Our society often paints an evil picture of landlords. But being a landlord is an important job and not an easy one.
One of the many problems contributing to the recent downturn in Real Estate was that a lot of amateurs got into the Real Estate business, thinking they could buy homes, rent them out at a profit and then sell them later on for a larger profit.
Some did make lots of money, but many others lost just as much, if not more. How did this happen?
To begin with, home shows are partially to blame for the trend, by putting on shows that make it seem like making money in Real Estate takes no effort. They put the 'buy and flip' mentality into everyone's head. But as noted time and time again, when someone tries to sell you on the idea that you can make something-for-nothing, it is either a con, or just bad advice.
And nowhere is this more true than in the landlording business. Make no mistake about it, it can be hard work, it takes a very specific constitution and often you have to be hard-hearted about it.
Much of the public has a negative opinions about landlords based on movies, such as the old time silent films that showed the "evil landlord" in his top hat, evicting some starving young family. Or TV shows, were the "fun" tenants hide, as the "boring" landlord attempts to collect the rent.
As young college students, we may have had bad run-ins with landlords. After all, we were just minding our own business, having 50 people over for a keg party in the back yard, and the landlord gets all upset because the other tenants are complaining! And that hole in the wall that he was bitching about - there is a story there. You see, we were playing touch football in the living room, and, well, things got out of hand. And just because we were a few weeks late with the rent is no reason to send those threatening letters and charge us late fees!
In retrospect, of course, our experiences with landlords in college were perfectly predictable. Renting to young people is predictably difficult as they tear things up, make lots of noise, and annoy the other neighbors. And in most college towns, the sort of landlords who rent to young people charge pretty high rents and spend a lot of time and effort trying to collect rents and manage the properties.
And our college experiences as tenants should be the first educational experience for you as a landlord - try to avoid problem tenants at all costs. If you can find good tenants and keep them, the job can be a dream. If you have a string of bad tenants, you can end up bankrupt.
Here are some tips on landlording, based on over a decade of experience:
1. Vacancy Kills: The biggest problem we saw with amateur landlords was a blase attitude toward vacancy. You need to keep your rental properties rented, or they don't generate income. It seems like a simple proposition, but most folks simply don't get it. In terms of cash flow, an unrented property can drag you down, as the mortgage, taxes, insurance, and utilities have to be paid every month. Most landlords are lucky to break even on a property or make a small profit of 5-10%, particularly if they just acquired the property. One month's vacancy a year is enough to wipe out that profit.
If you have a house or apartment to be rented, don't delay in fixing it up, advertising it, and getting it rented. I've seen people let properties sit around unrented for months, because they "don't have time" to get it rented. And guess where there time is going? You guessed it - the TV. Instead of painting the living room on their rented duplex, they are watching America's Idol. Yes, it is hard work to prep a unit for rental. But putting it off for two months isn't making it better.
2. Background Checks: When renting to prospective tenants, you have to do a background check, usually in the form of a credit report, to see whether they are going to be good tenants. Using your "gut instincts" alone can be a very bad idea, as the con-artist tenants out there (and they do exist, in great number, and prey upon amateurs like you) are very good at coming across as nice people - until they move in, of course.
Under the law, you cannot discriminate against tenants based on race, age, family status, religious affiliation, etc. - except in certain instances. Check your local laws. But discrimination in general is probably a poor way to go about picking tenants.
A credit history is a much better indicator to use. Someone with a string of unpaid debts is likely to be a poor tenant, of course. But someone with no credit history at all (and no verifiable employment history) is probably also a bad bet, too. Just like a cheating spouse will likely cheat again, so too will the serial defaulter likely default again. Amateur or soft-hearted landlords have it the worst, as tenants chose which bills to pay and which to put off. Nagging credit card debts and growling stomachs will get taken care of first, and the timid landlord better hope there is money left over for the rent.
3. Types of Properties: The type and location of your property will determine what kind of tenants and how much work it will be for you. As noted before, if you want to rent in a college town to college students, you can make a lot of dough, but expect a lot of hassles as well. You want to be a slum lord and rent poorly maintained properties in the ghetto? Expect more trouble for your money. The old real estate mantra hold true here too - Location, Location, Location.
4. Section-8: While some swear by Section 8 as a way to collect steady rent checks from the government and find tenants who are afraid to break any rules for fear of losing their housing subsidy, many others recommend you walk quickly away from being a section-8 landlord. Nay sayers tell stories of getting the worst sort of tenants. Tenants who have no financial investment in the property and cannot, by rules of section 8, hold legal jobs that earn enough money for living expenses. (This means that if they want to earn cash, they must do it illegally - often from your apartment.)
It has been reported that a tenant, paying nothing for rent and having no interest in developing a good credit record or a good rental history record, can literally destroy a property. Walls & floors are damaged, appliances sold off, windows broken, etc.
