There will be a day when even the best tenant moves on from your rental property for one reason or another. When this happens, you’ll want to make sure that you take the necessary precautions to bring in an other excellent tenant to pay rent on time, treat your rental as if they owned the property, and abide by the rules set up in the lease. While tenant screening is going to be your first line of defense, you will need to be prepared for the entire process. Take a look at some of the tips Landlordstation has put together below for finding the best tenant for your rental property:
Know How to Market – Your first step in finding that amazing tenant will be to cast a wide net to bring in as many applicants as possible. The more applicants you reach, the more people you have to choose from.
Be Careful How You Limit Yourself – There are certain limitations that will help protect your rental property and investment, but be careful not to limit yourself so badly that you miss out on great tenants that can’t apply.
Be Ready to Answer Questions – Applicants will have a list of questions for you as the landlord, and it’s best to have these answers prepared for them ahead of time. If you’re scrambling for even basic answers, they may move on to their next option.
Minimum Requirements – Don’t be afraid to set minimum requirements for your rental (as long as they are legal minimum requirements). If an applicant does not make enough money to pay rent, does not have a credit history that instills confidence in you that they will make payments on time, etc etc…you do not want to waste your time or theirs by going through the entire process just to decline them at the end.
Know How to Screen Your Tenants – Tenant screening will be your first line of defence against delinquent tenants. Tradelines can provide you a great deal of insight into their payment history and how reliable they have been in the past. Take this (combined with the other information you gather) and use it to form up an educated opinion on what type of tenant they may be for you if you were to accept them into your rental.
Verify References – References will help you gain a better idea about who your applicant is as a person, but you’ll want to make sure that they do not hand you a name or a phone number for a prior landlord or employer that really belongs to a friend that will simply tell you what the applicant wants you to hear.
Verify Income – You will need to have a set minimum income (or rent to income ratio) before you start to accept applications. Once the applicant provides their income to you, verifying that income is your next step.
Watch for Scams – Not every applicant that applies to your rental will be an honest person. You will need to be careful of scams from those that are often referred to as “professional tenants.” These people know how to work every angle to get into a rental and then stay as long as they can without paying rent.
Choosing Between Applicants – In the best case scenario you will have more than one applicant that fits what you are looking for in your next tenant. If so, you will need to have a way to choose between multiple qualified applicants.
Stand Out – Competition can be tough in certain cities, but competition against corporately owned rentals can feel like a losing battle. Make sure that you highlight what you can bring to the table that corporations often do not.
Investing in rental property is becoming increasingly popular across the United States. Not only is it a great way to grow your capital wealth, but it can also provide a source of passive income, which can go a long way towards helping you to achieve your financial goals.
However, the first steps into a life as a landlord can be treacherous. If you are not an expert in the world of rentals, mistakes are likely. And the problem is, they can also be very costly.
To help you avoid common rental investment mistakes, we have gathered a list of the top seven things that real landlords wish they had known before they got into the business. By banishing these assumptions, and learning from their experiences, you should be closer to making your purchase of rental property a huge success.
Know If the Seller Is Motivated
When it comes to buying a property, one often overlooked aspect is how motivated the seller is to actually sell their property. The Business Directory offers a definition of what a motivated seller is below:
A seller of property – for example, a residence or automobile – who is compelled to entertain reasonable offers from prospective buyers. The motivation may come from economic circumstances or a desire to abandon ownership. The buyer is often able to purchase the property at a reduced price or under favorable terms.
We are putting this at the top of the list because it could be the single most important factor in making a profit out of your investment.
Keep this in the front of your mind when choosing a property, and if the seller does not appear motivated to sell, then move on! Buying rental property is a business, so keep emotions at bay. Use your head and always aim to pay under the property’s market value.
Fixer Upper? Think Again
Properties in need of refurbishment can be very attractive to new investors as the asking price is typically a good deal lower than other properties on the market. Seeing a “great” deal can lead to making offers without taking the time to think them through properly. This is something numerous landlords wish they hadn’t done.
It is important not to be fixated on the low asking price without factoring in the cost of the refurbishment as well as the time it will take to get the property into a good livable state. Materials and labor can add up quickly and each day the contractors are working is another day the property is not earning rent.
So, don’t be caught unawares. Ask three trusted contractors for quotations on the work to be completed as well as estimated time periods before you make an offer. This will allow you to grasp the full picture before you move forward.
Choose Tenants Very Carefully
Once you have purchased your property, you will want to get someone inside, paying rent as soon as possible. Of course, that makes business sense. However, this process should not be rushed! Bad renters can be extremely expensive, causing your entire business plan to flop and ruining your investment. This is one mistake landlords look back on with pained expressions.
There are countless horror stories of tenants causing serious damage to property in a relatively short period of time. Taking these kinds of renters to court is a long and costly procedure, so it is best to avoid the situation altogether, if possible. Thoroughly screening potential tenants and finding responsible individuals who will take care of your rental purchase is a must.
It is recommended to start by setting base criteria, allowing you to screen interested applicants over the phone. This can include points such as past criminal convictions or bankruptcy.
For potential tenants that pass your initial test, an application form can be completed. This will provide you with further details and enable you to complete full credit and reference checks before you consider accepting them as a new tenant. It may seem like a waste of time, but finding a good tenant is a real blessing that will pay dividends in the future.
Ideally, you will have fewer hassles over the months, less wear and tear on the property and absolutely no late payments. If you are lucky enough to find great tenants, be sure to treat them well, possibly even promising to hold the rent at a set rate for the duration of their lease.
Any short-term losses you incur by doing this will be more than covered over time. Plus, it is beneficial to know you have somebody taking care of your investment.
Take Time With the Rental Agreement
Your rental or lease agreement is a critical document and deserves more attention than simply downloading and signing a template. A template can be a great place to start, but be sure to research any local state laws that may not be met by your contract.
