Now that you have been warned about the hardships of being a landlord, let us take a detailed look at what it takes to run a rental property. You will need certain resources, qualities, contacts and preparations in order to succeed at making money on your property without running yourself into the ground.
One basic rule to keep in mind is that every task or aspect of landlording will either cost you time and effort or money out of pocket. Example: You can take the time to do your own accounting or you can hire a professional bookkeeper to do it for you. If you do not have the skills for a task, or if you cannot afford the time, consider hiring outside help. Never fear…this article will reveal what it takes to be a landlord and, if you do not have it, how to get it!
Being a landlord requires time commitment. At a minimum, you need to run your rental business, even if that means just giving other people orders to carry out the work. But it is likely that as a new landlord, you will be doing all the work yourself. If you hold a full-time job, make sure you are ready to devote some of your off hours to being a landlord. If you own just a few rental properties, you should be able to do what needs to be done in the evenings and on weekends. If you are working with a spouse or partner, this will be even easier. And if your full-time job offers flexible hours, that too will help.
“ It is easy to handle everything myself, especially because all my properties are in the same area. I have more flexibility with my [work] hours than most people, so I can make appointments in the middle of the day.”
–Mark Berlinski, Owner of Multiple Rental Properties, Chicago, Illinois
Not counting the scouting and purchase of new rental properties, your time as a landlord will be spent on the following tasks:
• advertising and showing property
• screening potential tenants
• moving in tenants (organizing rental agreement, keys, house rules, etc.)
• collecting/depositing rents, paying bills and other accounting
• general maintenance and cleaning of the exterior of property
• maintenance and repairs on each unit
• tenant communications, as necessary
• renewing leases or starting over with advertising property
• staying informed on landlording laws, policies, rents and advice
How much time each of these tasks will take depends on the state of your property and how efficient you are. But you can see from this list that most of these tasks can be handled on weekends or in the evenings. And you can shave time off most of these duties with the advice in this book.
Here are a few tips on how to reduce the number of hours you spend on your regular landlord duties:
• Have tenants mail rent, or set up a direct debit to your tenants checking account or credit card. Do not waste time collecting checks in person.
• Schedule a time once a month when you sit down and pay all your bills and settle your accounts. Make this date about a week after rents are due so you can see immediately if a check is late.
• Batch as many landlord-related phone calls as you can and make them in one sitting.
• Set up a weekly and/or monthly maintenance schedule so you can batch small repair jobs to avoid multiple trips—your time is money!
• Bring something to do while you are waiting to show a unit or meet a repairman. If the person you are meeting is late or does not show, you will not have wasted time. Make phone calls, do paperwork or check out the unit or building for necessary repairs and/or improvements.
Let’s say you have spent the money to acquire your rental property and to get it in shape for your tenants. Now you are ready to start getting a return on that investment. But keep in mind: you are not finished spending yet. In fact, you are never finished spending. Be sure you have enough cash at hand to cover both regular landlording expenses and unexpected emergencies. Use these charts to calculate how much ready money you will need.
Minimum amount you should keep in a reserve fund:
- One month’s mortgage on the rental property.
- One month’s cost of utilities/other expenses on property.
- One month’s property taxes on rental property.
Recommended amount you should keep in a reserve fund:
- Three month’s mortgage on the rental property.
- Three month’s cost of utilities/other expenses on property.
- Three month’s property taxes on rental property.
You can anticipate major expenses by either examining the building yourself or having a professional home inspector go over the property if you are not confident. Consider the following:
• When will the roof need to be replaced?
• When will the furnace or the hot water heater need to be replaced?
• How is the building’s foundation?
• How long will the major appliances last? When do the warrantees run out on each?
• When should the floors be refinished or the carpets replaced?
• When should you paint the interior?
Take the information you gather and list a 3- or 5-year schedule of when major and minor repairs are expected, as well as maintenance work. Create a long-term budget around those repairs so you can start saving. And do not forget to update that budget every year!
