In this post I’m going to briefly talk about the things you need to do to be successful as a new landlord but, first, a little warning and disclosure: I am not a lawyer or an accountant. I am a seasoned real estate investor and the things I’m about to share with you are good general information for buy and hold real estate investing. Laws and practices may vary from state-to-state and even city-to-city. Make sure to seek professional legal and financial advice especially when it comes to specific questions concerning local laws and customs. Real estate investing does entail significant risk of financial loss. In this business you can lose more than your original principal investment. Don’t let anyone tell you that real estate investing is “risk free.”
So, you did it! You just pulled the trigger and closed on your first rental property. Congrats. Now you need to move fast because time is money. Costs start accumulating the very moment you sign on the dotted line. You need to make your property ready and get it occupied and generating income as soon as possible.
Get Your Property Tenant-Ready
Most new rental properties probably require some repairs, cleaning and / or upgrading in order to make it tenant-ready. I will not go into great depths about home renovation and working with contractors. I’ll just say that if you are working with a contractor, you need to ensure that person or company is reputable, licensed and insured.
Believe me, you’ve never seen how expensive the lowest bid can be until you work with an unlicensed contractor.
Where repairs are required, try to select inexpensive (not cheap) materials, and keep durability in mind.
Hire A Property Manager
If your investment strategy only entails picking up one or two rental properties to subsidize and diversify a greater investment portfolio, or, if you bought a property that is more than a 30 minute drive from where you live, I strongly recommend hiring a property manager. The property manager should do all the things I’m about to outline, but it’s still a good idea to be familiar with the tasks so you know what to expect.
Real estate brings together many different skill sets and because of that you will likely need a team. Some of the most common team members include lawyer, accountant, realtor/manager, and handyman. Some people can cover one or two of these skills but very few people can wear all of these hats.
Once your investment is ready for showing you need to get the word out. Online classified ad websites like HotPads and Zillow are free and highly affective. Depending on your market it can also be cost effective to advertise in the local news paper. They normally have print and online advertising options. You can also bring in a realtor just to find you a tenant. The realtor will put your home in the Multiple Listing Service (MLS) which will then list your home on the major sites such as Zillow, realtor.com, etc. This can be highly effective for finding good quality applicants but it will also cost you as much as a full month’s rent.
It is vitally important that you price your home right. If your home is overpriced, your advertising campaign will likely be doomed and a waste of money. Also, you don’t want to get just anybody into your home. You want to find a good strong applicant. Pricing your home right will help you attract a good pool of applicants to select from.
Applications and Evaluation:
Hopefully your advertising campaign generates a lot of showings and multiple interested parties. Now it’s time for paperwork. The best plan would be to go to your legal team member and have him or her draw you up a good strong application form, and lease. Or you can go to your local office supply store. They usually sell landlord packages that will consist of just about all the documents you’ll need for your business and they’re usually state specific forms. There are quite a few legal websites that do the same. In my experience, however, these forms are a little lacking. I like to take a hybrid approach. I go and find a form that I am generally comfortable with and then I just have my lawyer look it over. This service is normally much cheaper than having something done from scratch.
Make sure you have a good application and that the applicant fills it out completely and signs their name. Ensure that everyone over the age of 18 that will be living in your home fills out and signs an application. Even if you don’t do anything with the application at this point you need to have this information on file in case problems arise down the road.
Your application needs to consist of at least Name, current address, social security number, authorization to pull credit release, references, and employer.
Make sure you find out how much they make to ensure they can afford the place, and take the time to call their references and employer.
In general their rent should not be greater than about 1/3 of their income. Make sure you talk to their most recent landlord. I also highly recommend you pull their credit. There are a number of online services that will allow you to pull someone’s credit as long as you have the proper form filled out and signed. Most of these sites require their own form be used, so plan ahead.
Absolutely every time I’ve rented to someone with bad credit I’ve had major problems. People with good credit have a good record that they do not want to smear. You have a lot of leverage to negotiate with a person with good credit.
Often time people with bad credit don’t have much to lose and your only option to get reimbursed for damages or lost rent is to go to court.
Going to court is stressful and time consuming, not something that you want to have to do. Plus, even if you win in court you still have to collect which is almost always more stressful and time consuming. If the person has bad enough credit, you may have to get in line behind many other creditors. I highly recommend you pull credit and take credit scores seriously.
Hopefully you select a good strong tenant who is willing and able to rent your property. Now you need to sit down with your new tenant and fill out a lease. Your lease should be a good strong document that outlines the, move in date and end date, property address, rental amount, the date rent is due and late (always have a late fee in your lease), the deposit amount and receipt thereof, and house rules. Make sure you put some effort into your lease.
Make sure you also do a move in form. Many landlords get lazy at this point in the process but this is important. When your tenant moves in make sure you walk the property with them and note any damages. Have the tenant note the damages and sign the form.
Take lots of time/date stamped pictures and file them away.
All too often landlords complain that a tenant damaged a property and then demands the landlord pays to fix the home. It can be an ugly situation if there is now a big gaping hole in a wall but the landlord can’t prove that it wasn’t there at move in. Or, if the damage was there at move in then the landlord can feel confident in making the repair and not feel like she is being taken advantage of. Diligence often helps to avoid problems all together.
If you take care of business on the above items then you have a very good chance of settling into a very smooth operating mini-business. If all goes right from here then all you need to do is collect the rent, handle maintenance requests and do the occasional walk through until the end of the lease or move out.
I do recommend doing a walk through inspection at lease every 3 months. Make sure your lease covers property maintenance and cleanliness.
A sloppy and disrespectful tenant can cost you way more in property damages than a non paying tenant.
Make sure that you have the power to terminate the lease if you find a tenant is not properly caring for your property and fails to correct the situation. If you find you do have an unclean tenanting or see a lot of damage then you will want to do more regular walk though inspections.
I highly recommend you research if your state has a landlord tenant act.
Make sure you know how to handle a nonpaying tenant.
You need to know how to start the eviction process which usually entails serving notice. This is the critical first step in the process and it must be done correctly. Once it’s clear that an official eviction process will be needed, I highly recommend seeking the services of an attorney, especially for your first one.
I have never met a landlord that had all smooth sailing. You will run into aggravation. One of the biggest problems I have is being made out to be the bad guy no matter how much I give or try. I think a lot of well intending people feel the same about this business. Being painted as the evil landlord can really be crushing.
But, real estate investing is a powerful wealth and character building instrument.
I think every American should have one rental property at some point in their life. It’s a real eye opener.
With that said, real estate investing is not for everyone. It is risky and it can be time consuming and humbling. Going into it with realistic expectations is critically important. Be wary of any so-called real estate guru who claims otherwise.