So you want to be a landlord? You're not alone.
You could be attracted by the idea of having money just roll in from tenants every month. We spoke with a bunch of people who have owned rental property for many years, and those conversations opened our eyes quite a bit. Perhaps we'll instead fund our retirement through investing in solid blue-chip stocks. (Last month, we recommended a number of such stocks for moms on Mother's Day, including American Express
Still, the landlord business continues to fascinate. Here are some recommendations for you, if you're interested in becoming a landlord.
- First off, buy carefully. Consider the neighborhood and remember that you may well be called there in the middle of the night, to tend to some tenant's emergency. With the recent housing slump, abundant supplies of homes mean that you may not be able to demand much for rent.
- Next, anticipate unexpected outlays of money, some of which may be sizable. Overall, being a landlord can be a satisfying and worthwhile endeavor, but it does come with some experiences that can be real doozies. One landlord told the story of how amazed she was when she went one day to collect the rent at a rental property ... when she realized that all of the windows were gone. The tenant had sold them. Despite a trip to court, the landlord ended up having to replace 18 windows and frames and 18 storm windows, at a cost of roughly $4,000.
- Expect routine cash outlays. Rental properties aren't all about money coming in. You'll probably need to paint apartments (or offices) between tenants and every few years for remaining tenants. Rugs will need to be replaced, locks changed, various repairs and upgrades made. If you want to attract and keep tenants, your property should look clean and decent.
- Don't expect to raise the rent each year. You could do so, of course, but there are some compelling reasons to not do so, such as the importance of keeping good tenants. If you have a good tenant who takes care of the property and pays on time, you'll want to keep him or her happy. You're probably better off getting a reliable $800 per month instead of a more iffy and troublesome $1,000 per month. You can certainly hike the rate between tenants, and for a tenant who stays many years, occasional increases are reasonable.
- Expect that you'll need to be demanding. Don't let tenants fall more than two to four weeks behind in the rent, because many who fall behind will never be able to catch up. If there are problems, negotiate. One landlord explained that he switched a tenant to paying weekly instead of monthly, because that was more manageable for the tenant. The same landlord recommended collecting the rent in person because it allows the landlord to check up on the property's condition and make a personal connection with the tenants. (But be careful, too -- you might become a robbery target if you're known to be making the rounds at the same time each month, collecting cash. Perhaps you shouldn't go alone.)
- Learn the rules and the laws governing rental properties (such as the Fair Housing Act) so that you know how to deal with various issues, such as the screening of applicants. One landlord recommended preparing a summary sheet for each new tenant, listing your responsibilities and the tenant's. That can prove useful later on, if things end badly and you end up in court. You'll need to know things like when and how to evict, and when you can and can't lock someone out of the property. You'll also want to make sure you understand your insurance policy and what it does and doesn't cover.
- Seek out and develop relationships with people who can help you, such as friendly, experienced landlords in the area. They can be terrific resources when you need to know how to deal with situations.
- Become a do-it-yourselfer, if you're not already. You can save a lot of money by doing simple things like painting an apartment yourself. Learning a few lock and plumbing tricks can help, too. It's also critical to find good professional service people (carpenters, electricians, plumbers, contractors, roofers) and to develop strong relationships with them, since you'll need them to bail you out when a boiler stops working on a cold night or a toilet breaks. Treat these folks well.
- Expect some tenants to be jerks. The landlords I spoke with estimated that in their long experience, roughly 3% to 10% of their tenants have caused a lot of trouble. It might seem an easy enough problem to deal with, but remember that the problems are not always evenly spaced out. You might go several years with few or no problems and then run into a string of terrible tenants for several years.
- Assess your personality to see whether you have what it takes. You need a strong constitution. (You'll probably see some gruesome messes, among other things, as a landlord, and you'll likely have to clean some of them up.) You shouldn't let people walk all over you, because some will try to do that. You also need to be fair and even-tempered, and to be able to read people. Some folks will have real problems that interfere with their ability to pay you, but you may be able to work things out. Other times, it will be hard, but you'll need to evict them.
- Be careful checking references. One landlord suggests calling not just the last landlord (who might also be the current landlord, eager to get rid of these tenants), but the previous one or two as well. Those folks will have no reason not to be honest.
- Learn more. One useful book on the topic is The Complete Idiot's Guide to Being a Smart Landlord, by Brian F. Edwards, Casey Edwards, and Susannah Craig. Others are Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves by Leigh Robinson and Property Management for Dummies by Robert S. Griswold.
These are just a few of the many things you'll want to consider if you're on the road to owning rental property. This list is by no means comprehensive. Share any additional pieces of advice for would-be landlords, or ask any questions, on our Owning Rental Property discussion board.
And find great tips on buying and selling homes in our Home Center, which also features some special mortgage rates.