So You Want to Be a Landlord…
You’ve probably heard stories about the horrors of rental property investments. Tenants that stop paying, destroyed apartments, backed up plumbing and debtors that disappear under the shroud of darkness, never to be seen again.
The worst horror story I’ve ever seen came from a woman who called me this past week. She wanted me to give her an offer on her house.
We met at her building and everything seemed to be in pretty good shape. But as we got to the back of the house, Ruth threw her arm across my chest to stop me from walking back the hall into the kitchen.
That’s when I got the story. She’d been letting her grandson live in the house as long as he paid the bills. He never mentioned any problems and it wasn’t until he abruptly moved out that she found out about the disaster at the back of the house.
The main roof must have been leaking for months, maybe years. The water came led to rotten joists in the main roof, destroyed the flooring in the 2nd floor bedroom and deteriorated half of the beams in the kitchen floor. What I found in my property inspection was half a house with no roof or floors.
Being a landlord can be a scary proposition for many people. Yet there are millions of successful buy-and-hold investors that make their living renting.
If you’ve considered becoming a landlord, there are a few simple points to remember. These are the things that separate the landlord kings from the landlord wash-outs.
A buy-and-hold investment is the same as any other investment property. You make your money when you buy. Since the plan is not to sell in the near future, the property value is based more on the cash flow it can provide than on its value in the market place.
I use a multiplier to quickly evaluate my offer price on a rental property. I am willing to invest 50 times the net monthly rent into my buy-and-hold properties. If the property rents for $1,000 per month, my “all in” purchase and construction price cannot exceed $50,000.
As long as I accurately and conservatively estimate the cost of repairs, I’ll have a nice positive cash flow every month. There will always be repairs, tenant problems, evictions and unexpected costs. Buying at the right number builds a foundation for success no matter what may come.
Stick with Your Comfort Zone
There are some neighborhoods where I am comfortable. I’ve had bad experiences with my tenants in these areas. And there are some blocks where I just don’t feel safe. In these same neighborhoods, I know other investors who make a killing on their rentals. I just don’t invest there.
Unless you have a competent property manager to handle the day-to-day of your investments, you’re going to have to spend time at your properties. Do not invest in an area that makes you feel uncomfortable or unsafe. It’s not worth the potential gain. There are always opportunities within your comfort zone.
Screen Your Residents
This sounds like a no brainer. But you wouldn’t believe how many new (and even experienced) investors start to get nervous when their rentals sit vacant. They end up jumping for the first person willing to put down money to move in. Big mistake!
A landlord-tenant relationship is a little like a romantic relationship. It starts out great with excitement and a lot of smiles. But when the parties are mismatched, conflicts arise. Sometimes there are loud arguments, screaming, and threats. Unless all of the people in the relationship are in it for the right reasons, it will end badly.
Screen your prospective tenants. I use a 3-tiered approach. I get information about their credit history, income and prior rental history. If they pass the test on 3 out of 3 criteria, they’re approved. Two out of three, and I’ll require an additional security deposit or look for a co-signor. If they fail to meet my criteria in 2 of 3 areas, their application is denied.
I also look for “deal killers.” These are things that would automatically exclude them from renting one of my properties, regardless of their other qualifications. Deal killers are things like evictions, violent crimes, any crimes involving animals or children, or drug related arrests within the last 3 years.
Respond to Repairs
When does a $50.00 repair cost you $5,000? When it’s not responded to in a timely fashion.
I once had a resident in one of my rentals fail to report a loose tile in the tub surround. The tile eventually fell off the wall. Still no call. She finally contacted me after water was leaking from the shower, through the ceiling below and onto the hardwood flooring. A simple fix turned into a major renovation.
Let your tenants know that you intend to maintain their apartment. If they have a service request or concern, make sure you discuss it with them and respond quickly. This will built trust with your residents and avoid conflicts. If they know you care about their living conditions, it’s likely that they’ll care, too.
The result of a conscientious maintenance policy is a tenant that’s happy and takes care of your property. It’s a win-win for everyone.
Collect with Ruthless Consistency
The due date for rent on every one of my leases is the 1st day of the month. By law, there’s a 5 day grace period. If I don’t have payment on the 5th of the month, I assess a late fee to the account and take the first step in the eviction process on the 6th.
No exceptions. Ever.
You might think I’m a ruthless, money grubbing, heartless person. Maybe I am. But my residents know exactly what to expect from me. They pay their rent for September at the end of August. If money’s tight one month, they may have to skip an extra payment on their credit card, but I get paid.
Tenants will set the rules for your business if you let them. A relaxed collection process sets the stage for residents to set their own rules. You do not have to be mean. You do not have to be heartless. But you do have to be consistent.
Being a landlord can be fun and lucrative. There are those that succeed and those that fail. Ultimately the only difference between success and failure in this business boils down to the basics. If you are thinking of getting into the rental business, take care of the little things. The big things will take care of themselves.