The Pros and Cons To Landlording
What are the Pros and Cons to Becoming a Landlord?
I was asked the other day about the pros and cons to landlording, so I thought I would write up a quick post of my experiences. Most of us have heard the horror stories about becoming landlords and owning rental properties.
Like everything out there, landlording definitely has its pros and cons. When I say landlording, what I’m referring to is owning rental properties. Whether or not you choose to outsource the property management is really up to you.
In most cases, the pros of owning a rental property outweigh the cons as long as you choose the right rental property to begin with. Choosing the wrong property can cause more work and headache for landlords, which is where most of the horror stories come from. But in general, if you can find the right property, landlording can be very rewarding.
Some of the pros to becoming a landlord include:
• Appreciating Asset
• Great Returns / Cashflow
• Tax Benefits
Some of the cons to becoming a landlord include:
• Being Lied To
• Late Payments
• Tenants that Trash the House
• Calls in the Middle of the Night For Repairs
• Evicting Tenants
Becoming a Landlord
Overall, becoming a landlord can be extremely profitable if you do it correctly. The first thing you need to do is find a property in a good location. This is a must. You will be much further ahead in the game if you choose properties in good neighborhoods that are within the boundaries of good schools. Think about it. The best renters are those that care. They care about where their kids grow up. What schools they attend. What the crime is like in the neighborhood. Attracting those kinds of families is easier when you have properties located in these areas.
As a landlord, it’s important to have a rental application and/or an interview so you can pre-screen your tenants and find the good renters. An application is the best way to go because it will help you determine if the potential tenant will be able to pay rent. You may also be inclined to ask for referrals, or where they stayed last so you can contact the previous landlord to see if there were any problems. It’s important to get a feel of how well the tenant will care for your property. Landlords will often use the technique of asking the potential tenant to see the inside of their car. Depending on what the car looks like, will give the landlord a pretty good idea of how well the tenant will take care of the inside of the property. If the car is clean on the inside and well kept, than most likely the inside of your rental will be kept clean. If it’s messy, this is not a good sign. This is obviously not always the case, but a very good indicator.
Here is a link to a rental application you are welcome to use or modify to fit your criteria.
Next, you’ll want to get your legal “Rules and Regulations” or “Tenant Agreement” form signed. This form will set the guidelines or rules your tenants need to follow. These rules may include things like, who changes light bulbs, are pets allowed in the house, who is in charge of maintenance, the maximum number of people in the house, when rent is due, how it is paid, how much is rent, late fees if rent is not paid on a certain date, is the contract a month to month or year lease, how much the security deposit is, who pays the utilities, etc. It is important you have these contracts to protect yourself and your tenants.
You can pick up these rental agreements at any office supply store: Staples, Office Max, Office Depot and others. These are very basic forms, but they will give you a start. If you need to be more specific with certain things, you may want to get some advice from a legal professional and have them draw up the contract. The most important thing on the contract is the signatures. Be sure that the tenant signs and you sign as well.
We have a sample rental agreement if you would like to compare yours to ours. Or if you don’t have one, you can use this one as a template.
As soon as you have selected a tenant to live in your rental unit, it’s a good idea to have a tenant inspection report. This is given to the tenant when they move in and when they move out. This report will have a description of the property and all the rooms therein. The new tenant will go through and mark all the places that need repair, spots on the walls and floors, so they will not be held liable for the things that were already there when they moved in. When they move out, they will fill another one out and you will compare the two to see what damages, if any, were caused by this tenant. The deposit will usually cover these damages. Most landlords like to have at least a full months rent as deposit, which is then given back as soon as the tenants move out, and no damages apply.
Here is a link to a tenant move in inspection form.
It’s a good idea once you decide to become a landlord to check into forming a Corporation or LLC. Most landlords will form an LLC because of the protection it gives them. If anything was to happen on your property and the tenant sues you, you can set it up where all your assets will be protected. Whereas, there is a possibility of losing everything if the property is in your name. Go see an accountant or attorney that handles setting up these entities, and ask them for advice. They will help you to determine which is best for you. And don’t forget to get insurance as well. You’ll want insurance just in case anything happens to the property.
Now that you have your tenant in your rental property, you can sit back and watch the residual income flow right into your bank account.
6 Pieces of Advice to Landlording
Here are a few important pieces of advice you need to always remember and enforce at all times unless you would like your first experience as a landlord to be your last.
1. Buy properties in good neighborhoods. Remember, these are your rentals designed to provide you with lasting cashflow. Try to put yourself in a good position in the beginning by attracting good, solid families to rent your property. Good parents want the best for their kids. They want them to grow up in good neighborhoods where they feel safe and the schools are good. Don’t buy properties in bad areas where you attract bad tenants.
2. Be strict on your screening process. Make sure you find the right tenant or it can be a nightmare. You’re better off turning someone away because they don’t meet certain criteria then to force someone in your rental just because you don’t want to pay the monthly payment from your own pocket. Don’t put yourself in bad situations you don’t have to be in. Eviction is a nasty process, and you may end up this way if you rent your property to someone who is not qualified. Look how they take care of their car and get referrals.
3. Do not accept personal checks. Cash or direct deposit only. This is the only way to go because you’ll get excuse after excuse after excuse. One lie after the next. There are several providers out there that offer this kind of service for a nominal fee and it’s worth it. You can check out www.paynearme.com or williampaid.com. One thing to remember too is that you want to be firm. Don’t let rent slip a month or it will turn into 2 or 3. This is a common mistake many beginning landlords make. Don’t be the nice landlord that is a pushover. Don’t be a jerk either. Just make sure they realize that you are not the only owner (whether you are or not, doesn’t matter), it gives you more clout. But sometimes you have to be the bad guy.
4. Find a good handyman. This one alone you could write an article on. A good handyman is hard to come by sometimes. One that does a really good job, quickly for a reasonable price. Spend some time searching for a good handyman because they are worth every penny.
5. Renters insurance. You’ll want your renters to get insurance to protect them in case something happens or personal belongings are stolen. It’s also a good idea to make sure your insurance policy covers water damage. Water is the biggest issue with most rentals. A pipe brakes or freezes, sprinklers were left on too long and flooded the house, heavy rain flooded the basement, the roof, toilet or sink was leaking, water will always be a common issue. So make sure you are covered for water damage. This is different from flood insurance. Depending on where the property is located, flood insurance may be a necessity too.
6. Good rental agreement. Use a good, solid rental agreement that explains everything in writing and the new tenants have read the entire agreement and understand the terms. Get the full, one month deposit upfront. Take a quick video of the inside of the property just before the new tenants move in so you know exactly what damages were made if any.
All in all, being a landlord and owning rental property is a good thing. Even though it’s inevitable that bad things will happen, the pros, in my opinion, outweigh the cons. By planning ahead and knowing what to do before hand, will help eliminate nightmares in the future.
One alternative to all of this is to hire a property management company that will take care of all maintenance and tenant screening for you. Where this is very beneficial is when the property is located in a different state in which you reside. Rather than lower the rent and have the tenant watch the property, a property manager can keep an eye on the property and make sure it’s always rented, the tenants are happy and the repairs are completed in a timely fashion.
The hardest part is finding the right property managers. We sometimes have to go through 3 or 4 different property management companies before we find the one that is bending over backwards to keep us happy. But when you find the right one, they are a tremendous asset to your team. Normally property managers will charge 8% – 10% of monthly rents. You can negotiate this percentage depending on how many property they are managing for you.
I hope this has helped. Please feel free to leave any comments or suggestions with your experience as a landlord.