Warrantees and Guarantees
Keep a file of all receipts and warranty information on appliances and other major expenditures for the rental property. Check that file first when any repair work is called for on a washing machine, refrigerator, etc.
Set Up Separate Accounts
Open a new checking account to use for your landlording business. Deposit rent checks in this account and use it to pay any related costs. This is an easy way to keep track of your rental income and expenses. It also keeps your personal money out of the mix, as it should be.
Consider setting up a separate savings account or money market account to hold security deposits. This money, which tenants turn over as part of their rental agreement, is to be held by the landlord to cover expenses such as skipped rent or damages.
Many states require landlords to keep security deposits in a separate account and, if some or all of the deposit is returned to the tenant, to provide the interest as well. Check your state law on this or with your local landlord association or housing authority.
But what if you are just starting out and have no reserve funds, liquid cash or any cash for that matter? Well, the good news is you may not need a lot of money right away. However, it does not hurt to consider how you might get some ready cash if something unexpected comes up. Here are some options to keep in the back of your mind:
1. Refinance your rental property (or your residence) for a lower interest rate and pocket as much money as you can on the deal.
2. If you live on the premises of a duplex or three-flat, you can take out a home equity loan on the rental property (or your separate residence) if you have some equity in it. If you own a larger property, take out a line of credit using the property as collateral.
3. Get a second mortgage on the property. This is a last-resort step, to be undertaken only if you are 100 percent positive you can assume the additional debt.
A successful landlord—especially one who is a do-it-all-yourself type of landlord, needs certain skills and personality traits. A list of these characteristics can be found on the next page.
- A landlord needs to keep track of dozens of details, including accounting, recordkeeping, maintenance schedule, etc. If you are not good at staying on top of details, find a system that shapes your schedule and your to-do list.
- You will need to track several bank accounts and make sound decisions on spending and making money, including calculating how much rent you can charge and how to make a profit.
Landlord Central: Setting Up Your Home Office
You will need to devote part of your home to your landlording workspace. It does not have to be fancy or take up a lot of space, but as a working landlord, you should have:
• a computer with Internet access and a printer;
• a small file cabinet or other means of keeping paper records;
• dedicated space for maintenance supplies and tools; and
• a cell phone or dedicated phone for your business.
You do not have to have a dedicated computer just for managing your rental property; the family PC will do. Just keep separate folders or directories for your landlording…and be sure to back everything up regularly to safeguard it!
Using Your Computer
Of course, you can rent property without using a computer. All tasks can be done with a pencil, paper and calculator, but with a computer you can:
1. Keep track of your accounts. Use standard off-the-shelf accounting software to enter deposits and payments and sign up for online banking.
2. Perform credit checks on prospective tenants. It is fast and easy to request credit checks online.
3. Create advertising signs, flyers and classified ads. Once you have written them, just update as needed. Create or revise rental agreements, notices, policies, etc. Download templates and customize on your computer.
4. Send and receive faxes. You can buy software that lets your computer act as a fax machine. This might come in handy for receiving completed rental applications and leases, and it is cheaper and takes up less space than a fax machine.
5. Educate yourself. Stay up-to-date with state and federal landlording laws, research local rents and real estate prices, and chat with other landlords across the country—it is all on the Internet. Find enough space for all the paperwork that comes with being a landlord and develop a filing system that makes sense to you. Your paper files will include:
• signed rental agreements and leases
• up-to-date contact information on tenants
• building records
• receipts and bills
• insurance policies
• maintenance schedules
• tax records
• tenant correspondence, such as rent increase or lease violation notices
Paperwork involving anything you declare on your federal income taxes (rental income or deductions) should be kept for 7 years. If you are limited on space, box up each year’s receipts and forms after you pay taxes and store it in a safe, dry place like the attic or a closet shelf.
