When it comes to listing the greatest investments you can make to generate wealth and income, you’ll find very few charts that don’t acknowledge or crown real estate as the best wealth-generating investments out there.
And when it comes to real estate investment, rentals reign supreme when it comes to creating potential long-lasting passive income.
Whether you have the opportunity to invest in huge multi-complex apartments that bring in money from hundreds of people a month or you’ve realized that instead of losing time and money maintaining and cleaning the always empty backyard cottage or bedroom; you could get it to earn you a few hundred dollars a month. There is the potential for huge gain when you rent out.
Or more accurately there is potential for huge gain when you rent out RIGHT. Rent out wrong and you’ll have your hands full with the stress-inducing rental situation from hell.
Below, I’ll be detailing some of the most common pitfalls new landlords don’t account for that make all the difference between concluding whether renting out was the best or worst financial decision you have ever made.
What You Need To Know To Be A Great Landlord.
We’ll be covering the following 7 factors you need to account for to be a great landlord:
- It’s a business, not a hobby
- Someone has to be on call 24/7
- Knowing you as the owner is a disadvantage
- Murphy’s Law Of Breakages
- Be ready for the next tenant
- Empty Property > Bad tenant
- Understand your rental property and learn what works for it
1. It’s a business, not a hobby and certainly not an adoption.
This first point will be a direct attack on all current and future landlords who are close to their tenants.
Whether it’s close by proximity (they rent nearby or in the same property as you), close by emotions (Your tenant is your friend or family member) or close by personality type (you’re just a friendly individual) there are major risks to treating your tenant like a friend first and customer second.
To explain this, you need to understand that the foundation of every great tenant to landlord relationship comes down to the lease agreement and the enforcement of the lease agreement.
The lease agreement specifies the terms to which your tenant agrees to rent your property from you as the landlord, it equally specifies the terms to which you as a landlord do not agree to rent out your property to the tenant.
Fees, occupancy limits, handling of breakages, rules on renovations, penalty costs and so much more will be addressed in the lease agreement and a perfect world, the lease agreement is the law.
Unfortunately, the lease agreement can quickly turn into just another piece of paper if its rules aren’t enforced diligently. The more often you wave late fees or forget about the part which says “no dogs” because theirs is cute; the more you encourage your tenant to become a problem child.
This is not to say you need to be heartless or mean; a rare late fee with good cause from a great tenant can be waved so long as both of you are aware that the situation was the exception and not the rule.
2. Someone has to be on call 24/7
Let me be clear, there is a difference between “being on call 24/7” and “being action-ready 24/7.” There are very few things that a tenant will need and expect your immediate action to handle but in almost every situation; your tenant expects you to listen.
A tenant’s ability to positively voice their opinion to a problem to someone is as important a factor in real estate as customer service is to any business. It’s critical to managing the churn rate.
Churn rate in rentals is the measure of how quickly tenants leave your property. A vacant property for a landlord is the second-worst situation possible as it is a situation that costs you money equal to the amount you would have charged rent every single month.
If a tenant has a problem with a flickering or hard to open door; the problem doesn’t need to be solved then and there but it does need to be heard then and there. The moment your tenant feels mistreated is the day they start writing their notice to leave.
3. As the Landlord, you shouldn’t be known as the property manager.
This point is an important tip directly for landlords who don’t hire a 3rd party property manager or those who live near their tenant.
Landlords as the title implies are meant to lord over the land; set rules and collect rent.
Property managers are supposed to hear complaints and handle them to the best of their ability.
As you can see from the above description, each title holds different and opposing objectives from the other. The property manager wants to hear all the complaints to ensure a happy tenant who stays a long time while the landlord wants rules to be enforced.
Holding both positions isn’t necessarily a bad thing (it’s often great for first-time landlords), being known for both positions is.
2 likely unfavorable situations to arise from your tenant knowing you for both positions are the following:
A – they start fearing your landlord status to the detriment of property manager status and avoid telling you genuine issues surrounding their tenancy which could lead to their early churn-over.
B- they start being unconcerned by your landlord status and overvalue their ability to complain to you through your property manager statuses such as unfounded complaints about rent and contract rules.
This factor is why most landlords hire a 3rd party to act as a buffer between them and the tenant or refer to themselves a shareholder who is not the sole owner of the property; to make it easier to enforce contractual obligations.