Also, think about what is important to you, decide your boundaries on pets, how much notice you would like to receive when the tenant moves out, noise levels and even late fees.
The lease agreement is your one chance to set rules, so don’t rush. Be sure to ask an attorney to check over the document before signing it to ensure there are no loopholes.
Once you have set your rules, it is essential you stand by them from the beginning. Consider, for example, a tenant paying rent late one month when they have never done so before. If your reaction is “never mind, pay when you can,” you will be in a tricky position if they are late the following month.
The relationship between landlord and tenant is strictly business and it is easier if this is established immediately.
Plan for Property Tax Raises
Property taxes can shoot up, steeply, without notice. So be aware.
This mistake can be costly, especially if you have set a rental price without taking into account the added expense. Avoid stress and loss of money by researching as much as you can before you decide on your rental amount. The rules vary across states, so be careful here.
By failing to take property tax increases into account, you could be stuck with a shortfall every month for the duration of your lease … something that could be enough to cause the business to ultimately fail.
Build a Maintenance Savings Pot
The very point of your rental property is to be lived in, and as such, it is expected that maintenance will be required to keep it in a good condition. Wear and tear is normal. Unfortunately, maintenance issues often happen unexpectedly and the costs, especially with areas such as the roof, can mount up quickly. The best way to handle this issue is to keep a savings fund specifically for maintenance of your rental property. It is also wise to visit the property regularly in order to catch any niggles before they are too far gone – and more expensive – to repair. A good rule of thumb is to inspect your rental properties every three months in order to stay on top of the maintenance.
Fix any snags as soon as you notice them. This will keep your tenants happy and your investment safe.
Know Your Stuff
The underlying message that comes through loud and clear when asking landlords what they wished they had known before buying a rental property is to do your homework. Research is key with all aspects of buying for an investment. Research the location, the property type, the demographics, the seller’s motivation, the loan types, how much rent is being charged locally and so on. The law surrounding real estate can also be complex, especially when it comes to rentals, so be careful not to be caught off guard.
In addition, don’t be lazy when it comes to due diligence. Keep on top of everything. If this is too much for you, then seriously consider using an agent. There is certainly no shame in that and it may be one of the most sensible things you can do, especially when just starting out!
A real estate agent will know the movements of the industry, especially within a given location. They will be aware of trends and other happenings in the market as well as be privy to the inside scoop on properties that you may not be able to find out for yourself. They will also have contacts they can recommend to support you along the way. So, if the homework is too much, consider hiring someone to do it for you.
When it comes to navigating the real estate minefield and buying your first rental property, it is almost expected that mistakes will be made. While it can be great to learn this way, it can also be expensive and complicated to rectify. There are many instances of buyers deciding to flip their properties ASAP instead of continuing with becoming a landlord. But, by following these 7 suggestions, you might just escape a few of their biggest regrets and make your own venture a real success.
Are you considering buying or selling real estate in the near future? Then you should seriously consider using the services of a real estate agent.
You would be forgiven for thinking that buying property for rental is the new trend. So many people are turning to real estate as the answer to their financial woes and with good reason. It can be a solid way to build wealth as well as a passive stream of income, but as with all investments, it doesn’t come without risk. It is hard to understand the mixed signals that we see in the headlines. Take a look at this from Global Property Guide, for example.
“Housing demand is rising in the U.S., but house price-rises are slowing. Why this seeming contradiction? The answer is simple: Increased housing supply and more new-builds are coming onto the market, so demand pressures can more easily be met.”
The property market is complex and full of complicated processes along with plenty of jargon. And this is why an agent could be invaluable to you. If you are not an expert, it probably won’t be long before you feel out of your depth when going it alone. That is not ideal when you are purchasing a house – which is a huge commitment – and mistakes can cost a fortune!
Of course, selling rental property through an agent means that you will be paying them a commission, but their advice and expertise can save you in the long run. So, before you reject the idea of hiring a real estate agent (or Realtor) in exchange for going it alone, take a look at what you are dismissing.
Before we dive in, you should also be aware that not all real estate agents are Realtors. An agent with the title “Realtor” is part of the National Association of Realtors, which comes with a strict code of conduct. Take a look below for more detail:
A REALTOR® is a licensed real estate salesperson who belongs to the National Association of REALTORS®, the largest trade group in the country.
Every agent is not a REALTOR®, but most are. If you’re unsure, you can ask your agent if they’re a licensed REALTOR®. REALTORS® are held to a higher ethical standard than licensed agents and must adhere to a Code of Ethics.
REALTORS® should recognize that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment.
Such interests impose obligations beyond those of ordinary commerce. They impose grave social responsibility and a patriotic duty to which REALTORS® should dedicate themselves, and for which they should be diligent in preparing themselves. REALTORS®, therefore, are zealous to maintain and improve the standards of their calling and share with their fellow REALTORS® a common responsibility for its integrity and honor.
1. Network and Connections
One of the most valuable assets an agent can bring to your rental property transaction is people. An experienced real estate agent has built personal connections and relationships throughout their career. This network is one of the strengths enabling them to move quickly in the market and to make sound decisions. The real estate agent’s network can also be beneficial when it comes to selling property as they may assist with marketing and can bring more traffic to your property than you could without their assistance.
Their network should include a team of tried and trusted professionals across the industry, who are accustomed to working together. Their network may include attorneys, contractors and accountants for example – teamwork is the cornerstone of their success, as seen here:
“Keller Williams was designed to reward agents for working together. Based on the belief that we are all more successful if we strive toward a common goal rather than our individual interests, we're confident that every Keller Williams professional shares the vision of serving our clients at the very highest level possible.”
If you were going it alone, you would have to rely on your own judgment and build a team from scratch, which is not only time consuming but also risky.
2. Insider Knowledge
An experienced real estate agent will have an intimate knowledge of the rental property industry. You should choose someone who knows the location you seeking and who is used to dealing with the type of property you are interested in purchasing. The right agent will be aware of current trends due to their constant immersion in the market.
