In the Middle Ages, so-called Lords of the Manor sat in high towers and left all the work of the estate to their peasants. But the 10 million modern-day landlords in the U.S. would call their job far from cushy and much more, shall we say, hands-on.
Renting out properties can provide a steady stream of income, with landlords earning on average $97,000 per year. It can also come with some tax benefits, such as the ability to deduct up to 20% of business income.
But the gig involves a lot more than just handing out keys and cashing checks. You’re also on the hook for ongoing repairs and maintenance. If a property ends up vacant or damaged, you’ll be left holding the bag.
As you gear up to manage your first rental property, preparation makes all the difference between a peaceful, profitable situation and an expensive headache. To provide you with the most comprehensive and well-rounded information, we spoke with nine professional landlords and real estate investors who collectively manage hundreds of properties.
1. Choose a rental property that will attract tenants.
When deciding on which rental property to invest in, senior real estate analyst and investor Matt Frankel for Millionacres says to keep one fact in mind: You make your money when you buy, not when you sell.
“Focus on finding a property that should produce reliable cash flow each month, and then make sure to account for uncertainties such as vacancies and maintenance, which will consume 15%-20% of the property’s expected rental income,” Frankel advises.
When selecting a property, it helps immensely to know what tenants are looking for. Ideally “good” rental property will check most or all of these boxes:
- It’s located in a desirable or up-and-coming neighborhood
- It has a favorable rent-to-price ratio (i.e. you should be able to charge rent for at least 1% of the final price paid)
- The property has a strong history of price appreciation
- It offers perks that are desirable to tenants, such as dedicated parking, access to public transportation, safety and security features
2. Use a vigorous vetting system to choose only the best tenants.
Tempted to relax your criteria and lease to a non-qualifying tenant just to fill a property? Don’t. Do. It. A bad tenant can end up costing you more than a couple of months of vacancy.
Jean Tanner, a real estate agent and owner of more than 100 rental properties in Utah County, stresses the need to to collect and review all of the relevant information from an applicant before you sign the lease. Your vetting process should require:
- Contact information
- Current and at least three previous addresses, if applicable
- Employment history
- Proof of income
- A credit check
Tanner recommends contacting the applicant’s previous two landlords directly.
“Sometimes the current landlord will falsely paint a good picture of a bad tenant because they want to get rid of them,” she explains.
“By going back a couple of landlords, you’ll be more likely to get a complete picture.”
She also does a drive-by of the applicant’s current address to get an idea of how well or poorly they are maintaining the property.
The vetting process can easily become a full-time job, especially if you’re leasing multiple properties. To offload some of the manual tasks, you might consider using an online tool like RentPrep, MyRental, National Tenant Network, TurboTenant, or SmartMove to get tenant screening reports. Most charge a nominal fee, but it can be well worth the time saved.
3. Prime the property for a new tenant without making lavish upgrades.
While you don’t need to spend a ton of money on expensive improvements for your rental property, you should make sure it’s in a condition geared to the caliber of residents you want to attract.
Shirley Weems, a top real estate agent and rental property owner in Palm Bay, Florida, recommends tiling all of the floors before renting out a property. “That way, you won’t have to spend any more money on them later, and you don’t have to worry about pets, kids, or any other sources of damage to carpet or hardwood,” she says.
Give the house a fresh coat of paint.
While it’s not a hard-and-fast rule, it’s generally recommended that landlords paint the interior of a rental property every three to five years. Fresh paint is one of the most cost-effective and high-impact ways to refresh a space, making it look and smell cleaner, newer, and brighter.
To get the most bang for your buck when painting a rental property, go with a paint that’s neutral enough to appeal to a wider pool of tenants, and durable enough to stand up to daily wear and tear. Pro tip: A semi-gloss finish is easier to clean. Here are some top picks for rental-friendly paint colors:
- Popular Gray by Sherwin Williams
- Quail Ridge by Behr
- Revere Pewter by Benjamin Moore
- Gentle Cream by Benjamin Moore
- Jogging Path by Sherwin Williams
Think “hotel ready,” not “totally renovated.”
While a rental doesn’t have to be top-of-the-line, it shouldn’t be bottom of the barrel, either. Strive for a happy medium that keeps tenants happy without busting your budget.
For example, if the fridge needs replaced, go for the mid-range Whirlpool brand rather than the smart Fridgedaire. If your countertops are beyond repair, install modern laminate, tile, or a solid-surface material rather than granite or quartz to keep your budget in check while maintaining a marketable property for renters.
