You can be a landlord too! It’s not just for wealthy people – don’t get the idea that people that rent out houses or apartment buildings are all million-dollar investor types. There are also normal, everyday people that rent out those types of places. It’s easy to get into really – if you’ve been paying a mortgage on your home for a reasonable amount of time, you can look at moving and renting it out for a profit. In my experience about 10 years is the magic number where the mortgage payments easily become low enough compared to a rental income to make it worth it. There are other ways to get into it of course, but in any case, here’s what you should know beyond the basics that a good book from the library will provide.
1. Don’t get into being a landlord unless you’re psychologically prepared to evict someone and watch their stuff be moved out onto the street.
Evictions happen even when you try to avoid them. Of course you try to avoid them! Everyone loses when someone’s kicked out. You can do everything possible so that it doesn’t happen, but there are surprises in life.
2. Call the prospective tenant’s current landlord and their previous landlord for a reference.
The current landlord may just want to rid themselves of a horrible tenant. The previous landlord will be more honest. Always call, even if the folks are super nice.
3. Watch out for red flags.
Meet with the prospective tenants personally to be able to evaluate their situation and personalities. Once they find out you’ll be doing a background and credit check most people are surprisingly open about their situation. We had one person tell us they filed for bankruptcy a year or so ago, but “Don’t worry, I have a year’s worth of rent payments in the bank right now.” <- Huge red flag there. She thought that would help? You may be swayed by the second part of what she said, but the essential part is the bankruptcy. The rest of it just brings up more questions.
4. Be firm, assertive, and kind.
One of the great advantages of owning a rental property is that it puts you in the position of learning how to be a good landlord. It gives you the opportunity to be a nice, understanding landlord instead of a jerk-face. And when you’ve been too nice it gives you the opportunity to understand why some landlords are wound-up tight-asses who won’t budge an inch on anything.
Of course when I started I wanted to be the nicest landlord that ever lived – understanding, easy going, forgiving. Of course, I was taken advantage of. You can be nice and firm at the same time.
The best way to describe this is a line I heard a property manager say once when leaving a message for a tenant that was having trouble paying their rent. We would have to evict them if they couldn’t pay. He said something like the following.
Hey Steve, it’s J. I’m calling to find out if you’ve been able to find the money for the rent yet this month. There are still a few days left before we’ll start the eviction process. Please give me a call back when you can, and if you can’t make the payment that’s fine. It just means this isn’t the right house for you.
The important line of course is “this isn’t the right house for you.” Your dead-beat renter is a real, live person with feelings and needs. Besides treating him or her with respect, it’s also the reality of the situation that there may be somewhere that person can live other than your rental property. Being kind and truthful in this way may help avoid the kind of eviction where the police are involved.
5. Do NOT hold out for a high rent when there isn’t enough interest in your unit.
I have heard this time and time again – only 2 people came to see my unit this week and neither of them filled out an application, but I know if I just keep everything the same then I’ll be able to get the monthly rent this unit deserves! BS! This is simply one of the worst business moves ever. Unless it’s winter time, you need to have at least 3 applications per week coming in or you are asking too much money. Appointments and walkthroughs are not applications, by the way. Look, lets compare some examples. In one you ask $1,000 for a unit and it sits vacant for 2 months before you rent it (so you’ve just lost $2,000 up front). In another you ask $1,000 and then lower the rent by $20 every week and it rents after 1 month for $920. In the third you almost had the price right and it rents for $960 after 2 weeks. The timespans below start the day you begin trying to rent out the property.
|$1,000 per month after a 2 month vacancy
|$920 per month after a 1 month vacancy, $940 in the second year
|$960 per month after a 2 week vacancy, $980 in the second year
|12 month timespan
|24 month timespan
|+$22,000 (no increase in rent)
|+$21,380 (assuming a $20/month increase after the first year)
|+$23,280 (assuming a $20/month increase after the first year)
So there you have it. By insisting on keeping with the higher rent, you’ve made yourself maybe an extra $620 over 2 years, and maybe you’ve lost yourself $1,280 over 2 years. Here are some problems with this.
- The rent you stubbornly cling to may not be the right amount and the unit may never rent.
- Lowering the rent regularly based on the number of applications you get guarantees the rent is competitive.
- Getting a high rent for the unit is not the most important thing – getting a worry-free tenant is the most important thing.
- You want to have multiple applications so that you can choose the best of them. If you have only one application you don’t have this luxury.
A higher rent may also mean you’re not able to raise the rent at the end of the lease.
6. Raise the rent regularly, but not too much.
You should raise the rent regularly to keep up with inflation and to keep up with other rents in the area. It would be a bad situation to have your unit be $200 less per month than the current market value for similar units. You would be losing money and when you tried to correct it the tenant would rightfully freak out.
The amount should be small, like $20 or 2% of the rent. Otherwise they may start looking for a new place to live. With regular, low increases they won’t look for a new place because moving is expensive and a huge pain. In this way you’ll also catch up to current market value if you’re not already there.
- Should you rent to government voucher (e.g. “section 8”) people?
Yes. These folks have their rent paid for them partially or completely by the government. Speaking from personal experience, people whose income comes from the government are often better tenants. This is because their income is pretty much guaranteed. For some reason they’ve always paid on time. As with any other tenants, look for red flags in personality.
Those are the things that I either never saw in any book or that I wish I had payed more attention to. When everything is managed well it can be a joy to own rental property, because YOU do it. You did it, and someone else is paying your mortgage for you, which is a great way to invest automatically. Happy renting!