Whether you have some extra cash you’d like to invest, or you’ve recently acquired some property, it can be tempting to jump into the landlord game. After all, it seems like many people make decent money managing property and earning a rental income.
Jill Wente, a realtor with Better Homes and Gardens Real Estate Gary Greene, says that many clients entertain the idea of becoming a landlord.
“Most clients are thinking about buying a move-up property for themselves and holding on to their current home to turn into a rental property,” Wente said. “Or they are thinking about purchasing their first rental property for a monthly income and price appreciation.”
But before you decide to rent out your home or buy something new, here are some things you should consider before you start collecting rent checks and becoming a landlord.
Expenses can add up quickly
After forking over what is likely to be a sizable down payment, be prepared for extra expenses like fixing a broken pipe, electrical repairs and higher insurance costs, experts say.
When purchasing a second property, most lenders will require at least a 20 percent down payment in order to secure financing. “The good news,” says Wente, “is that you will have the opportunity to gain price appreciation on 100 percent of the property while having only 20 percent in it.”
Insuring a rental property is also more expensive than a home you live in.
If you decide to rent your current property, you’ll see a change in your homeowners insurance. “Because your home is no longer owner-occupied, your homeowners insurance is going to increase,” cautions Wente. Landlord policies are typically 25 percent higher than standard homeowner policies, according to the Insurance Information Institute (III).
Doug Quattrochi, executive director of MassLandlords, a non-profit landlord association based in Massachusetts, warns potential landlords to “watch what you pay for a building or home. Ask yourself: what are the major repairs needed or coming up.”
You should also assess your own skills at handling basic repairs. If you’re not the handy-man type, and you can’t handle all the issues that come up with owning property, make sure you have a list of people you trust, and can afford, to hire. “When repairs are needed, do you have a list of contractors you can depend on to get the plumbing fixed and the air conditioner back on?” asks Wente.
Finally, there will be periods when your rental is unoccupied or tenants don’t pay rent on time. And that could cause cash-flow problems. Brittney Benson, general manager of the National Association of Independent Landlords (NAIL), suggests potential landlords ask themselves, “Do I have the extra funds to cover rental costs, such as mortgage payments or property taxes, if there is a problem with tenants not paying rent?”
Be realistic about what you can handle as a landlord
As a potential landlord, you need to be realistic about your ability to afford the property whether rent checks are coming in or not.
Wente reminds clients that “chances are, your rental will be vacant from time to time. Your next renter rarely comes walking in the next day. It may only be a couple of days or it may be as long as 60 days.”
Quattrochi echoes that sentiment and advises people to think of this when setting the rental price: “Will the rents pay for the mortgage, taxes, insurance and repairs, with extra, in case I have a vacancy?”
Despite the normal risks of earning money as a landlord, real estate can be a good investment. To calculate your return, start by looking at rental prices in your area on similar properties. Then deduct taxes and any fixed expenses (such as mortgage payments, insurance, HOA fees and lawn maintenance), and then periodic costs that come up when new tenants move in, like cleaning fees, repainting walls or rekeying the locks.
Screening tenants is a must (as is knowing your rights)
Being stuck with a bad tenant can not only disrupt your cash flow, but it’s also one of the reasons landlords fail.
“People don’t screen their tenants adequately. One bad renter can ruin you,” cautions Quattrochi. This can be especially true depending on your state’s landlord-tenant laws.
It is important to “always know and understand your federal, state and local rental laws,” Benson adds. “Many landlords learn the hard way that not being knowledgeable about the laws can end in costly lawsuits or lost rental income.”
The U.S Department of Housing and Urban Development (HUD) Fair Housing Act prohibits housing discrimination based on race, color, national origin, religion, sex, disability and familial status. In addition to federal discrimination laws, each state and city will have specific landlord-tenant laws and regulations.
“Knowing the law will help you stay in complete compliance with regard to safety issues,” says Wente. “Not knowing will not protect you from legal action.”
Quattrochi also recommends building a network of support to help deal with tenant-related issues. “You should join your local landlord club or association,” he says. “You will need to build your team. Other landlords can be invaluable when it comes to knowing what to do or who to hire when problems arise.”
But all agree on the importance of tenant screening. “Do your due diligence when selecting renters,” says Benson. “Do as much screening as you possibly can, regardless of the cost associated with it.”
Remember that taking the time and energy to screen tenants could save you from needing to evict the wrong tenant.
Managing property takes time
Bad tenants aren’t the only reason many landlords fail. “Typically people decide to leave the rental property business because of a bad experience with tenants, or the time constraints and attention required of their rental business,” says Benson.
In addition to late-night or early morning phone calls about needed repairs or other emergencies, Quattrochi suggests asking yourself about the logistics of managing a property. “Who is going to have keys for an emergency, or am I able to get there quickly myself?”
Additionally, Wente asks clients “if they’d mind getting a call on a Saturday morning with a toilet emergency, or at 11 o’clock at night because the air conditioner isn’t working.”
And don’t forget about the work needed to market the property to prospective tenants. The entire rental process takes time: photographing, listing and showing the property, and then screening tenants. But even while the property is occupied, the list continues: “Maintenance requests, lock-outs, repairs, evictions and numerous other potential time-consuming surprises” are all part of the process, according to Bensen.
Don’t believe all the get-rich-quick real estate stories, either.
“Real estate can be very worthwhile, but it’s usually ‘get rich slowly,’” Quattrochi says. “You should invest thinking about your retirement, your children, and the long-term.”
For these reasons, it’s a good idea to be clear on your financial goals and realistic about your return on your income property.
Property managers: pros and cons
You’ll also need to decide whether you can manage the property yourself or hire someone. One option is to work with a property manager. This can alleviate a lot of problems with tenants and repairs. “Property managers can be an incredible resource for some landlords,” says Benson. “If the property owner lives out of state or far from the rental property, a property manager might be a great option.”
It’s important to know exactly what your property manager will handle and what is still your responsibility. Don’t make assumptions. And make sure to thoroughly read your contract–and ask questions–before signing on.
Another thing to consider is how much control you’re giving up by using a property manager. “Remember that property managers will manage the way they want, not necessarily the way you want,” warns Quattrochi. “Get to know how they screen tenants, supervise contractors and bill their fees. Don’t assume just because you have a manager that you don’t need to audit their handling of maintenance issues and renter/customer service.”
Becoming a landlord checklist
If you’re still interested in trying your hand at being a landlord, do some extra planning so that your investment doesn’t cause you more headache than profit.
- Calculate how much rent you’d need to charge to cover all your costs (mortgage, taxes, insurance, repairs, etc.)
- Familiarize yourself with federal, state and local laws about fair housing and landlord-tenant rights
- Create a list of contractors you can depend on and trust
- Weigh the pros and cons of using a property manager
- Network with other landlords, or join a landlord group or association, to create a support system
- Carefully and thoroughly screen potential tenants
“It’s a hard business to be in for some people,” Benson admits. “But if you’re prepared and perform your due diligence, it can be very easy as well.”