Plus, agents have access to hidden information and listings that are not publicly advertised, which means that they may be able to provide you with access to properties you may not have known about without their input. This knowledge is incredibly valuable when buying rental property, and it is usually far more in-depth than the research you could achieve on your own.
Additionally, Realtors and real estate agents are aware of the ethics, codes of conduct and unwritten rules of the industry … nuances you may not be aware of yourself. Opting for a real estate agent equates to putting yourself in the hands of an expert.
“Going above and beyond.
That's the sign of a RE/MAX agent. Buying or selling, you'll have a trusted pro guiding you every step of the way.”
3. Problem Solving
Realtors are familiar with the typical roadblocks that tend to crop up when buying and selling property, so they will be unfazed by situations that leave you reeling. By remaining level-headed and determined to close a deal, they could prove to be ideal at solving last minute or emergency issues that arise.
What would you do, for example, if you were faced with one of these problems chosen from Investopedia’s top 10 problems preventing closing a deal?
1. The termite inspection reveals extensive damage.
2. The appraisal wasn't high enough.
3. There are clouds on the title. (Any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful.)
4. The home inspection reveals major defects.
5. The seller backs out.
6. The home isn't insurable.
Your real estate agent knows!
4. Expert Communication
Realtors are fantastic communicators, expert negotiators and great sales people. This means you can rely on them for the tricky conversations that always come up in the buying or selling of real estate. Effective communication for sales is a skill that takes time to learn and develop, so if this is not a strong point of yours, a real estate agent could be essential.
“Your communication skills determine your chances of a sale – from your opening pitch to your closing statements. Developing your questioning, vocal and conversational skills will help you build on a strong first impression by gaining trust and establishing credibility.”
An agent will also be an ally to guide you through complicated and sometimes nerve-wracking scenarios such as dealing with counteroffers and rejections of offers. They will be able to recommend and implement strategies that can close a deal without losing money.
5. Time Saving
Often, people don’t anticipate that the buying and selling of property can be a full-time job, requiring attention around-the-clock. There are numerous people involved in the process, and it can often be difficult to meet all of their needs in a timely manner, especially if you are also juggling other commitments. This is, of course, the perfect time to turn to your real estate agent, who will work all hours of the day or night to service the deal.
While the initial thought of paying commission can be off-putting to sellers, the service provided by experienced Realtors can be invaluable to securing a great deal. For buyers and sellers alike, the amount of time and money saved by using an expert ally is considerable. They can guide you through the complicated processes, avoiding mistakes and making the entire transaction simple for you.
Most realtors have an extensive network of business connections they can call upon to help with closing your deal. These trusted experts in the industry will also work on your behalf. Agents have unparalleled insider knowledge of their housing market that you simply won’t be able to match with online research. They are also experts in problem solving, sales negotiation and communication, too.
These are five key benefits of using a real estate agent to buy or sell your property, and this is just a sampling of how they can assist. So, why not take a bit of time to find out how you could benefit from a Realtor before forging ahead alone?
In this post, we have identified the first 8 steps you should take as a landlord in order to ensure that purchasing your rental property is an investment success. Making the choice to purchase real estate is a great step towards taking charge of your financial future. But, it can be tricky to know where to start. However, it is vital to be prepared, as mistakes can be costly. The role of a landlord requires you to keep multiple balls in the air, and knowing the right place to start can be the difference between profit and loss in your venture.
1. Stay Within the Law
The first thing we must mention are the legal implications of renting a property. There are federal and state laws you must be aware of and these must govern your actions if you are looking to become a landlord.
These laws cover numerous aspects of buying to rent that you may not be aware of, including discrimination rules when it comes to choosing the tenants occupying your property. State laws may dictate eviction terms and even late fees as well so it is important to be aware of these before you begin drafting your tenancy agreement.
“Rental Property Law involves all law surrounding landlords and tenants, leases of immovable property, rental collection, evictions and advice on general disputes arising between all stakeholders in the rental property arena. It involves the dynamic relationship between a rental agent, a landlord and a tenant and is an intrinsic and often underestimated aspect of general property law and sales.”
Even in the event that you are expanding your own property to include rental space, you must check the legal stipulations, as permits may be required. Your insurance terms will also need to be amended, and you should check that the electrical circuitry and plumbing supplies are safe and able to take an additional load. Doing so will prevent potential negligence claims.
2. Calculate Rent Amount Carefully
Collecting rent is an essential component of being a landlord, and it can be tempting to look only at existing properties to calculate your rental amount. While it is true that setting your rent at slightly below the current average for your location should ensure that you are not left with a vacant property, this shouldn’t be the only factor in the decision.
Look closely at your costs, including the loan repayment amount, tax deductions, maintenance savings and insurance. You should also take account of the capitalization rate, which calculates the rate of return on an investment property using the expected annual rental income divided by the purchasing price. It is explained in more detail below by Property Metrics.
“The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.”
Once you have your figures in hand, you can make an informed decision about the rental rate which should prevent nasty surprises further down the line.
3. Screen Tenants Thoroughly
Hopefully, this is not news to you! It is absolutely crucial to screen every potential tenant, as bad tenants can prove to be far costlier than a vacant property! Check out the post we wrote on this topic here for additional details.
While renters are looking for the right property to rent, as a landlord and property manager, you are looking for the right tenant for your property.
You must treat every single potential tenant the same way, using the same checks and making your choice without discrimination. We recommend you conduct an initial screening over the phone, enabling you to state your base requirements such as no criminal records or bankruptcy. From there, an application form can be filled out by each potential tenant, allowing you to conduct more thorough checks on their background, criminal and credit checks as well as references.
It may feel like a hassle, but will save you a fortune in the long run!
