09 Jan Making Money as a Landlord: The Secrets to Success
Landlords who have run successful rental businesses for years do much more than collect checks on the first of each month. Landlords with less experience may set out to earn passive income right off the bat, but the process of running a rental business requires time, labor and organization. Landlords who make a living off rental income have gotten their process of maintenance, management and payment collections down to an art – and they do it well.
Well, how can I be one of those landlords?
It may not happen overnight, but the best way to learn is by taking advice from the pros. Here are some tips in what profitable landlords say are vital to running a successful rental business.
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Crunch the numbers.
Like it or not, there’s quite a bit of math involved with rental property, and expenses are far more extensive than simple mortgage payments. Unfortunately, profiting from rental property is much more complicated than calculating the mortgage and adding some room for pocket change. Additional expenses that play a role in the money you collect are property taxes and city fees, insurance, maintenance and repairs, and vacancy rates. In addition, any employees or professionals you bring onboard to help manage or maintain the property will add a hefty business expense.
If you want to be a successful landlord, you need to get realistic about the numbers. Expenses tend to be higher than anticipated, making profit lower than expected – so don’t make the mistake of ignoring the math. Be upfront and organized about what your expenses are, so you can appropriately calculate just how much it costs to run the business – only then can you think about profit.
Be analytical.
Successful landlords identify with rental property as their business, and they know not to get too personally involved. Bargain listings are often marked down for a reason, due to run-down locations or required maintenance, that dilute worth after buying. Understanding the real estate market in your area is pivotal to making smart investments.
How much are tenants in the area paying for rent, on average? What amenities are available in the area, such as grocery stores, healthcare and public transit? What is the neighborhood like, and is it an area that will attract the kind of tenants you’re looking to rent to? These questions are all important to consider anytime you look at a potential property, and being honest with yourself about the answers will either lead you to a great deal or save you from a headache.
Get tax-savvy.
Pro-tip: the IRS will not go out of their way to save you money.
Understanding tax information and deductible expenses can keep you from overpaying, but it requires education and organization. The money you save can go towards enlisting the help of a professional. [Related: Check out “Top 10 Tax Deductions Often Overlooked By Rental Property Owners“]
While it may be tempting to try it yourself, a specialist can ensure your taxes are filed correctly the first time around and fix any potentially expensive mistakes in advance. Different states have varying tax laws when it comes to real estate, and having a professional crunch the numbers will let you know exactly what expenses you can deduct and how to correctly file your returns. Don’t skimp out on fees to pay a professional, especially because they can save you much more money in the long-run.
Be fair and reasonable.
Successful landlords understand professionalism as having a balance of fairness with real-world application. It’s important to be personable, but don’t allow yourself to be taken advantage of. Make yourself available to tenants, but understand the importance of your business and that your main job is to provide a quality living space. Getting too close with tenants can blur the boundaries of the landlord-tenant relationship, and may result in late payments and complications.
Conversely, avoid being too distant as a landlord, as well. Tenants want to know their voices can be heard and trust that their landlord has their best interests in mind. With that said, the key to being a quality landlord is by being respectful and available while still preserving the boundaries of your business. If you foresee any of this being a struggle for your personality, it’s advisable to consider hiring a property management company to fill the landlord shoes for you.
Screen tenants before renting.
This is a big one – thoroughly screening every tenant before signing a lease can save you time, money and stress in the long-run. It’s easy to get caught up in the allure of renting a vacant unit to the first person who comes along, but rushing the process may result in renting to an untrustworthy or irresponsible tenant.
Touch base with references provided, run background checks and take a look at credit reports. While this step may be easy to overlook if a person seems okay, performing these screenings gives you an overview of the tenant’s legal and financial history, and indicates their reliability. Don’t wait to find out a tenant is unable to pay on time each month when their credit score could have told you from the get-go. Save yourself the time and expense of chasing down missing payments and evictions, and take a look beforehand. [Related: See how we screen our tenants]
Additionally, it’s a good idea to hold tenants accountable by reporting their activity to credit bureaus, as it is an effective way of rewarding timely payments and penalizing late-payers. When tenants are aware their payment records are being reported and can impact their credit score, they are much more likely to pay on time and remain diligent. This process can also benefit the tenant, because repeated timely payments give a great boost to their credit score.
Stay organized.
Profitable landlords have their organization down pat. Whether you have one property or ten, an organized system of records and payments is imperative to keeping the business on track. Keep all records of signed leases, rental payments, property taxes and insurance payments, certificates, licenses, and insurance policies neatly sorted and easily accessible. This system creates a paper trail should you ever have a legal or financial issue to address, not to mention the organization will save you time down the road. [Related: “Hitting The Books: Tracking Rental Expenses“]
While staying diligent in organization is a key factor for beginner landlords, as your business grows, you may find yourself in the position of needing to employ further help. Staying on top of multiple properties can be difficult, especially if you are looking to split time. A property manager can be a great investment in order to keep an organized system amongst several buildings or units. This person can also take over routine tasks such as collecting payments, scheduling maintenance and managing repairs, and even marketing and acquiring new tenants. [Learn more about our property management services in Denver and Tampa]
It’s also a good idea to invest in organizational software, such as a property management app that offers payment services, maintenance scheduling, and keeps digital records of business expenses. Some apps even offer built-in screenings for potential renters, saving you a lot of time and money in both the present and the long run. It may find such software to be cost prohibitive if you only have one or a handful of properties, however those landlords with a larger portfolio may find management software costs to have a good return on investment.
Becoming a successful landlord can be quite the challenge, but it’s not impossible. By learning from the pros and applying yourself in the right areas, you can certainly make a satisfactory living with real estate investing. If you’re passionate about your investments and have the drive to stay organized and be analytical, real estate investing may be the right business for you.
