Landlording is a tough business, which some people are simply not cut out for. However, successful landlords have factors in common. Here are Seven Rules they tend to follow:
1. Screen Your Tenants:
If the three most important factors in real estate are location, location, location, the three most important factors in landlording are, Screen your tenants, Screen your tenants, Screen your tenants.
Good tenants pay the rent every month and take care of the house. Bad tenants don’t pay rent and destroy the house. That can cost thousands of dollars in damage, lost rent and eviction fees.
Conducting a thorough background check is beyond the scope of this article, but there’s lots of information available thanks to my friend with a one and 1,000 zeros. Please educate yourself and know the ins and outs.
You may want to consider a tenant placement service that will conduct background checks and supply you with reports. You still have the right to accept or reject any applicant. They typically charge the equivalent of one month’s rent for this service.
It is vital to verify employment history and rental history of every perspective tenant. Unfortunately there are many con artists out there who prey on inexperienced landlords (and greedy landlords). They will move into your house and stay there, without ever paying another dime, until they have dragged the process through the court process and have exhausted all legal options, which can months if not years.
Applicants will sometimes say they work somewhere they don’t really work, or say they live somewhere they don’t really live. They may give the phone number of a friend who will pretend to be their landlord or employer. Always verify the phone number to the landlord or place of employment independently instead of relying on the number provided.
It is essential to visit the perspective tenants’ current residence. First, you will be able to verify they actually live where they say they live. Second, you will see whether they keep the place clean and neat. Some applicants may claim to be living with their parents, in which case you have no landlord reference. This may be true, but do you want to take that chance? They may in reality be in the process of being evicted from their current home.
2. Charge Slightly Below Market Rent
This may seem counterintuitive and some landlords disagree, but the reasoning is that good tenants can afford to be selective because they have options. They know they have decent income, references, rental histories, etc …, and will choose the best home at the best value. Bad tenants have few options and will take whoever will take them -- or whoever they can trick into taking them! High rent is not an issue, especially if they’re not going to pay anyway.
3. Take care of repairs promptly
You should offer a quality product (your rental property) and try to keep it that way. Tell your tenants you want them to notify you when something breaks. Repairs can end up costing a lot more if not tended to. For example, a leaky pipe can cause mold, floor and wall damage, etc … if not taken care of promptly.
Of course you don’t want tenants calling for trivial or unnecessary reasons, but if that is the case you can deal with it by telling them you’re going to start charging for service calls that are either unnecessary or not your responsibility as defined in the lease.
If you are handy you may want to take care of some repairs yourself. Repairmen who are good and affordable are hard to find. Good property managers are also hard to find, so I strongly recommend managing your properties yourself. You will have to collect the rent every month and take repair calls. When there is a problem you can visit the property and decide if it’s something you will do or hire out.
If you do the repairs yourself always be respectful of tenants’ privacy and possessions. Ask their permission before entering rooms and be careful of their furniture, clothes and other items. And clean the work area properly when you’re finished.
4. Make a Policy Then Stick to it
It can be difficult to deal with tenants if you don’t like confrontation or telling people no. If you tell them it’s company policy it will make life much easier.
“We don’t allow pets. It’s company policy.”
“We can’t take a personal check for the first month and security deposit. It’s company policy. However, once you move in you can pay by personal check.”
5. Don’t Be Too Nice
You are their landlord – not their friend -- and this is a business. Don’t make their problems your problems. They may want you to feel sorry for them because they’ve fallen on hard times and can’t pay the rent. But you still have to pay the mortgage.
It is also a good idea to identify yourself as the property manager – not the owner. (If you own the house in a company name, such as an LLC, then it’s the truth). The “owner” has control and discretion, you as a property manager do not (or at least not as much). It also gives you the ability to “pass the buck.” For example if the tenant is late with the rent and you want to get the eviction process started (which you should), you can say it’s not up to you and it’s company policy. You may even run into the amusing scenario in which tenants tell you what they would like to do if they ever get their hands on the owner.
6. Don’t Rent in the Worst Neighborhoods
Most people who live in these neighborhoods are honest and hardworking, and some landlords deal successfully there. But they usually have a high degree of experience, so it’s not generally a good way to start for beginners.
Houses in these neighborhoods are cheap and have high rent-to-price ratios, but there are reasons: You’re more likely to have problems collecting rent, and you’re likely to have expensive repairs since the housing stock is usuall old and neglected (they are mostly rentals with which previous landlords have done the bare minimum in an attempt to maximize profits.
If you are considering Section 8 (which you should), keep in mind that people with Section 8 generally do not choose to live in bad neighborhoods. They can afford to be picky because they have vouchers – i.e. guaranteed money – and many landlords actively seek tenants with Section 8.
7. Have a Small Nut
If you pay too much for a house or pay too much in renovations, your mortgage and other expenses are going to be too high. Smart landlords buy cheap, and pay off the loan as soon as possible, so that they own the house free and clear. If you can buy with cash, even better because there’s no loan to begin with.
The rent must far exceed total expenses, which consists of mortgage payments, property taxes, repair expenses, etc …
In conclusion experienced landlords buy smart, manage their properties and their business carefully, and enjoy the rewards.