Congratulations on becoming a landlord. You have taken an important first step in the path to building wealth for you and your family. I love being a landlord - at least most of the time - because you are enjoying passive income. While you are on vacation or sleeping or buying another property - your investment property is generating cash flow.
However, if you don't take a few simple steps in advance to set up your rental property correctly, you can create avoidable problems with accompanying stress. Don't worry. In general, the good tenants outnumber the bad ones and you’re able to manage your property profitably.
To help reduce or eliminate some of the stressors associated with being a landlord, take these seven simple steps:
1. Set up a separate LLC or other entity for your rental property. You want to make sure that your rental property is separate from your personal residence and other assets. If something unimaginable happens and you are sued, your liability should be limited to the asset of the rental property. Putting the title to the rental property in a separate entity will help to protect your other assets.
2. Set up a separate checking account for rental income and expenses It is much easier to keep your rental income and expenses separated from your other assets if you set up a separate checking account. Tax preparation will be much easier also if all the income comes in to one account and you pay your rental expenses and mortgage out of the same account. A separate account also supports the argument that the rental property is its own asset, separate from your other assets.
3. Make It Easy to Collect Rent. Automating the process can make rent collection much easier. Set up your separate checking account with a bank that accepts credit or debit cards or even automatic bank transfers. This is more convenient for both you and your tenants, and it provides a transaction history for bookkeeping. If you have a multi family rental property with several tenants paying you rent each month and you are receiving checks, you will want to deposit each rent check separately so that you can track who has paid and on what date.
4. Outsource Maintenance and Use Service Contracts. Anything beyond a few units can be a headache in maintenance, including painting and cleaning up after sloppy tenants. Hiring a crew to take care of this involves all the problems of recruiting and training employees, managing payroll and benefits, and other concerns.
If you don’t want those additional stresses and don’t need full-time help, outsource these routine maintenance tasks to another company. It may cost a little more than doing the work yourself, but you’ll have more free time and less anxiety.
At a minimum, make sure that you have reliable contractors on speed dial and that you have an HVAC service contract. You can count on your furnace dying on Christmas Day and your air conditioner icing over on the 4th of July. Without a service contract, you will be at the back of the line waiting for service while your tenant checks into a hotel at your expense. A service contract will guarantee that your HVAC receives priority treatment during the busy seasons and a good service contract will also provide maintenance checks twice a year.
5. Keep an Emergency Fund. Whether you opt for employees, contractors or the DIY route, you’re still going to pay for repairs and upkeep. Some routine maintenance you can budget for, but events such as careless tenants, storms, litigation or burst pipes are something else. If your insurance policy won’t cover it, or units aren’t inhabitable, you’re losing money. It’s best to set aside what you can from the very beginning so that one major setback doesn’t cripple your cashflow.
6. Find a Property Manager. You could also pass on your landlord troubles to someone else by hiring a reputable property management company or professional. Those with special training and significant experience may be better suited to handle maintenance, budgets and bad tenants than you are. A manager will cost you money, but eliminate the difficulties of being a landlord while you sit back and take the profits.
7. Tenant Screening. Better tenants mean fewer missed rent payments, less property damage and longer tenant retention. Getting good tenants requires screening each applicant to weed out those who may represent a high risk. Screening requires verifying employment, conducting background checks, checking credit scores, calling references and anything else you consider a good indicator. If your tenant is moving from a nearby single family home, drive by the property and see if it looks maintained. Has the tenant brought in the trash barrels after trash day? Is the yard cluttered? Chances are that is how your property will look after this tenant moves in.
I use a company called Smart Move, which checks credit scores and criminal back grounds. The prospective tenant fills out the application on line and pays the company. I get the results and then follow up with checking references and past landlords. When checking references with past landlords, do not rely on the word of the current landlord. If the tenant has been a problem, that landlord may not tell you the real story about the tenant because the landlord just wants him or her to leave ASAP. Call the landlord previous to the current landlord. That landlord may give you the "real" story about the tenant.
Familiarize yourself with the Fair Housing laws and protected classes in your county, state and on the Federal level. Certain classes of people are "protected" and you cannot base your rejection on those classes. For example, you can not reject someone because of a disability but you can reject the prospective tenant because they are smokers. If you are not sure about the protected classes in your local area, get guidance from your city or county landlord tenant office. This is important. Make sure that you document the reasons for your decision.
You also don’t want to be too fussy. If you reject one applicant after another, you’ll wind up missing out on rent. Tenant screening is another time-consuming task you could delegate to a professional service.
8. Pick a Good Property for Your Investment and Maintain It. You can't always guarantee that you will have financially solid people apply for your rental, but I really do believe that well maintained properties in good neighborhoods attract desirable tenants. If you offer a clean, well maintained home in a desirable school district, chances are that you are going to have stable people with steady income applying to be your tenants. You certainly are going to have more people to choose from than if you offer a property that is dirty, in need of maintenance or in a marginal neighborhood (by whatever definition you choose.)
Having argued in favor of solid properties in good neighborhoods, there is another approach. If you buy an investment property in an emerging neighborhood, you may not get as much rent and your tenant may or may not give you more problems, but you may see more appreciation in the value of the property itself.
Being a landlord has been a great source of income throughout human history. It may be a little more complicated today with all the legalities and paperwork, but it can still be profitable and rewarding if you’re thoughtful in spending your time and money.
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