5. Reasonable Rents: Many amateur landlords think they can buy a property and then raise the rents 20-30% and "make more money". This is a bad move. When you make rents too onerous, people have incentive to move out, thus adding to your vacancy problem. If you have a unit that is unrented one month every year, due to tenant churn, then the increased rent doesn't necessarily offset the losses. Add in the cost of advertising and prepping a unit for rental, and you are losing even more.
Good long term tenants are no hassle and can put your property on auto-pilot. If you charge a little less than market value, chances are, they'll stay put. And the money you "lose" by doing this, is more than offset by the lack of vacancy and its attendant hassles. Not having to take a night off to paint a kitchen on a "for rent" unit is worth something to you.
6. Direct Deposit: Rather than waiting for rents to come in, then taking the checks to the bank to deposit, and hoping none come back the following week marked NSF, consider Direct Deposit. Give your tenants a stack of direct deposit slips to your bank account, along with the pre-paid postage envelopes. (If you fear giving out your account number, bear in mind that that information is already printed on the back of every deposited check, so the tenant sees it anyway.) Or more common now, tenants can just pay online, directly from their computer to your bank. Offer them a small rent discount as an added incentive. Either way, you don't have to deal with the tenant or the deposit. You could also set up direct deposit using online payment mechanisms, such as billpay.
7. Late Fees versus Discounts: Rather than trying to collect "late fees" for late rent, structure your lease so there is a discount applied if they pay by the 1st of the month. Trust me, they will make sure that money gets there on time! Late fees are harder to collect, particularly if you end up in court. But the main thing is the psychology of it. By offering a discount for early payment, you are the "good guy", whereas by charging a late fee for late payment, you are the "evil landlord". The net effect of the payment scheme is, of course, the same.
8. Security Deposit: Make sure you have the security deposit, and the check has cleared, before the tenant moves in. Collect at least two months rents, as tenants often move out without paying their last months rent and then there is no security deposit left over to cover damages. Also, ask for a "pet deposit" if they have pets, as there will certainly be additional cleaning expenses to remove odors, stains and scratches when they move out.
Be sure to check local laws pertaining to security deposit collection, refund and interest payment. In some towns, every apartment's security deposit must be held in a separate account. (Ten apartments = ten bank account.)
9. No More Mr. Nice Guy: You are running a business, plain and simple. If the rent stops coming in, be wary of trying to be their "friend" or trying to help them out. The reasons for this are numerous. Reason number one is that the bank won't be so considerate when your mortgage payment is late.
The second reason you don't want to be pals with your tenants is that your interests are often diametrically opposed and you may end up on opposite sides of an issue - or in a court room. It will also make it that much harder to evict them, should it come to that.
Reason three, is you may be tempted to let some things slide a bit, like late rent or damage to the house. One missing rent check in a three flat is one third of your monthly income. And since tenants are no fools, they will try to use friendship with you as a means of manipulating you into being lenient and letting things slide.
This is not to say you should be a heartless jerk either. If you know they had a family emergency causing the rent to be late one time, showing a little kindness can make them loyal tenants who feel more obligated to get you the rent early in the future. Getting to know them as people - and letting them do likewise with you, can also make it harder for them to consider breaking any rules or moving out. They might even tell you which neighbor has been stealing your paper every morning.
10. Evicting Tenants: If a tenant doesn't pay, begin evicting at once. Eviction is a nightmarish process for any landlord and takes up to six months or more. It is expensive, too. Many landlords try to delay the process, hoping the tenant will pay. But once they are more than a month behind in their rent, chances are they will never catch up. Some landlords will even offer cash incentives (to cover "moving expenses") to get non-paying tenants out. Of course never pay before they are out and have turned over the keys.
* * * In summary,
You are risking an awful lot when you get into the landlord business, as many amateurs of the last decade found out. Not only can you lose boatloads of money, but your credit history can be damaged or destroyed - and you can end up in bankruptcy as well!
The tenant, on the other hand, has nothing to lose, except maybe a good reference from you as a landlord.
So you see, the deck is stacked against you from the start. Landlord/tenant law puts a lot of power in the hands of tenants. They can use delaying tactics and the law to stay in a home for a year or more, without paying rent. They can even get free legal assistance to help them do that. By the time you evict, they have sold the appliances and moved onto the next sucker landlord.
So don't feel sorry for tenants or buy into this "evil landlord" nonsense. Most landlords are living paycheck to paycheck, and need those rent checks every month to cover their monthly expenses. Very few are making ridiculous profits in the rental business anymore. So if you don't have the constitution to be tough when you need to be, don't get into the rental business. You won't be doing yourself or anyone else a favor by going bankrupt.
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