask for pay stubs to establish a work history. Call to confirm the stated work history. It is important that your tenants have adequate income to pay that rent and that they are likely to remain employed for the duration of the lease.
Other decisions that you will have to make about your rental space and under what terms it will be rented out. For example, will you allow pets? If you allow pets what kind will you allow? Will you put a weight restriction on the pets that you allow?
Other decisions you will need to make about the lease agreement is how many people will you allow to live in the space? Don’t kid yourself people can be a little strange when it comes to how many people that let stay in their apartment. You may rent to a family of four and then hear that 15 people are living in the space because the family of four moved in all their relatives.
Make sure every person that is going to live in the space is accounted for by name on the lease. Figuring out all the things you want to include or exclude in the leased space before you start advertising the space is the best way to do business.
What a Good Tenant Looks Like
A good tenant is a tenant that pays their rent on time every month, and they respect your property. They follow the guidelines of their lease and notify you quickly if there is anything wrong with the property that needs to be addressed.
A good tenant is the gold standard of tenants that make becoming a landlord worthwhile. You form a symbiotic relationship with them that is based on a mutual understanding that the lease is carved in stone and should be followed accordingly.
You can be an absentee landlord but you do want to make sure in your absence your property is being taken care of. It is your property and ultimately it is your responsibility. For example, after an ice storm no one clears the sidewalk in front of your building, someone falls and gets hurt, next thing you know you have a letter from a slip and fall attorney.
Even in the case of single-family rentals, if the lease does not spell out that the tenant is responsible for clearing the ice on sidewalks, you can be sued. In some cases even if the lease does spell it out, and your tenant does not abide by the lease agreement, you can be sued.
In your absence it is important that you have either a trusted employee like a superintendent to keep an eye on things or you pay a property management company to act on your behalf. It is important that your property is taken care of.
Your tenants can withhold rent if you do not take care of the property and keep your end of the lease-up by providing the services that are outlined in the lease. Do your part and collect rents every month.
Initially there is a lot to learn, what with negotiating garbage pickup and home maintenance, but with time becoming a landlord will seem as easy as anything else you know how to do well. The process is relatively simple. Consider the steps you would take in your personal life to save some money and apply it to how you manage your rental property.
For some people becoming a landlord means becoming a bit tougher in how they look at people. A landlord-tenant relationship is strictly a business relationship there is no room for personal feelings.
It can be difficult to evict people when you have formed a personal relationship with them, and unfortunately in some cases, you will have to evict people. You are in this for the profit. When tenants do not pay their rent that eats into your profit.
Many landlords wait too long to rip off the band-aid and evict people that cannot afford the rent. The longer you wait for the more losses you are faced with. Rarely can a tenant catch up payments and stay current, and you are not doing them any favors by letting them get deeper and deeper into debt.
Becoming a landlord has both good sides and bad sides to it, but if you do it right, there is a great deal of money to be made.