What should you keep and how long should you keep it? Signed leases or rental agreements keep these as long as you own the building. Once a tenant leaves, you can move his or her lease from your active files to a storage area, but it is a good way of keeping track of who lived in your building.
Contact information on tenants Keep cell phone numbers, work numbers and emergency contact numbers for 2 to 3 months after the person leaves, in case you need to reach him or her.
Correspondence with tenants:
Their letters of complaint and requests for maintenance or letters to them regarding broken house rules or policies
Keep these throughout their tenancy until approximately 6 months after they leave. You may need a paper trail in case a dispute arises, or if you need to prove why a security deposit will not be returned.
Receipts, bills and other tax-related documents 7 years for anything declared on your taxes.
Records of purchasing property and making capital improvements
Keep these as long as you own the building. Eventually you will need these for tax purposes.
Tools to Go With You
Put all your most commonly used tools in a portable toolbox and have them ready to go. Keep the tools in your garage, some other area of your house, in the trunk of your car or consider leaving tools onsite at your rental property. Perhaps you can keep a locked box in the basement of your multi-unit building where you can access wrenches, a plunger or a putty knife, as needed.
A Dedicated Phone Line
One area where you definitely want to keep your personal life and your landlord life separate is the telephone. Having a separate phone for your business helps you control communications with tenants, prospective tenants and contractors, and also provides a more professional sound on your voice mail message and when you answer.
The best way to have a landlord hotline is to get a cell phone devoted (or partially devoted) to managing your property. Use this number as your landlord hotline and give it to tenants and your professional contacts. Make sure to list the number in rental ads and on your business cards and forms.
If you prefer not to use a cell phone for your landlording business, you can either install a second phone line in your home or use your home number. Either way, make sure you have an answering machine or voice mail that you can check when you are away.
Note on Getting a Second Telephone Line
Telling your phone company you want a business line installed is like asking them to charge you more. Make sure you request a second personal line, like you did for Internet access or to handle your teenager’s calls, or you will pay more for installation and calling charges on a business line.
Landlords must be available to their tenants (or their management company) round the clock. If you go out of town for a week, or just a day, people should have a way to get in touch with you. If you will be unavailable—in the hospital or backpacking across Europe—appoint a contact person for emergencies and let your tenants know how to reach that person.
Building Your Rolodex of Contacts
Even if it makes good financial sense to do everything yourself, from balancing the books to installing a deadbolt lock, you should know some skilled professionals you can call on in an emergency. They include:
• an accountant and/or tax preparer who specializes in property management
• a lawyer who can handle liability suits and questions
• an insurance agent
• a plumber
• an electrician
• a carpenter
• an HVAC contractor
How can you locate contacts in these areas? One way is to join a local association of rental property owners. These associations are terrific ways to network, get answers to your landlording questions and stay abreast of your local laws and rental market.
Reading this book and browsing through the information on the enclosed CD and the Web landing page, www.socrates.com/books/landlording-handbook/aspx, can get you up and running as a landlord. But if you want to excel as a property owner and manager, your learning should not stop here. You can continue your education through several avenues: reading books and periodicals, browsing the Internet and talking to other landlords and related professionals.
Here are some suggestions of resources you might find useful:
National Apartment Association
This association is an advocate for quality rental housing, serving the interests of rental property owners, managers and others. Landlords can get insurance through NAA, get information on vacancy rates, the rental housing market and other indicators.
Ask questions, sign up for the free WEEKLY RENTAL OWNER e-newsletter, access a free special Real Estate Report each month and more.
Full of resources from listings of landlord associations to links to appraisers, contractors and handymen, state laws and much more.
National Association of Residential Property Managers
Looking for a property manager? This is a terrific resource.
Now you have an idea of what you need to be a successful landlord: money, time and skills, as well as an office setup, a phone, a Rolodex of contacts and continuous education. If these items are all within your reach, let us get started on the nuts and bolts of how to start your new rental property business.