There’s no doubt the COVID-19 pandemic has thrown off everyone’s plans a bit. If you were planning on making the move from a city apartment to a suburban community, you may have had your plans delayed when realtors couldn’t show houses for a stretch of time. On the other hand, if you were considering purchasing an additional property and using it as an income source, you may have felt the sudden strain on the housing market.
Current landlords are already experiencing the challenges associated with COVID-19. As things return to a “new normal,” it’s good to refresh yourself with a few of the questions and points that need to be considered before you get into your first dance with being a landlord.
Be in it for Long Game
One myth you need to keep in mind is that this is not a “get rich quick” scheme. Becoming a landlord requires capital upfront, lots of time, patience and a willingness to learn new things from minor home fixes to dealing with all sorts of personalities. Remember, depending on the rate you charge and the price you paid, you can be sitting with a mortgage for quite some time. A rental property can be a great early way to start planning for extra money in retirement, or sending a kid through college, none of which, as you know, happen overnight. Staying in the space for the long game to help build toward a bigger goal is a great way to keep yourself invested and either improving or expanding as time goes on.
Whether you have one apartment you are renting out, or several multi-family units, your finances can be an additional strain if you don’t take the time to separate it from your personal finances. Consider filing your rental business as an LLC for this exact reason. This separates yourself from liability if anything were to happen on your property.
After filing as an LLC, you can separate your finances from business to personal. A great way to keep yourself organized is signing up for a mobile business bank where you can see a snapshot of all your finances from your phone. With your finances separated and organized, you have the convenient ability to invoice your tenants’ rent directly through the app and receive payments easily. Regardless if you are jumping into rental properties full-time or on the side, you will be saving yourself dozens of headaches down the road after organizing your finances.
Yep, taxes; there’s really no escaping them, unfortunately. Just like with your personal taxes, you will want to work with a professional CPA or tax advisor to see how the taxes will play out on your rental property.
Rather than just getting advised on what you will owe come tax season, ask your advisor some questions that can help you out. These can range from how much you should pay yourself, as this will affect your personal federal and state taxes, to what a good rate is to charge tenants based on the monthly and annual expenses you have on the property.
Make it Official
Just like organizing your finances, everything agreed on with a tenant should be in writing, or signed digitally with a software such as DocuSign. If your tenant breaks any terms of the lease, from damaging the property to not paying rent, having a record of the agreement will help your case if the issue escalates to being reviewed in small claims court. While having records of everything related to your property helps cover you for future inevitable problems, it’s also just a good resource to see changes you have made year by year. Creating these records can help you plan for future tenants or be used as a guideline for additional properties.
Just as you put everything in writing with terms of the lease, it’s always good to have some proof for future incidents. Many leases include terms and conditions including not damaging the property, or that the property will be left in the same condition it was found.
Before and after any tenants move in or out, take some time to go around and take pictures of your property so there’s a visual stored inventory of what they’re going into. If at the end of their term you say they broke a term in the lease relating to the appearance beyond normal wear and tear and they deny it, it’s good to have evidence to support your case.
Get Legal Counsel
Whenever you deal with legal documents such as lease agreements, it’s a good idea to have a lawyer take a look over everything before you and the leasee sign off. While it may not be necessary to bring a legal advisor on full-time, making sure you have all the necessary language, and terms in there is worth the expense.
Draw the Line
Friends and family, though they’re often some of your favorite and closest people in your life, may not be the right fit for tenants. Your rental property is a business, and once you start letting family and/or friends rent from you, it becomes extremely difficult to separate the business aspect from your personal feelings. Now, is it okay to rent to them? Yes; there’s no law saying not to. It just creates a challenge you must be ready to tackle. While these people aren’t out to take advantage of you, you would be naturally more lenient on payments, or favorable to suggestions they make, among other aspects.
In our opinion, it’s best to separate business from personal in this regard to save yourself from tough conversations down the line or, at worst, fractured relationships due to minor disagreements.
Put in the Work
Your investment property will only give you what you put into it. If you decide to do everything as cheap as possible, you’re opening yourself up to increased maintenance fees on a recurring basis. Spending additional time and resources up front not only makes for a happier tenant, but it also opens up your possibilities to charge a higher fee based on the amenities provided.
Though you are spending more up front and opting for, say, nicer materials for the countertop, or stainless steel appliances, those investments have the ability to pay for themselves much quicker than outdated ones which constantly break down. Bigger expenses such as remodeling the kitchen, putting on a new roof, or installing new windows can also drastically increase the value of the property when you start thinking of your exit strategy and dwindling down your landlord career.
Hire a Handyman
If you have a background in handy work, your venture into property management likely won’t need many outsourced work aside from major projects. However, if you don’t, or this is a side business for additional income, then hiring a handyman is a must.
Hiring on a by-need basis is fine, but depending on the amount of work and properties you have in your portfolio, the number of tasks can add up extremely quickly for any landlord. Consider bringing a handyman on full-time to service any and all maintenance needs to save you money down the road, and leave yourself with a sense of security that no matter how big or small the problem, it will be taken care of.
Budget, Budget, Budget
Just as you do in your personal life, there’s no surprise budgeting is a part of your rental properties success or failure as a landlord. Your budget shouldn’t be a painful process, but rather, make it a great resource to keep you on track month by month. When you’re building your budget, remember the factors you can’t control such as occupancy rate.
While it’s great to think about being at 100% occupancy for 12 months at $1,000 each as a landlord, that likely isn’t feasible for a number of reasons ranging from the economy, to not being able to fill a space, and the lag time between a tenant moving out and the next one in.
Becoming a landlord can be an extremely lucrative business to get into. Buying properties in desirable areas at a low cost can pay dividends in the long run. Take the time to do your homework on all different aspects of your future landlord journey, from financing, to insurance and everything we covered in this article. Good luck, work hard, and remember to stick it out for the long pay!