4. Create a Robust Lease Agreement
Your rental agreement should be strong with no loopholes. This document is your protection against damage to your property, it is what gives you the power to enforce your landlord rules, and it should be created with care. Customizable templates can be a good place to start but be sure you are covered, and you are abiding by the laws in your state. We would advise an attorney familiar with your local laws review your document before you sign.
5. Make Sure Your Property Is Attractive
When choosing a rental property, you probably have a long list of requirements in your mind. The location, the basic condition, the number of bedrooms, etc., but you are unlikely to consider the finer details as someone living there.
As a landlord, it is easy to overlook the points that make a property attractive to tenants when you are in the mindset of making an investment. But, being aware of aspects such as privacy, space and sound proofing can mean far fewer complaints over the years.
6. Inspect Your Property Regularly
Once you have chosen a great tenant for your property and you have documented the property condition and inventory on their arrival, don’t think you can sit back and enjoy the rent rolling in. Landlords should protect their investment by regularly inspecting the rental property in order to ensure it is being kept in a good condition and to keep on top of any required maintenance. Include these regular inspections as a term of the lease so that the tenant is aware that this will be happening. Usually, every three months is enough to check on the condition.
These inspections will give you the opportunity to catch any issues before they become big problems, hopefully saving you money. And just in case you are wondering if routine repairs are really your problem, take a look at this Q&A from NOLO.com.
If a landlord doesn’t make required repairs, what are the consequences?
If a tenant requests repairs and the landlord or property manager doesn’t meet the habitability requirements, a tenant usually has several options, depending on the state. These options include:
•Making the necessary repairs and deducting the costs from the next month’s rent
•Withholding the entire rent until the problem is fixed
•Paying less rent while the rental remains substandard
•Calling the local building inspector, who can usually order the landlord to make repairs
•Moving out without responsibility for future rent, even in the middle of a lease.
7. Do Your Filing!
One secret to being a successful landlord is organization! You have legal and tax responsibilities, so do yourself a favor and keep everything straight and retain records of everything. As the following quote from Investopedia shows, rental income is classed as a common income source.
“Money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.
For example, suppose you rent out a house for $1,000 per month and you require that new tenants pay first and last month’s rent when they sign a lease. In this case, you’ll have to declare the $2,000 you received as income, even though a $1,000 of that $2,000 covers a period that might be several years in the future.”
Some people find it useful to set up a separate bank account for rent and hire an accountant to do the books, plan for taxes, etc. Often, landlords even go as far as using a separate phone line and P.O. Box number for any correspondence relating to their rental property in order to keep this part of their business separate from anything else.
8. Hire a Property Manager
When you are armed with the knowledge of these first steps, you should, hopefully, feel clear headed and empowered to move forward with your goals of becoming a landlord. But, if this has left you feeling more concerned than before you started reading, fear not. There is another option. A property manager can take care of all of your needs once you have purchased a property, from advertising for tenants, to sourcing and screening tenants, to the lease agreement, inspections and maintenance of your property.
They can handle rental collection, late payment and even eviction if necessary. The huge benefit of hiring a property manager is that your time will not be tied up in the administration of your investment. Take a look at the opening line of Ray White Management’s “Owner” page which shows they understand the goals of a landlord and know what is required to make that happen.
“Here at Ray White we recognize that your rental property is a significant investment and as such, you expect appropriate returns. In order to achieve this, you need to minimize your vacancies and maximize your rental yield.”
These 8 steps should provide you with a real insight into exactly what is required of you as a new landlord. Following the guidelines will keep you and your investment protected while avoiding costly and time-consuming mistakes. So, whether you decide to go it alone or hire a property manager, you should find that your rental property venture is a success.
The demand for rental property in the U.S. has been steadily growing since 2005, and this trend is set to continue, according to The Joint Center for Housing Studies of Harvard University (JCHS). It is no surprise that more people are deciding to become landlords, therefore, we are asking this question today: Is it worth it?
The JCHS shows us that on paper the rental business is sound in the medium term, at least.
JCHS reports that since 2005 the number of American households living in rental properties has risen by around nine million, the biggest increase on record. And over the last 10 years, the share of rental households in the U.S. has gone up from 31 to 37 percent to reach its highest level for more than 50 years.
The sharp rise in the number of rental properties in the U.S. has been particularly pronounced since 2010. Some 1.05 million new rental households have joined the market every year since then putting “the 2010s on track to be the strongest decade of renter growth ever recorded,” says JCHS.
Rental property is considered to be a sound way to build a passive income, which can be life changing. Rental income has allowed people to take early retirement and achieve wealth and financial freedom that is only a dream for others. Real estate has been outperforming stocks and real estate investment trusts (REITs) … so why are we questioning whether becoming a landlord is worth the effort?
It is just that. The effort involved is enormous. Becoming a landlord is expensive, with the minimum downpayment an average of 20% of the property value. It takes a great deal of hard work to enter the market, not to mention ongoing maintenance of the property and management of tenants. In this post, we are looking at the four key challenges that landlords face, in an effort to determine if the returns make it all worthwhile.
1. Finding the Right Property
One of the key elements that makes being a landlord worth it or not, starts before tenants are anywhere in the equation. The real money in the deal is made at the very beginning, when choosing the right property and negotiating a buying price.
With thorough research and the help of a trusted real estate agent, you should be able to find a property in a great location that is highly attractive to renters in the area. You should also know the maximum price you can purchase it for in order to make the investment worthwhile to you.
This is crucial to making money, in both the short term and also over the life of the investment. When looking at a “fixer-upper” be cautious, as the attractive price may not be a fair trade off in comparison to the time and cash required to convert it into a livable unit. You need to know the cost of materials and labor required to refurbish the property before you place an offer.
Jason Sherman, who owns a communications and marketing firm in Chicago, has bought eight fixer-uppers over the years and rented out most of them. He advises that if you’re going to buy one, bring in a contractor for a walk-through beforehand. “But you should also do your homework so you know what materials cost and how much time a project takes, and so you know if what your contractor is telling you is fair,” Sherman says.
