So you’ve invested in your first rental property, and you’ve decided to handle everything yourself. Congratulations! And good luck. You’ve set off on a new challenge.
Some of the main things we’ve seen DIY landlords stumble over include the following. If you can check these off in the beginning, you’ll be in a much better position to make your property investment successful.
So how do you set the rent price? Lots of factors are involved. One of the biggest mistakes first-time landlords make is underestimating costs.
It’s easy to make sure you cover your fixed costs, such as mortgage, insurance, and taxes. But be sure to factor in reasonable estimates for those variable costs, too, such as water, garbage, and landscaping, as well as the cost of regular upkeep and maintenance. Also make sure to put aside enough to cover big-ticket items and unexpected repairs.
A good rule of thumb is to plan on annual costs (not including mortgage) to run at least 3.5% to 4.5% of yearly rental income on each property.
Once you have a clear cost basis in hand, take a good look at the market. What do comparable rentals go for? Take a good hard look, and make sure you don’t over-price the property. If you can come under comparable rentals and still be profitable, you might want to consider the competitive advantage of doing so.
Make sure you collect all the information you’ll need in a written application. A good lease application should include information on current landlord, prior residence history, and employment, as well as complete contact info.
For residential tenants, a credit and background check are highly recommended. And that requires written authorization. So be sure to include the authorization in your application form.
A good tip is to pre-screen as much as possible, by including a positive but realistic description of the property in your listing, as well as your requirements. That way, there’ll be no surprises, and you’re more likely to attract the kind of tenants most suitable for your property.
Drawing Up the Lease
This can be tricky, so be sure to do your homework here. A lease is a legal contract, so you’ll need to draw up a lease that complies with all of your state’s tenant-landlord laws. (See more under ‘Legal Requirements,’ below.)
In general terms, it’s good to think through up front what you expect from your tenants and what they can expect from you. As with any agreement, the best way to avoid potential problems before they happen is to set out mutually agreed on expectations in the beginning.
If you’re leasing residential property, the lease should specify who is authorized to live there; how much the rent is, and when and how it’s to be paid; clearly explained terms of the security deposit (such as the amount, how it will be used, how and when it will be returned); your rights to enter the rental property; and the tenant’s and landlord’s upkeep responsibilities.
State by state rules vary for several important lease terms. So be sure to find out what your state’s laws are concerning such things as the maximum security deposit you can collect, what notice you’re required to give for entering a tenant’s home, and more.
If you’re leasing commercial property, be prepared. Commercial leases can get quite a bit more complicated. So if you’re trying to handle this yourself, the best advice is to hire a lawyer.
Covering All the Legal Requirements
Most people know that federal law doesn’t allow you to turn away a tenant based on gender, age, race, ethnicity, etc. But not everyone knows that also means you can’t say a place is “perfect for female roommates,” or specify no kids. You can, however, decline a tenant based on his or her credit report. Or even based on references or income.
On top of federal fair housing laws, different states have different laws governing rent-related issues. State laws also cover such matters as termination and eviction rules, security deposits, required landlord disclosures, landlord access, and tenant rights and protections. Cities and counties also usually have local ordinances that affect landlords and tenants, so be sure to research those, too.
You can research the relevant state and local laws online or at your local public library or law library. Just remember that in legal matters, ignorance of the law is not an excuse!
Handling Maintenance and Repairs
If you’re handy with a tool box, you’re probably thinking of doing lots of the regular maintenance work yourself. That’s fine, for simple cosmetic upkeep, or if you really have the professional skills for work beyond that.
But the most efficient and cost-effective approach for the do-it-your-selfer usually involves hiring a dedicated team of professionals. Find a good general contractor, and put together a team of licensed tradesmen (or women) you can depend on for specialized work. You’ll be rewarded in savings – of time and money – down the road.
Finally be sure to keep sure to keep detailed records of everything. For each tenant, be sure to keep a record of their application and deposit information, the move-in checklist and photos, all repair and maintenance records for the property, and a copy of all notices and other correspondence with the tenant.
As soon as you pick up more than one or two rentals, or if you’re investing in commercial property, you’ve launched a business. And to be successful, you need to run it like a business.
As every entrepreneur quickly learns, you can’t do everything yourself in any business and be successful. There’s a point at which you have to invest in professional services and support in order to be profitable and grow.
Smart entrepreneurs are alert to recognizing when they reach that point.
If you’re reached that point with your rental property, consider outsourcing some of the leasing or management duties, so you can move on to more – and more profitable – investments. At DMG, we’re happy to help with part or all of your property management needs. Reach out if you’d like to learn more.
Do you have topics you’d like us to address in these resources for property owners? Let us know, and we’ll try to include it in an upcoming post.