Think you could become a landlord? Before you jump in, consider the following checklist to see if your property would make a good rental.
Expenses vs. Income
Before you get too invested in the idea, figure out if it’s worth the cost. If your house is in good shape, in a good place, and the mortgage is small of nothing, you’ll likely be making a profit from renting it out. Another reason to go rental might be to help balance or lessen the money drain on a property, either because it won’t sell, or you want to hold on to it longer. For example, rending can help some homeowners hold onto a property long enough for the property value to rebound, even if they make little or no profit in the meantime.
You’ll need to calculate hard numbers, both the best and worst case scenarios, for expenses and income. What must you spend on the home? Include mortgage, utilities, repairs, yard maintenance, insurance, and any services you’ll require, like a legal consultant or property manager. Then calculate what you should be able to get in rent by looking at the area’s market and comparable properties with realistic high and low options. You can get help and advice from several nonprofits that specialize in helping small businesses get started, such as www.score.org.
If the income is bigger than the expense in the worst-case scenarios, you have a potential for profit.
Self Manage or Hire a Manager
Are you cut out for this job? It’s definitely not for everyone. Being a landlord can be the source of major stress and require a lot of tough decisions and hard work. Can you handle the maintenance and upkeep responsibilities? Could you deal with a difficult tenant? Could you evict someone if necessary? Most importantly, could you keep emotion out of it all? If you can, and you live in town, then you might want to try self-managing your property.
If you don’t live in town, or the work isn’t appealing, you can hire a professional property manager. Check up on the person or firm’s credentials and licensing, if they are bonded, the state of their insurance, the services they provide (tenant screening, 24-hourmaintinence, ect.), and ask for references. Make sure they keep client’s money in separate trust accounts (not a master agency account) and provide detailed records of tenant payments and any expenditures they handle.
For a good manager, expect to pay 10% of the rent. Be suspicious of any offer less than 8%, as the undercutting could reflect on quality.
Tenant selection is vital for a landlord, but so is keeping it legal. Selecting or rejecting a tenant based on ‘a feeling’ or hiring a data-broker can get you into big legal trouble. Instead, use a detailed application form approved by a fair-housing lawyer, with identity and rental history, and check up on all records and references. To do a credit check, state it clearly and get a credit-check release signed by the applicant. Write out your application and rental policies and stick to them.
Know your legal obligations as a landlord and your tenant’s obligations as well. Make your contract clear and specific, and remember that an illegal clause, even in a signed contract, is invalid. Also learn your state’s laws of handling rental income, deposits, and interest. Keep detailed records for everything from screening to money management for several years in case of an audit.
Money Matters and Bookkeeping
Whether you self-manage or hire a professional, you must keep the rental business records separate and clearly recorded. Financial software can make this easy and can help you determine if the rental business is successful. Operational expenses (including maintenance and professional services such as managers or accountants), property taxes, and mortgage interest are tax deductible business expenses. Keep a separate bank account (or accounts) for the business and keep a portion of profits aside to handle inevitable repairs and other issues.
Want to find out if you have what it takes to be a Real Estate Agent or Broker?
About Geoff Thompson — Geoff Thompson is an Owner and Founding Partner of Express Schools, LLC. which operates online education providers Real Estate Express, Insurance License Express and License Tutor. Follow him on Twitter.