13 Tips for New Landlords – Real Estate Investing
As a new real estate investor, you may have bought a property that you want to rent out or you may be thinking of purchasing one to earn some passive income. After buying the property and renting it out, you will become a landlord. Being a landlord can be challenging and rewarding too.
There are many responsibilities of a landlord. He/she has to look after the property, find tenants for the property, screen prospective tenants, and create rental agreements. Once the agreement is signed, the landlord has to be prompt in collecting rents every month.
With so many things to take care of, it will help if you know some of the best practices on being a landlord. The following tips are specially compiled for new landlords who are about to get their feet wet and want a head start in being able to fulfill their tasks in the best possible way:
#1: Run a rental property like a business of its own
Managing a single rental property might not be your full-time job. You may be a part-time real estate investor who wants to earn some extra income on the side.
However, do not let that fool you into thinking that managing a property is going to be easy. You have to treat each rental property as an independent business.
It is a business which requires time, effort, and money. In return for all those inputs, you create a new source of income for yourself.
Before you begin any business, you need to plan for it. Real estate is the same. You will have to check the location of your prospective property.
Is it a safe neighborhood? How are the roads leading up to the property? What condition is the property in? How much repair/maintenance work will it need?
Make sure that the smoke detectors work and all the vents are free of debris, moisture or mold. Check external and internal pipes for combustion. All utilities should be functional. Comply with the building code.
You will also have to brush up on the local, state, and federal laws related to housing.
After all, you do not want to get into legal trouble with your first investment. You also want to build a good reputation by being a transparent business that complies with the law.
Next, you should get landlord insurance. Incidents like theft or a pipe burst are unforeseen events. You want to protect yourself from any loss arising from such events.
Losses can run into thousands of dollars if a tenant decides to sue the landlord. Hence, getting insurance and protecting yourself from accidents and liability claims is critical.
With the product (property) of your business ready, you now need to think about customers. In this case, they will be tenants.
You will have to come up with metrics on how you want to evaluate prospective tenants and then screen them to select the best tenant who you want to let out your property.
While managing a property, you will have to keep track of all the finances. You will also have to be proactive in maintaining the property in good condition.
If anything breaks down, then you should have a go-to person ready to fix the problem. Furnaces can break, tenants can lock themselves out, faucets can leak, things happen.
Contacts of plumbers, locksmiths, and contractors should be ready whenever something needs to be fixed immediately. These professionals are like the employees of a business or contract workers of your business.
#2: Use technology to find tenants
Gone are the days when you were dependent on your broker to find tenants. While brokers still play a big part in trading properties and finding tenants, the landlord can now initiate the process by going online.
A large number of people now search online for rental housing. You should, therefore, list your property online so that prospective tenants can find it.
Listing your property online costs almost no money and is very cost effective. You can use websites like Trulia and Craigslist.
Make sure you include pictures, price information, address, the number of rooms/bathrooms, the amenities list, and neighborhood information when you post your listing.
Tenants want to know how close your property is to areas of interest, what your property looks like from the inside, and whether the property is within their budget. Tenants need to visualize the property and the transaction before they get motivated to meet you in person.
The more clear and detailed your listing, the higher the likelihood that you will meet tenants who are credible and prompt in paying their rent on time.
#3: Set the rental price correctly
Rental prices are market driven. You must conduct research to find out what the rental prices are in your property’s neighborhood.
Websites like Rentometer can guide you in figuring out the rental values for a particular location. If you price your rental value too high, then it can lead to a vacant property.
If you price your rental value too low, then it can mean making less income and leaving money on the table.
While rental prices cannot be controlled by you, you must think about the rentals in relation to the costs of owning and maintaining the rental property.
You have to think about fixed costs like insurance, taxes, mortgage payments, etc. and variable costs like repairs and improvements. The rent minus all of these expenses will ultimately be your net income from the property.
It is what you will get in your hands after every expense is taken away. If you hire a property manager, then the manager’s salary will be an additional expense to consider.
#4: Require prospects to submit an application
Set up an online application form or have prospective tenants fill out a physical application form. Collecting information will allow you to conduct the screening process outlined above.
It is important to stay organized with all of that information as well. Application forms allow you to achieve both of these things.
A good application form should ask for the tenant’s name, address, employer information, income levels, the reason for seeking accommodation in your property, and any previous landlord references if possible.
You basically want to ask for information which will allow you to screen the prospective tenant based on the metrics that you defined for filtering out the good tenants from the average ones.
#5: Follow a process for screening tenants
Every landlord wants high-quality tenants. Landlords want their tenants to pay rents on time, have a good credit history, and aren’t involved in criminal activities. Finding such tenants should be the goal of every landlord.
In order to find tenants with these traits, a landlord has to design a screening process which can filter out good quality tenants from multiple applications.
Once the metrics are finalized and the process is designed, it is important to diligently follow that process for every single application that is received by the landlord.
It might take some effort to go through the routine of vetting and screening an applicant, but the results will be worth the effort.
#6: Perform a credit check
A credit check is done to verify the financial credibility of a tenant. A bad credit record indicates financial imprudence.
When performing a credit check, watch out for high levels of debt, outstanding payments, any past instances of eviction, and bankruptcies.
You want tenants who can demonstrate that they will be able and willing to pay rents on time. A good tenant will treat you and your property with respect.
Always remember that no matter how good the tenant is, even as a person, and no matter how charming his/her personality, credit record is to be given priority over all other “soft” factors.
Ultimately, it is about financial responsibility.