Any house that you buy will need to be prepared as quickly and efficiently as possible, to make it clean and attractive to potential tenants, in order for you to start receiving rent.
2. Choosing Good Tenants
Many of the landlord nightmares that you hear revolve around a “bad” tenant, who either refused to pay rent, destroyed the property or has had to be forcibly removed. These situations are, fortunately, in the minority, but they do happen. Even tenants that consistently pay a few days late are enough to cause real hassle, so it is no surprise some landlords decide that renting their properties is simply not worth the effort.
Fortunately, there are simple steps you can take to vastly improve the likelihood of securing a good tenant. This does take a little more work, but good tenants are worth their weight in gold!
We recommend you screen all potential tenants thoroughly before deciding on who will live in your rental property. This should include credit and criminal checks, calling employers and past landlords and even using social media for screening. All potential tenants should be screened using the same criteria, and you should also be aware of the laws forbidding discrimination by landlords.
Once you have chosen a tenant, be sure the lease agreement includes a clause for late payment, so you are protected in the event that they do have financial difficulties. Charging a late payment fee is usually enough to deter tenants from making this a habit and establishes a business relationship from the beginning. If you fail to include this in your lease agreement, however, you leave yourself uncovered if a tenant does pay late. Take a look at this advice for tenants from NOLO.com.
“If your lease or rental agreement says nothing about late fees, your landlord may not impose one, no matter how reasonable it is.
Laws in a few states restrict the imposition of late fees, both by amount, and whether the landlord must wait until you’re a certain number of days late before he imposes them.
The fee should be within a certain percentage of your rent. Your landlord is always on shaky ground if the late charge exceeds 5% of the rent. That’s $38 on a $750-per-month rental. Of course, if the rent is extremely late—say, ten days—a higher late fee, such as 10% of the rent, might be reasonable.”
3. Maintaining the Property
The one thing about investing in a house rather than in stocks, is that stocks never get leaky roofs, nor dripping faucets. So does that make being a landlord too much like hard work?
This really depends on how much effort you put into regular maintenance. You should expect to spend money to keep your investment property in good working order, no matter if it is a new build, or an older home. You should calculate this into a monthly fund (more on that in a moment).
Houses need to be taken care of, and usually issues that are recognized quickly, can be rectified more simply. For this reason, it is advisable to conduct regular inspections on your rental properties, this way you can check the floors, doors, roof and anything else that may show early signs of trouble.
A savings fund will ensure you are prepared to fix any issues quickly, and, hopefully, expensive items such as the roof won’t need work too regularly. Your building’s inspection should give you an idea of what to expect. A guide on how much money to save for maintenance is offered here by About Money.com.
“One popular rule of thumb says that one percent of the purchase price of your home should be set aside each year for ongoing maintenance. For example, if your home cost $300,000, you should budget $3,000 per year for maintenance.
That doesn’t mean you’ll literally spend $3,000 every year. It just means that on average, over a span of a long time period (10 years or more), you’ll spend around $3,000 annually, according to this rule of thumb. Some years you’ll spend far more; a roof replacement, for instance, will cost $4,000-$8,000. Other years, you’ll spend far less.”
4. Managing Cash Flow
The final factor in deciding whether becoming a landlord is worth it or not is the profit that is made. Remember above all, that being a landlord is a business. Your main aim is to purchase income-producing property.
So, after the purchasing fees, mortgage payments, repairs, maintenance, taxes and other costs, there should be enough money from rental payments to make it worthwhile in the immediate term, as well as increase in property value to make the investment worthwhile in the long term. You can recruit the services of a financial advisor to help you make the right decisions, or try this cash flow calculator to see if your sums add up.
Being a landlord is hard work, without a doubt, but if you manage each aspect and are prepared along the way, the benefits can be worthwhile. You can use a real estate agent to assist you in the early days conducting research, and, if the stresses of tenants, with hidden pets, vandalism and late payments is too heavy a price to pay on your sanity, then it may be best to consider a property manager to handle that burden.
Investing in rental property can be expensive and stressful, but the long term gains can really make it worth the effort, and there are services to support you along the way if you need them.
According to Reuters, demand for rental property is remaining strong despite other challenges within the economy, which means that it continues to be attractive for individuals looking to invest.
“U.S. housing starts rose solidly in September (2015) on soaring demand for rental apartments, a sign that the housing market continues to steadily improve even as economic growth has slowed.
… It was the sixth straight month that starts were above 1 million units, pointing to a sustainable housing recovery.”
Many are becoming landlords with the hope to change their financial future, and open doors that would have otherwise remained firmly shut, thanks to rising debt and fewer employment opportunities.
The worrying trend that we are seeing though, is for some to consider investing in rental property as a “get rich-quick” scheme, and a way to earn an easy buck. That couldn’t be further from the truth. Becoming a landlord is a long-term investment that can be extremely lucrative, but only when it is treated as a business with a carefully crafted strategy for success. This post explains why such a business plan is important to your success as a landlord.
Identify Your Goals
Becoming a landlord is not a form of passive investment. As we have said, it must be treated like a business, and as such, you must identify your goals before you begin.
Knowing what you intend to achieve in the short, medium and long term will help to shape your decisions along the way. For example, you should decide if you are looking for a strong passive income enabling you to quit your job, or are you looking to break even while you slowly pay off the mortgage, for a long term gain?
Knowing what you want to achieve will determine the amount of time and energy you invest in the business, and will reveal if you need to develop any skills in yourself, or if you should hire an expert to support you from outside.
Keeping all emotion out of the planning process will help you to see your objectives clearly, and you will be able to plan your strategy from there. If you feel like you can skip this step, take a look at the following excerpt from Personal excellence.co, on people that don’t set goals.