John “Matthew” Kammeyer, CCIM, a state-permitted property manager with Five Star Property Management in Las Vegas, Nevada, uses the phrase “hotel-ready” as a rule of thumb. “When you stay at a hotel, it doesn’t have to be the most current HGTV styles, but it does need to be clean, with no evidence of residents staying there the day before,” he explains.
4. Resist the urge to spend your rental income right away.
One of the biggest mistakes new landlords make is not building up sufficient cash reserves prior to purchasing a rental property. Weems says it’s a good rule of thumb to keep six months worth of mortgage and property maintenance costs in a separate account.
Cynthia Meyer, a certified financial planner and rental property owner in the New York City area agrees and recommends the following savings method to stay diligent:
“For new landlords or those who don’t have sufficient reserves, save all net rents (rent minus mortgage, taxes, insurance, and expenses) until you have a full year of building expenses. “Then, when you inevitably spend cash reserves on unexpected expenses, go back to saving as much of your net cash flow as possible until you have fully replenished your reserves.”
Frankel knows firsthand how important it is to keep more money in that emergency fund than you think you’ll need. A few days after closing on his first property (a triplex), the water heater died, leaving him with an unexpected $3,000 bill to repair the damage and replace the unit.
5. Get tons of “before” documentation to protect yourself from later disputes.
Every landlord has heard the age-old excuse from a tenant at some point: “That was already like that when I moved in.” When it comes to a pet-stained carpet, a hole in the wall, or water damage on a wood floor, it’s your word against theirs — unless you have proof of the state of the property before they moved in.
Schedule a comprehensive walk-through with the tenant and catalog any existing issues, such as cosmetic damage, non-functioning appliances, and leaky faucets. Tanner recommends taking video footage so there is indisputable evidence of what the home looked like before it was leased. Check out this example of a landlord inspection checklist — you can create your own to include any specific features or amenities.
6. Avoid homeowners insurance gaps and consider requiring renters’ insurance.
If a rental property is mortgaged, lenders will require home insurance (and flood insurance, if the property is in a flood zone). Eric Hughes, a former property investor turned consultant, recommends that landlords — along with any homeowner or investor — choose to insure for the purchase price or the full replacement value, which is the cost to rebuild the home if there is a total loss.
Kyle McCorkel, a full-time investor in Hummelstown, Pennsylvania who owns 35 rental units, looks to get the least expensive insurance possible, but also adds coverage for liability just in case a tenant attempts to file a lawsuit for something that happens on one of his properties. He typically gets $500,000-$1,000,0000 in liability coverage per property (depending on the size), and also purchases an umbrella policy that layers on additional coverage.
In addition, Tanner includes in her leases a requirement that the tenant has his or her own renter’s insurance to cover any damage to their personal property.
7. Know ahead of time who is paying for utilities.
Be clear about expectations for who is covering electricity, gas, water, sewer, trash pickup, and other utilities. “Don’t assume that what works for one property will work for another one, as different properties and municipalities have different quirks,” advises McCorkel.
He recently signed a lease with three new tenants stating that he would pay for water, sewer and trash, but afterwards he realized that in that municipality, trash was paid for by purchasing standardized trash bags from the city. Now he’s stuck buying trash bags every few months for the tenants.
8. Consider using a property management service.
If you’re moonlighting as a landlord while working another job, live far from the property, or don’t enjoy juggling the minutia, hire a property management company.
Depending on where the property is located, a property manager will charge anywhere from 8%-12% of the monthly rental value. In exchange, they will handle everything in relation to the day-to-day upkeep of the rental property. This includes tenant complaints, rent collection, evictions, and ongoing maintenance.
“This takes the day-to-day tasks off an investor’s plate, so they can focus on the higher-level tasks of finding the right properties, performing due diligence on them, and securing good financing,” says Hughes, the real estate consultant. “It also ensures that critical tasks like tenant screening are handled by experienced pros who do it every day.”
Max Cohen, founder of a real estate investment firm, owns and manages 25+ units in Gainesville, Florida. He notes that being a small-time landlord can quickly become a full-time job. “As a landlord, there are a lot of different tasks to be handled, such as utilities, repairs, maintenance, tenant management, and staying on top of recurring bills,” he says.
The National Association of Residential Property Managers is a good place to start looking for a reputable property management company.