#7: Execute a written rental agreement
A written agreement is the most practical way to communicate your expectations and lay down the rules of engagement with a tenant.
A rental agreement can also be used as an important instrument in any legal proceedings. While some kinds of oral agreements are legally acceptable, there is no substitute for a proper written agreement.
Besides, oral agreements can lead to instances of “I don’t remember agreeing to that”. With a written agreement, everything is clear and transparent and there is little scope for confusion.
You must work with a lawyer to draft any written agreement. The agreement is to be made keeping state and federal laws in mind. The clauses in the agreement have to comply with all relevant laws.
The agreement should be very specific and not ambiguous. Actions which are prohibited need to be specified, consequences of non-compliance need to be clearly mentioned, and timelines need to be specific as well.
#8: Require tenants to take renter’s insurance
Renter’s insurance does not cost very much. However, the benefits are disproportionate. We live in a world where lawsuits are quite common.
If any belongings of the tenants are damaged, then they could be encouraged to file a lawsuit against you. To protect yourself from such liabilities, it is important to ask tenants to get a renter’s insurance.
Most of the tenants should not have a problem getting one because it does not cost a lot to get such insurance.
In some cases, the tenants themselves will be eager to take renter’s insurance in order to cover themselves for any loss that may occur while they live on your property.
Just a word of caution, before you add anything about renter’s insurance in your rental agreement, speak to a lawyer about the laws with regards to making renter’s insurance mandatory.
#9: Keep a record of all transactions and communication
As a landlord, it is important to keep a record of all transactions that you conduct with the tenant. We are not asking you to create a mountain of paperwork.
Records can now be stored digitally in a slim hard drive. You can scan deposit receipts, rent receipts, and maintenance receipts. You should also keep a record of all emails or communication between you and the tenants.
Keeping digital records of all the things mentioned above is not just good business practice, but also an important resource that you can create in case of a legal proceeding.
You can prove a point in the court of law if you have a record of rent receipts and tenant communication.
If you make digitization of records a standard operating procedure every time there is a payment done or an email sent, then you won’t have to spend extra time compiling such records.
It will keep compiling as time passes by and within a few months, you will have a neatly organized library of records.
#10: Online rent payments are the way to go
We live in a digital world where the internet has made life so much more convenient for everyone. Take that convenience to your business as well and have tenants pay rent online.
It will be easier for them and for you. Otherwise, you will have to visit the bank to cash in the checks or deposit any cash money.
With online, the money flows automatically to your bank account saving you the additional overhead expense of visiting the bank.
Checks can also get lost in the mail if you live far from the property that is rented out. With online, you will know exactly when the payment is made and when that money will come into your bank account.
Online payments also mean that the tenants can pay as per their convenience. An added bonus with online is that you can encourage tenants to sign up for automatic scheduled payments.
That way, there is no case of the tenant forgetting about rent payment. The rent automatically gets deducted from the tenant’s account on a specific date of the month.
Millennials and the younger generation prefer to pay rent online using their mobile phones or computers. So, this option is a must if you want to do a real estate business in a modern way.
#11: Delegate the work to a property manager
As with any business, it is good to delegate work to someone who is capable of performing it. That way, you are then free to use your valuable time on growing your business.
In real estate, you can think about hiring a property manager. That person can look after the property, market the space, collect rents on time, and deal with all the issues of the tenant.
A skilled property manager can also manage multiple properties down the line.
Hiring a property manager makes sense if the cash flows from the property allow you to pay the salary of the manager.
It also makes sense to hire a manager if you live far away from the rental property and cannot visit it as often as the manager can.
A property manager would basically streamline all the responsibilities and tasks of the landlord. You will have the peace-of-mind and your time can be better spent buying more properties.
Plus, the manager might be able to do a more professional job in managing the property than you could. After all, that is the core skill of the property manager.
Do remember that even if you hire a property manager, the legal responsibility of maintenance of the property is with you, the landlord.
The property manager is simply a third-party agent who is performing the work on your behalf. Hence, it is a good idea to find a good property manager whom you can trust.
You should conduct interviews and ask for references before you decide to hire any individual as your property manager.
#12: Keep hold of good tenants
Screening tenant applications and filtering out the best ones take a lot of time and effort. After you find a tenant who pays rent on time and takes good care of the property, you do not want to lose them.
You do not want to keep screening and filtering applications over and over. If you have something good going, then you want to try and elongate it as much as possible.
So, with the really good tenants, you should encourage them to renew the lease about 3 months before expiry. If you feel 3 months is too early, then try bringing up the renewal at least 2 months in advance.
Try not to let the lease run down. Otherwise, there is an incentive for you and for the tenant to look elsewhere.
The earlier you can tie up the good tenants with lease renewals, the lesser the chances of vacancies.
Plus you also save the time which you might have to spend trying to find a new tenant. Make it a win-win situation for both of you.
#13: Do not be afraid to enforce the rules
You make rental agreements not to protect yourself in a legal proceeding, but also to establish ground rules. And the best way to protect the credibility of those rules is by actually following them.
Some landlords might be pressured into not enforcing a late payment fee or a fine for something that is prohibited.
Not enforcing the rules will give a message to the tenant that it is ok to cut corners at certain times and they might take advantage of your leniency in the future.
In return for enforcing the rules, make sure that you also follow your obligations.
For example, if you set the Notice of Entry in the rental agreement to 24 hours, then make sure you inform the tenant that you will be visiting the premises at least 24 hours before you show up.
The tenant will appreciate that fact that you are also following the rules.
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