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Do you envision yourself as a landlord, sitting back and collecting rent every month with little effort or hard work? It turns out there may be a few things you should consider before jumping in.
Becoming a landlord requires not only financial resources but also managerial talent, attention to detail and, often, a healthy portion of sweat equity. There may be months when emergency repairs will eat up the potential profits making this role much more than just collecting rent.
On the other hand, 37% of U.S. households live in rentals, according to the National Multifamily Housing Council.
To set yourself on your way, here are 10 valuable tips for becoming a successful landlord:
Assess your temperament
“The biggest common mistake landlords make is being too nice,” says Kathy Hertzog, president of LandlordAssociation.org. “You have to look at your rental property as a business. If someone says they can’t pay rent today and want you to accept a late payment or partial payment, you are setting a precedent that will make it difficult if you ever have to evict them and go to court.”
Don’t underestimate the rigors
Before becoming a landlord, a frequent mistake is assuming that being a landlord will be easy work. Often, that is not the case. There will be repairs that pop up that need immediate attention, such as a toilet is overflowing onto an apartment floor in the middle of the night. That’s not something you can, nor want to, put off until the morning.
There is, however, a way to minimize interaction with tenants. Hire a property manager, says Eric Wetherington, president-elect of the National Association of Residential Property Managers. “The investment in hiring a professional manager is typically covered within 18 months of owning a rental, in our experience,” he said. It’s an added expense, nonetheless, and needs to be factored into the total cost of having a rental property and the impact to your profit.
Know the rental laws
Once you’ve made the decision to become a landlord, know the federal, state and local rules, regulations and building codes that pertain to rentals. For example, federal laws call for making “reasonable accommodations in rules, policies, practices or services if it is necessary for the disabled tenant to use the housing.” If the tenant were to become blind, for example, he or she would be allowed to have a guide dog, despite a no pet policy at the rental. Most states have a department of housing, Hertzog says, and at the local level there’s your municipality’s administration office. Start there, Hertzog says. Call and ask to speak to the person in the department that handles rules and regulations for rental properties.
Mr. and Ms. Fix-It
Armed with knowledge about rules and regulations, a landlord can move on to making appropriate repairs and improvements to the rental. The most important aspects to pay attention to are the ones that make a residence that’s habitable and safe.
“One of the most common mistakes is thinking you can repair something yourself when you really shouldn’t,” Hertzog says. “That can be a really costly mistake.” In fact, says Wetherington, some regulations require licensed specialists like electricians to be used when performing work on rentals.
Covering your rental, covering you
If the property is separate from the landlord’s primary residence, he or she needs to inquire about landlord insurance. If the rental is on the same property as the primary residence, then a discussion with the insurance agent will center on the various options available for the landlord. Make sure you’re clear on the coverage needed to fit your situation.
In addition to surveying the market for comparable properties and rents in your market, consider whether the property is carrying a mortgage or has been paid off. If the market will bear more than enough to cover the mortgage, a landlord would be wise to set aside 20% of the rent each month to cover future maintenance on the property. Often, landlords fail to take such preventative measures and may be caught off guard when unexpected repairs arise, Hertzog said.
Finding the right tenant
Landlords can go beyond typical advertising efforts including Craigslist, newspaper ads or posting “For Rent” signs in the rental’s window. A landlord in a college town may want to place ads through a local university’s housing office to attract college students or faculty. Medical facilities often have an office searching for housing for hospital staff and it may be worth your effort to contact them and let them know of your available rental.
Know your tenant
A landlord should always conduct a background and credit check. The background check should involve calling previous landlords (be aware that the current landlord might provide glowing references just to get a difficult tenant to move).
Additionally, you ideally want a tenant whose income won’t be stretched every month to pay rent. Rent should only comprise of a third of your tenant’s monthly income. Keep in mind that prospective tenants who are denied housing solely based on their credit report are required under federal law to receive a letter stating their application was turned down for that reason.
Drafting a lease
There are a number of online services that create a customized lease based for the state where the rental is located, such as DIY Landlord Forms to ezLandlordForms. Important items to include in a lease are clear statements about who is responsible for various tasks, such as maintaining the yard to ensuring upkeep of appliances, Hertzog says. These forms often have a clause that can be included where tenants are required to obtain renter’s insurance, which is a smart move since your homeowners or landlord insurance will not cover the tenant’s personal belongings.
It’s imperative to do a move-in inspection, ideally taking photos of the rental’s condition, as well as a move-out inspection, Hertzog says. It’s the only way you’ll know if the tenant has damaged things in the apartment for which part of his security deposit can be used to make repairs.
Once you’re ready to take that next step to become a landlord, take a moment to learn how much insurance coverage you will need for the property you plan to rent.