Cory and I have been taking the same commuter train into the city for a couple of years now. Though I’m self-employed as a real estate investor and he’s an up-and-coming CPA, we both enjoy the commute to our respective offices each day and frequently chat about how lucky we are to live where we do. Actually, we talk about a lot of things and are often surprised by how much else we have in common. Lately, Cory has been asking about the work that I do and just yesterday expressed an interest in investing in real estate rentals. I told him that being a landlord for the first time can be stressful and, if you’re not careful, expensive. I also told him that if he was serious about becoming an investor, I could give him some tips on how to improve his chances of doing it successfully. So, we devoted our next several commuter chats to just that.
Top Tips for Being a Successful First-Time Landlord
Cory’s reasons for wanting to buy and hold properties as rentals are right in line with why most new real estate investors do. There are benefits to being a landlord that are hard to deny. You can make passive income from your rentals, take advantage of certain property tax deductions, and even speed up your investment’s appreciation by updating or adding amenities like a pool.
But, there are also challenges to being a landlord that can, and often do, overshadow the benefits. Constant repair issues and tenant problems are two of the biggest you’ll face. And, both of these can cost you time, energy, and money in the end—especially if you’re trying to manage an out of state rental or multiple properties all over town.
Like I told Cory, however, there are things you can do to increase your chances of tipping the scale so that the pros and cons of being a landlord don’t cancel each other out. Here are the tips I shared with my friend on how to be a successful first-time landlord.
- Make sure the rent you charge covers the costs you pay. In order to make passive income from your rental, the rent you charge—and can realistically expect to receive in your market—must more than cover your mortgage and operating costs. This shouldn’t be a problem provided you bought the property at a good price and can keep other expenses, like maintenance, marketing, and insurance low. If you paid too much from the get-go or invest in an area with high property taxes, you could have trouble convincing a tenant to make up the difference with an exorbitant rent amount—and be stuck with a property that keeps you in the red.
- Add to the property only if it helps you increase the rent. Whether during the initial stages of rehabbing a unit or when making repairs between tenants, take care not to add anything that you can’t financially justify. Expensive bamboo flooring, solid wood crown molding, or a customized kitchen renovation in your investment property all look great. But, they may also not fit the target market—or pocketbook—of the typical tenant in the area. And, if you can’t increase the rent, it may not make sense to drastically improve the look or functionality of the unit. A little market research should provide you with enough clues on what to do for the rehab. What you definitely don’t want to do is get into a financial fix with a property no one can afford to rent.
- Know, and abide by, all fair housing laws. The federal Fair Housing Act of 1968 and the amendments that followed protect the rights of tenants by defining and outlawing certain discriminatory landlord behaviors. To avoid any legal ramifications brought on by a renter—or a potential renter—it’s critical that you familiarize yourself with these laws and actively strive to follow them. There is a lot to learn, too, since state and local governments often impose additional restrictions on landlords. Breaking the law out of ignorance won’t guarantee you a fair shake in court, either. You could still lose thousands of dollars in a lawsuit, not to mention your property, if you inadvertently dig a hole too deep to crawl back out of.
- Screen tenants thoroughly. Since dealing with problem tenants is one of the bigger financial drains on landlords, screening them thoroughly before offering a lease is crucial. Fail to do this and you could end up with a renter who never pays on time or who causes property damage that their deposit doesn’t cover. So, perform criminal background checks, inspect employment and rental history, confirm income and credit scores, and follow up on all references. But, also be sure to set your criteria early on, and within the law, so that there is no confusion or cause for a disgruntled tenant to challenge you in court later.
- Document everything and keep it organized. Of course, you’ll want to document any ongoing issues you may have with a problem tenant. But, you’ll also want to document—and organize—just about everything else, too. Keep the condition reports on your property up-to-date and available to new tenants, as well as all required disclosures on lead, radon, and mold. Make sure your rental applications and leases are state-specific. And, record every complaint, maintenance issue, notice of entry, and rental receipt in a place that you can easily find should anyone, like a city inspector, ask. Better yet, make multiple copies and save some online. Paperwork can be a pain, but it can also be a problem-solver if you ever need to prove you fixed a leak or returned a deposit.
If the work of safeguarding the returns on your buy-and-hold as a new landlord sounds stressful, it is. But, that doesn’t necessarily mean that investing in rental property as a beginner can’t be done successfully. But, there is an easier way to jump-start your career as a real estate investor that can potentially increase your chances of realizing good returns in a shorter amount of time and with a lot less stress. And, that strategy—buying, renovating, and selling houses for profit—isn’t difficult to get into, or succeed at, when you’ve got a great team to support you.
Getting Support for Being a Landlord for the First Time
The first property I ever invested in was a rental, and so was the second. I had so much trouble keeping my financial head above water on the first one, that I was determined to make up for my mistakes on the next one. Of course, that ended up being a bonehead strategy since I still had to face the same challenge of staying in the black that I did before—and that Cory will have to overcome if he decides to become a landlord, too. Eventually, I started to wonder if being a real estate investor was right for me.
When I became an independently owned and operated HomeVestors® franchisee, however, I learned that it was my investment strategy that was the problem, not necessarily me. See, because of the shorter time horizon for buying homes to rehab and resell, you can realize potential returns on these investments in anywhere from three to nine months. While I continue to hold rental properties, I incorporated this strategy into my investment model and it’s actually what I prefer now. The difference is that, thanks to the training, qualified leads, and ongoing support I received from HomeVestors, I’ve gotten good at choosing properties with a better monthly ROI. As a result, I’ve been able to skillfully diversify my portfolio—and successfully stay in the green.
Wondering which real estate investment strategy, and franchise opportunity, might be right for you? Contact HomeVestors today to discuss your options.
Each franchise office is independently owned and operated.