9. Set clear communication guidelines with your tenants.
If you decide to self-manage your property, set clear expectations with your tenants from the start. Frankel suggests giving your tenants hours during which they can call you and get a quick response. Make it clear that unless it’s an emergency, a tenant shouldn’t expect to get through to you in off-hours. And you don’t necessarily have to offer physical office hours — you can schedule meetings by appointment, either in-person or via video chat or phone.
10. Perform regular inspections and make periodic updates.
One of the biggest mistakes a landlord can make is to adopt a “lease it and leave it” mentality, never stepping foot in the property unless a tenant calls with a problem. Tanner conducts a walk-through inspection of each of her properties once every six months — not only for her own peace of mind, but also to make sure the tenants are happy and that everything is working properly.
“I ask if there’s anything wrong, if anything needs spruced up, and also check to make sure no damage has been done,” she says. “The communication helps create a better relationship with the tenant, and they’re more likely to tell me about any problems.”
Tanner also sets aside anywhere from $5,000-$10,000 per year for periodic updates and upgrades, such as putting in new carpet every seven to 10 years. “It’s a big mistake to never update anything unless the tenant complains,” she says. “If you proactively keep the property maintained, the good tenants are more inclined to stay.”
11. Track all income and expenses.
To determine whether a property is profitable, the key is knowing the numbers. McCorkel keeps a spreadsheet of all money coming in and going out to help him make future financial decisions, such as whether to sell a property or continue to hold it.
“Tracking the financials also helps to take the emotion out of investing,” he says. “I’ve dealt with a lot of landlords who become emotionally attached to a property, which clouds their judgement when it’s time to make a key decision.”
This knowledge will also help keep you motivated when the inevitable setbacks occur. For example, McCorkel recently had to fork over $2,000 in repairs after a sewer backup, but it didn’t faze him because he saw in his financial records that he’s earned $16,000 in overall cash flow from the property.
12. Make rent collection easy.
Rather than waiting for residents to pay with checks or cash, use a software program for online payments. Some of the most popular platforms include Cozy, PayYourRent, Avail, SparkRental, and TenantCloud. Many of them offer the option for tenants to automate their payments, eliminating the need to chase down late payers.
When it comes to collecting rent, Cohen said the key is to be firm but friendly. “If the tenant is paying late, you need to take the proper action, such as three-day notices and late fees. This is a business, not a friendship,” he points out. “I always have to remind myself that the bank will come for their monthly payment regardless of what situation we as landlords are in.”
Kammeyer, the property investor in Las Vegas, notes that it’s also important to stick to your protocols. If you waive a late fee for one resident, for example, you need to do it for all of them. “If you treat people differently, you may be subject to a HUD housing complaint and fine,” he warns.
13. Have a team of trusted professionals on speed dial.
Being a landlord may seem like an easy gig when everything’s running smoothly — until it isn’t. To help smooth the inevitable rough patch, it’s important to have some knowledgeable and reliable experts in your corner, including the following:
- Eviction attorney
- Property inspector
- Real estate agent
- Insurance agent
14. Be smart with your lease terms.
Having a rock-solid lease protects both you and your tenant. Make sure it includes these core components of a residential lease:
- Names and contact information of residents
- Term of tenancy
- Maximum number of occupants
- Amount of rent and schedule of payments
- Security deposits and any other fees
- Policies on repairs and maintenance
- Renters’ insurance requirements
- Any specific rules and regulations
Tanner always sets up her leases to expire at the end of July, as it’s much easier to find new tenants in the summer rather than the middle of winter. She suggests looking at the occupancy rate in the area where your property is located, and then setting the lease terms accordingly. Tanner also likes to offer two- to three-year leases as a means of keeping good tenants.
15. Have a plan for handling lease breaks.
If you rent out a property long enough, you’ll likely have a tenant who needs to get out of a lease before its end date. A smart landlord will have a plan for how to handle this situation.
“If a tenant must break their lease for whatever reason, they will of course surrender their security deposit — but many landlords aren’t sure whether they should ‘go after’ the tenant for the full value of the remaining lease,” says Hughes.
He prefers to offer two options, which are fair for both parties and give the tenant some control over the situation:
- The tenant can pay two months of rent to buy their way out of the lease and all of its legal obligations, or
- The tenant can agree to keep paying rent until a new tenant moves in, however long that takes.
16. Document everything.
Even if it seems like a trivial email or a casual phone call, it’s important to keep a record of every point of communication and every document that passes between you and your tenant. In the event of a dispute down the road, detailed and date-stamped documentation will be a landlord’s best friend.
Header Image Source: (Krystal Black / Unsplash)