“Have you ever encountered people who have a passive approach toward life? They don’t set any goals and they just live life on a meandering, day-to-day basis. You see them 1 year, 3 years, 5 years from now, and their lives are largely the same, save for a few changes that are really more the result of others’ actions and desires rather than their own.”
2. Assess the Costs
Once you know what you want to achieve with your rental business, you can start to assess the costs involved. When purchasing rental property, these costs fall into two categories: the upfront payments and the ongoing fees. Both need to be considered carefully.
Much of the long term profit of a rental property investment is determined at the point of purchase.
If you pay too much for a unit, you will lose out in the long run, so always aim to buy below market rate. When it comes to the mortgage, research the options and take time to choose and secure the loan, trying to negotiate the interest rate will also make a huge difference to the profitability of your investment.
Take into account that with a rental mortgage, you will typically be required to pay a downpayment of 20% of the property value, and also to prove that your income will cover the cost of your own home loan, as well as the rental property.
The ongoing costs to consider include taxes, insurance and maintenance, and these should be weighed against the rental income. Once you are able to determine the expected monthly profit per unit, you can ascertain how many units you will need to procure to achieve your landlord goals.
3. Calculate the Risks
As with all investments, there is real risk involved with buying real estate to rent; therefore, a good business strategy is to calculate these risks carefully. It might be sensible to start small, with a single apartment for instance, learning the risks as you go.
Learn everything you can about your “product,” by which we mean the type of home you want to purchase to rent and research the area intimately.
You can even go as far as to pose as a potential tenant and visit rental properties on the market to discover what is available and for how much. Become an expert in the demographics of your chosen area, so that you can purchase the kind of property that appeals to the renters living there. Better still, enlist the skills of an experienced real estate agent who already knows more about these details than you could imagine.
We have all heard the overused phrase “location, location, location.” In fact, it is widely believed to be the single most important aspect about investing in real estate. However, it has been used so frequently that the importance has started to become watered down. The reality is that without a good location, the best numbers and the best data will quickly become irrelevant when buyers or renters show no interest in the property. [source]
4. Attract the Right Customer
Once you have decided on your location and property type, you have probably narrowed your pool of potential tenants to a select demographic, which is perfect. But you can’t leave it there. You need to attract and choose your tenant carefully. This will start with the rental price.
The amount of rent you charge should be chosen after considering your monthly costs and expenses, taking account of other properties on the rental market.
You want to remain attractive to tenants, without losing your monthly income. If it is possible to position yourself slightly below the average in the area, you should guard against expensive vacancy, but that is not always possible. Compare your initial goals with how much you hoped to earn as profit to keep you on track when making these decisions.
Screen your potential tenants thoroughly, using the same process for each. By checking credit and criminal ratings, as well as following up on references, you have the best opportunity of choosing someone that is reliable and responsible enough to pay their rent on time and take care of your investment.
If you do find a good tenant, then do everything in your power to keep them happy! They are your customer after all, and a good tenant will save you stress and money over the months.
“The essence of an investment in real estate is a good tenant,” said James McClelland of the Chicago-based Mack Cos., perhaps the largest owner-manager of single-family rental properties in the Midwest. “A good tenant in a bad location is better than a bad tenant in a good location.” Market Watch
5. Build a Solid Team
If all this sounds like hard work, then you are right! It is serious hard work. That is why a great part of your strategy could be to build a strong team around you, of trusted professionals across the industry that can assist you.
A real estate agent can be invaluable in supporting the purchase of your rental property, and can connect you with their network. Your team can include people in areas that you lack skills and expertise, and may include the following: an attorney, contractor, accountant, mortgage broker and even a property manager, that can handle ongoing inspections and tenant concerns. It is prudent to choose professionals based on personal recommendations, and keeping your business head, move on when relationships are not positively working for you. Once established, a team can save you time, hassle and money, so they are usually considered worth the cost of using their services.
“Engaging the services of a property manager is about more than no longer having to worry about the fine details. It also means that the big picture should be taken care of as well. And in this case, that means ensuring your properties perform to their utmost potential.” [source]
Becoming a landlord is simply a different form of developing a business, and as a result, it is essential to create a business plan. This article identified five of the main aspects to consider when starting out in the rental property business. We have covered everything from setting solid goals, calculating the costs and risks of rentals, keeping the customer happy and building a team. Following these guidelines will keep your business strategy clear in your mind, giving you the best chance of success.
It’s that time again: the end of your tenant’s lease is coming up and you’re looking at your options. They’ve been great, you hope they stay on, but rental prices are on the rise all around you. Should you raise their rent too? If so, how much? There’s a fine balance between making sure that you are taking care of your tenants so that the good ones will stay with you and making sure that you’re earning a profit in your business.
Before you raise the rent, there are a few questions you should ask yourself:
How does the rental income compare to your mortgage? If you’ve taken out a mortgage on your real estate investment, there will be a percentage of the rent that you use every month to pay on that. Part of deciding if it’s time to raise the rent or not will be taking a careful look at your rent versus mortgage ratio, which will include understanding the details of your mortgage as well as adjusting your ROI expectations.
Do you need to raise the rent? You will need to find a balance between what you need to turn a profit in your business and encouraging your good tenants to stay. Part of that is being aware of what other landlords in the area are charging. If you raise your rent above what they have similar properties set at, your tenant may feel it’s a better option to move, leaving you with the turn around and possibly even a vacancy for a length of time.
Is it legal for you to raise the rent?
What are your tenant’s rights? Tenants have certain rights when it comes to rent increases. You’ll want to make sure to check your local laws and have a thorough understanding so that you approach the situation in the best way possible.
What does the law say about Section 8 rent increases? If you’ve decided to open your rental up to Section 8 tenants, you may find a few more restrictions than you would have had otherwise. Like with many things, there are pros and cons to choosing Section 8 tenants, but you’ll want to make sure that you follow the law when it comes to raising rent on these tenants.
