Are you landlord material?
It’s not as easy as it looks.
To make the most of income property requires an accountant’s eye for detail, a lawyer’s grasp of landlord-tenant laws, a fortuneteller’s foresight and, should you choose to manage your rental property yourself, a landlord’s firm but friendly disposition.
“Where people who want to become landlords fall short is, they don’t realize how much work goes into it,” says Diana George, founder of Vault Realty Group, now part of Century 21.
So before you leap in, you’ll want to consider whether you have the time and skill to put into managing a rental. While rental property is considered a passive investment, that doesn’t mean you’re fully passive in managing it.
Success requires a longterm outlook.
Jeremy Kisner, a senior wealth adviser at Surevest Wealth Management in Phoenix, owns two Las Vegas rentals. The unit he’s held for 13 years has had two tenants and low maintenance, while the other has had three tenants in four years — the last one a costly eviction.
He’s taking the same advice he gives his clients.
“The way that people get in trouble with almost all investments is, they just don’t hold onto things long enough,” he says. “With rentals, if you break even on a cash-flow basis, that’s actually not too bad because you’re paying down the principal and building equity that way. Then, you hopefully also see some appreciation.”
So if you’re looking to make money in real estate, you’ll want to think long term. As you pay down or eliminate principal over the years, you should be able to grow your cash flow.
It’s easy (and costly) to break the law.
State landlord-tenant laws can act like an open manhole cover for rental owners who ignore them, according to Kathy Hertzog, owner of Erie, Pennsylvania-based Landlord Association.
Case in point is tenant security deposits. It’s not as simple as collecting and holding the money.
“There is definitely bookkeeping involved. You need to have that account for each tenant and keep that money in that account and save it,” Hertzog says. “Security deposit laws govern how much time you have to return a security deposit when tenancy ends, less any expenses for cleaning and repair, all of which have to be itemized.
“In some states, if you don’t turn that in, the tenant can go after the landlord for double their security deposit for failing to return it within the specified time period,” she says.
Of course, this is only one aspect of the laws surrounding rental property, and there are many others that landlords must know in order to avoid running afoul of them. You’ll want to be familiar with rules about eviction, fair housing and other regulatory requirements.
DIY or use a management service?
If you purchase a rental property, should you be your own landlord or fork over 6% to 10% of your rental income to a management service? While there’s no right answer for everyone, George and Kisner prefer to subcontract the work.
“They do the background check on your tenant, make sure they sign the lease and pay their rent on time,” George says. “That frees you up to manage your money, not your property and tenants.”
Hertzog says there’s a potentially steep downside to being your own landlord.
“If you get too close to your tenants and the tenants have financial problems, you can find yourself stuck because you don’t want to evict them,” she says. “You have to be very professional about it, because if somebody doesn’t pay their rent, they’re stealing from you.”
On top of this issue, are you comfortable making the executive decisions that must be made in managing a property? Will you repair or end up replacing that failing air conditioner or leaky dishwasher? You’ll need to make the call as to what is the best course of action.
Budget for the unexpected.
Failure to plan for the myriad expenses of owning a rental can become a fast track to disaster.
“As a landlord, you want to save about 20% to 30% of your rental income for upkeep, maintenance and emergencies,” says Hertzog of the Landlord Association.
“You want to make sure you’re not just living off that,” she says, “because then when something big happens, you won’t have any money to fix it, and now you’re stuck because you’re a landlord with a property that needs to be repaired quickly, and you don’t have that money.”
Remember to renew your leases.
If mom-andpop landlords have one glaring blind spot, it’s the failure to renew tenant leases in a timely manner, according to George.
“You’d be surprised how many landlords don’t renew their leases every year, so they’re letting their tenants go on month-tomonth leases,” she says. “What’s wrong with that? What’s wrong is, their whole thinking is that now, if I want to get my tenant out, I can’t because now they’re not strapped to a lease.”
“Also, they can’t raise rent,” says George. “The only way you can change rent is if you have them sign a form changing the lease every year. That’s how you keep your tenants in check.”
Depending on the state, landlords can give notice of eviction for a specified period.
In California, where George is based, the state allows landlords to give 60 days’ notice for tenants who have lived in the property for more than a year (or 30 days for less than a year), though the situation may be different in rentcontrolled cities. The landlord also might offer a new lease contract at the same time.
Want long-term tenants? Consider Section 8.
Section 8, aka the Department of Housing and Urban Development’s Housing Choice Voucher Program, typically caps the rent for low-income Americans who qualify at 30% of their adjusted monthly income.
While some landlords are skeptical of the paperwork and potential upkeep problems presented by some Section 8 renters, Hertzog views Section 8 tenants favorably.
“Older populations and persons with disabilities are usually excellent tenants. They take excellent care of the property because this is their home. This is where they want to be. Plus, if they don’t pay their rent or ruin your home, they risk losing their Section 8 voucher,” she says.