4. Murphy’s Law Of Breakages (Anything that can be broken, will be broken)
Unless your target rental audience consists of the top 1% of income earners who won’t pay rent unless the countertop is gold finished Italian marble stick to “Durable and Lasting over Fashionable and Seasonal.”
Your ideal tenant as a landlord is one who stays and pays their rent for years to come. Unfortunately, the longer a tenant stays in your property, the more comfortable they become and the more likely they are to break anything and everything that is easily broken.
Chipped walls, burnt electrical sockets, spilled soup carpet stains, cracked windows, displaced tiles, children drawing on walls and on and on; you’ll soon find out that nothing is safe and everything must be given the best chance of survival.
Always remember that when you’re spending money on your rental property the goal is cheap in the long and not cheap today.
5. Be ready for the next tenant
It’s always important to remember that the nature of rentals is an expected inconsistency. At some point down the line, you will lose a tenant and have to find a qualified one to replace as quickly as possible.
Whether you have the world’s greatest tenant or the world’s worst tenant always remember that tenants are seasonal. The season may 3 months to 6 months or 3 years to 6 years but never rest on your laurels by believing that a tenant is forever.
Because of this, at all times; you need to be able to say yes to the following 2 questions.
-I am financially able to survive 3 months without a tenant
It’s only in the worst of cases that a tenant leaves your property in under a period of 6 months but depending on the market situation; you may have an empty property for up to 3 months.
This becomes a period where the cost of the rental property entirely falls on you and you need to make sure you’ve accounted your savings to be able to handle such a situation.
-My current tenant has paid the cost of attracting my next tenant
This is not saying that you have a clause in your contract that makes your current tenant continue to pay rent until you find a replacement.
The logic behind this question is that you have been steadily saving a portion of the current tenants’ rent towards paying for the necessary renovations needed to attract the next tenant.
The longer you’ve had your tenant the more renovations funding you should have and the more you will likely need. Remember how we stated above that the longer you have a tenant the more likely they are to break things?
Your funds must be able to repair everything or the majority of things needed to make your rental property attractive for the next tenant,
6. Qualified Tenant > Empty property > Unqualified tenant.
The term ‘Qualified’ refers to meeting a specific set of criteria representing viability for a certain position, which in this case would be the position of tenant for your realty property.
Qualifying reduces the risk of wasting time and resources while waiting to see whether or not a tenant is a good or a bad tenant. Those who meet the qualification criteria are good and viable tenants while those who don’t aren’t.
In such a case it easily makes sense that a qualified tenant > an unqualified tenant but some might try to justify an unqualified tenant being better than no tenant as at least the unqualified tenant still brings in rent at the end of the month while an empty property does not. This is not the case.
A few important qualification questions are around their prospective tenants’ Credit score, recent bank statements, referrals from the past landlords, provision of criminal history and face to face gut feeling.
An empty property will indeed cost you missing out on rental income and if it wasn’t for the fact that an unqualified tenant could cost you missing out on rental income and so much more; it would be the worse off situation.
An unqualified tenant represents a tenant who shows signs of either inevitably being unable to pay rent consistently/at all or who shows signs of troublemaking to the extent of requiring an eviction.
Such a tenant will cost you the following.
- The stress of inconsistent or lost rental payments
- The lost rent during the period of tenant eviction notice period
- Attorney and legal fees if the tenant is being difficult to remove off the property
- Court case fees
- Lost rent during court eviction period
- the lost rent in time spent looking for another tenant
- Renovation costs for the new tenant
The above scenario represents a very real possible situation when dealing with an unqualified tenant, which is why it is important to rather have an empty property than fill it with an unqualified tenant.
7. Investigate your rental property and learn what works for it
Rental real estate is an extremely flexible and diverse industry that can range anywhere from huge complex apartment complexes, large multi-unit properties, single-family homes, backyard cottages or spare bedrooms.
Each rental stage has its advantages and disadvantages where typically larger operations are more profitable at the cost of management complexity while smaller operations are less complex to manage but earn less.
Besides complexity and income, the type of rental will also influence the level of necessary rules needed to maintain peace within the landlord to tenant relationship.
The closer a tenant is to you, the more likely it is that more restrictive rules are needed. You might not mind if a tenant who is renting a single-family home from you comes in and out of the property at 1 am but that would likely change if the tenant was renting a spare bedroom in your home.
Avoid unexpected pitfalls and build a respectful and profitable relationship with your tenant by keeping the above 7 points in mind when you next interact or bring in a new tenant.