Can you raise the rent on a disabled tenant?Once again, this may depend on the location of your rental, but some local laws will limit how much you may raise the rent on a disabled tenant due to the fact that they are likely on a fixed income.
What if you decide to raise the rent, then what?
Knowing it’s time: There are a variety of reasons why you may wish to raise the rent on your rental property, including keeping up with rising costs. If you choose to, you should make sure that your timing is right and that you stay on task when it comes to letting your tenants know about the change.
Writing a rent increase letter:Once you’ve made the decision to raise your tenant’s rent, you’ll need to let them know. You should provide this information through a written letter before you give them the option to renew their lease so that they have time to consider their options.
Tips for negotiating a rent increase: When you choose to increase the rent, there’s a chance that the tenant may wish to negotiate that increase. It’s good to know the type of negotiations that they may try and if you’re willing or even able to budge on anything for them.
Helping to take the edge off the increase: If you have a great tenant that you don’t want to lose, but costs and the local market are requiring you to raise rent, you may think about offering them something extra if they choose to sign on for another year with you. This helps to show them that, even though you feel like it’s necessary to raise the rent, you still care about them and hope that they’ll stay.
Additional options: In addition to the above options that you can offer to your tenant to encourage them to stay in your rental, you may think about reaching out to local businesses to see if they are willing to work with you. You can offer discounted prices that will last throughout the year, rather than a one-time gift.
Running a rental business can be difficult. There are many moving parts and often it feels like not enough time in the day to handle them as you should. One thing you can do to elevate some of the pressure is to cut costs without cutting efficiency. That can come in many ways, so LandlordStation has gathered a few tips for you below to help you find the best place to focus on so that you can start saving money.
Save on Taxes – If you forget or don’t know what to deduct from your taxes as a landlord, you’re throwing money away. There’s a set of deductions that landlords can take advantage of that could save you quite a bit each year.
Save on Insurance Premiums – Your rental will need to be insured, but you’ll want to make sure that you’re not paying more than you should be for what you’re receiving when it comes to your monthly premiums.
Save on Electricity – Some landlords cover utilities, some do not, but if you are handling even part of the electrical bill for your rental, you’ll want to make sure you find the best deal available.
Save on Landscaping Costs – Certain locations have bad droughts at during the warmer months of the year and water is rationed. Landscaping that does not require a great deal of water to keep up will help you cut down on watering expenses.
Save on Upgrades – If you’re planning on upgrading your rental anyway, you may want to look into certain eco-friendly upgrades that can save you money in the long run.
Save on Maintenance
Preventive – Maintenance emergencies can be expensive, and while you should always have some money saved back for those occasions, you can help to save that money by keeping up with preventive maintenance.
Tips – If you keep up on small maintenance issues you won’t find yourself having to do major repairs nearly as often. A touch-up job here may keep your paint looking fresh longer or a carpet cleaning could prolong the life of the carpet in your rental.
Using Daily Sites to Cut Costs – Sometimes saving money means getting creative. Instead of paying top price for quality work, you may want to check daily deal sites to find coupons so that you can receive top quality work for a fraction of the cost.
Promoting safety in your rental will help protect both your investment and your reputation. If your tenants are committing crimes in your rental, it could potentially make you liable, depending on the type of crime. While it can be difficult to make that judgement call before really getting to know them, there are a few ways to protect yourself against criminal activity and the legal situations that that can bring about.
Screen Every Incoming Tenant – A thorough tenant screening process is one of the best defences that you can put into place for your rental business. The tenant(s) that you accept into your property will have full access to it without a great deal of supervision, so it is imperative that you know who these people are to the best of your ability. A credit, criminal, and eviction report may not provide 100% certainty, but it will give you insight into how they approach debts owed and if they have had any prior run-ins with the legal system.
Know the Limitations of a Background Check – Everything in this world has a limitation, but the limitations of a criminal background check can be very frustrating to a landlord trying to protect their investment from people that might cause trouble if accepted as a tenant. There is no central database for these records, which makes collecting them difficult in some cases. Records may not make it into a search or they may take a bit longer for the county to provide them, but part of protecting your property will come with understanding how to work around these limitations.
Reasons Why a Record May Not Show – There are valid reasons why a record may not show up in a traditional background search. Part of protecting yourself against surprises down the road will come through understanding the limitations and finding ways to work around them. This article provides a few additional reasons to the above article.
Accepting a Tenant With a Record – While you should always have policies in place as to what you will and will not accept in terms of credit, criminal, and eviction history, there are certain considerations you should make before you simply throw an applicant with a criminal background out.
HUD Guidelines for Criminal Records – The US Department of Housing and Urban Development issued a set of guidelines within the last year that may affect how you approach applicants with a criminal record. While those with a criminal record are not considered a protected class, per se, HUD’s reasoning behind the new changes is that denying someone based entirely on their criminal record may lead to discrimination against race or color.
Illegal Activity Warning Signs – As previously noted, criminal background checks may be missing information, so you’ll want to make sure to keep an eye on your rental property. You may have accepted the best tenants you’ll ever have, but if you start seeing warning signs of illegal activity, you’ll want to at least take a closer look.
Spotting Drug Dealing/ Manufacturing Signs – Drug dealing and manufacturing can be a very dangerous brand of criminal activity that you will want to watch out for. If your rental gains a reputation for drug trafficking, it may be difficult to rent it again once you get the delinquent tenant out.
Tenant Mediation – As a landlord you may often have a tenant come to you with a complaint about another. If it’s something small, or a complaint about non-compliance with the lease, you should have a set of policies that direct how to handle the situation. If the complaint is criminal in nature, you’ll need to know how to handle it with the utmost care.
Evicting Problem Tenants – One reason that you may choose to go through the eviction process is to handle a tenant that has broken the lease that you signed with them. This could come in the form of non-payment of rent or it could be that you’ve discovered illegal activity in your rental. If you decide to pursue and eviction, be careful that you take all of the necessary legal steps.
Promoting Safety in the Rental – Part of protecting your rental will be to promote safety with your tenants. Criminal activity inside the apartment or house is not the only concern. You’ll want to make sure that law-abiding tenants living within your rental feel safe in their home as well.
Landlords, we understand how long it can take to choose your rental location, find your ideal unit, organize the funding and prepare the place so it’s ready for tenants … every step of that process costs you money. We realize your goal is to have someone living in your unit as soon as possible! Of course you want to start immediately receiving rent, so you can start to earn money on your investment.
However, we’re here to warn you to not rush the last step: finding a tenant. Choosing the “wrong” tenant can be a devastating blow to your rental business and can cause enormous damage to your rental property!
Unfortunately, the worst case scenarios – such as non-paying tenants who don’t take care of your property and refuse to leave – do happen! While it is impossible to guarantee you can always avoid this situation, careful and thorough tenant screening can go a long way in helping to find a solid tenant, allowing you to protect your investment, as much as possible.
The only problem is that screening tenants is a legal minefield. Many landlords inadvertently break housing laws and expose themselves to potentially crippling legal action. This blog post has been created to help you navigate the law governing tenant screening so that you can find the right person to live in your rental unit, without breaking the rules. Here are the do’s and don’ts you need to know.
Do Investigate Housing Laws on Rental Limits
Before you begin advertising and screening potential tenants for your rental property, take valuable time to research the specific laws in your state. There may be restrictions on the rent you can charge, the security deposit you can ask for and, certainly, on the screening criteria you can use to decide on the successful tenant to move into your property. To learn the rights of tenants in your state, click on this link.
Do Decide a “Rent to Income” Ratio
When you’re ready to advertise for tenants, decide upfront on your basic requirements. This will ensure you can weed out the majority of callers immediately without investing too much time into the process. A useful first screening determinant is a rent to income ratio. Many landlords decide that their tenants must be earning at least three times the rental amount.
Do Conduct Initial Screening Over the Phone
When you advertise your vacancy, ask interested candidates to call. This will allow you to discuss your basic requirements and conduct an initial screening quickly and efficiently. This way you won’t waste their time and you will also save yourself hassle, too.
Don’t Ask Discriminatory Questions
When screening potential tenants, you must always be aware of questions that may be discriminatory. You may not refuse to rent your property based on any of the following factors: race, color, national origin, religion, sex, familial status or handicap. These are known as the protected classes.
Do Meet the Prospective Tenant
Once you have conducted your initial screening, it’s beneficial to meet with the prospective tenant at the property. This gives them an opportunity to see if the property is suitable for their needs and also gives you an insight into the kind of person they are, too. Be aware of answering questions such as, “Is the area safe?”
Anything you reply here could be considered misleading. In this instance, it would be better to suggest that the individual researches police statistics and visits the location at various times to make their own decision.
Do Request an Application Fee and Permissions
If both the potential tenant and you are satisfied to proceed with the application following the meeting, send an application form, with requests for permission to complete background checks, and also collect an application fee. This will give you everything you need to start the full screening process.
Do Follow a Set Process Every Time
Be sure you stick to the same process every time, for every single potential tenant and keep records of your findings. This keeps the application process fair and consistent. It protects you in the event of legal action brought about by the potential client, and it also helps you to compare results from different individuals.
Do Complete a Credit Check
A credit check will provide you insight into the financial responsibility and spending habits of a potential tenant. You’ll learn their history of late payments as well as any debts they may have.
Do Complete a Criminal Check
You want to keep your property and other tenants safe from harm, so be sure to conduct a search of any convictions over the last seven years.
Do Check Employer References
Employer references are important, as you want to know that your potential tenant is able to pay their rent on time every month. A steady income is a good indication of reliability here. Look for three years employment history and the current wage. It is useful to phone the current employer for this information.
Do Check Landlord References
When it comes to landlord references, be aware of the potential for false details to be given. Try to use specific information from the application form to verify the accuracy. Ask for information about the duration of the lease and whether the payments were made on time each month.
Do Check Personal References
With personal references, there will virtually always be an element of bias, as the prospective tenant will provide the contact information of family and friends. Don’t let this put you off however, we recommend you still follow up and make these calls, as the information can be useful.
Do Use Social Media
Social media can be a very useful tool for landlords to use when screening potential clients. It can be used to verify the general details that have been provided on the application form. It is also a great way to determine if the individual has pets.
Always keep in mind that information shared on social media may not be true, and, above all, be very careful of breaching the potential tenant’s privacy. Any information that you inadvertently discover regarding protected classes may not be used at all in your decision making process.
Don’t Fall for Emotional Stories
When deciding on the right tenant to move into your rental property, make sure that gut instinct or tugs on your heart strings aren’t playing a part. Choosing the best tenant is essential for the smooth running of your business, so it’s imperative you have a sound basis behind your final decisions.
Do Take Full Deposit
When you decide on the right tenant and agree on a date for them to move into the property, don’t be tempted to accept anything less than the full deposit and full first month’s rent before they enter the property.
Don’t Hand Over Keys Until Everything Is in Place
Only once the full process is complete, contracts are signed and money is in your account, should you hand over the keys to the property.
Every landlord wants to secure tenant that will pay their rent on time, every time and respect their property; therefore, it is essential to thoroughly screen each prospective tenant. This can take time, but it’s worthwhile, if you want to avoid potential future legal action and hassles with eviction. At LandlordStation, we offer a quick and easy online tenant screening service saving you a tremendous amount of the hard work. The whole process can be started with just an email address, and we take it from there … it’s that simple.
Your prospective tenant can input their sensitive personal data without you needing to get involved. Once the details have been given, we conduct checks on the following:
A full report is then sent to you, so you can make a quick informed decision to approve or reject from there. It can be as simple as that to find great tenants, protect your investment and stay within the law!