Elvis has left the building? No, his blue suede shoes were actually IN OUR BUILDING. Ask someone what they think about owning and managing rental properties and you’ll likely get a variety of different thoughts and feelings. Some may have had a terrible experience with a renter and vow to never touch a rental property again. Others may have found it to be a great source of side income. You may have heard others say that they love the tax breaks. So what are some things you should think about before getting into the rental game? Read on and find out. We have had experience with rental properties in the past. In fact, as I alluded to, one of our renters was an Elvis impersonator. He was great at what he did and turned out to be a great renter for us as well.
Recognize the risk that you are taking
Owning and managing rental property is a big risk. For most people, buying a home is the largest purchase they will make in their life. Buying or owning a home that someone else will live in means you are taking on this great financial risk, yet you are giving up a lot of control because you’re not living there. That’s a BIG DEAL that shouldn’t be taken lightly. Taking on rental property is not for the risk averse. On the flip side, there are steps that you can take to be smart, minimize risk, and hopefully have a positive experience with your rental property. At the end of the day, be honest in analyzing the risk you are taking.
Identify Your Goals and Exit Strategy
Rental property can’t be something that you go into haphazardly. You need to know why you are in it and what you want to get out of it. Over the last few years, my wife and I have had a couple of rental properties. Here is how we approached things on the front end:
In the first scenario, we purchased a house, fixed it up and rented it out to a family member. Our goal in this case was to provide a solid rental for our family member that was in a bad rental situation. The house was very inexpensive, so we knew with solid certainly that charging a reasonable rent to our renter would provide us with a little cash flow on the side. However, after fixing the house up, we saw that some big expenses were probably on the horizon if we held on to it for the long term, so after that family member bought their own home, we decided to get out while we were ahead and we sold the home. All in all, we held it for a little over a year and a half.
In the second scenario, we were stuck upside down on a townhouse unit. We were looking to start a family and wanted some room to run around as our place did not have any yard whatsoever. So our options were either stick it out in our current place for a very long time, or take the plunge to rent it out. In this scenario, our goal is to come out relatively even on our cash flow and hold it until we are able to sell it and pay off the existing mortgage. We still currently have this property.
We were clear on the front end what we are looking to get out of it, and when we will get out of it. Have a plan now. Yes, plans, the market, and other variables will change and you may need to adjust. However, go into it knowing what you plan to get out of it.
How Will You Find Renters
Before you jump in, it’s important to have a clear idea if you are going to be able to rent your place and how much rent you plan to charge each month. After all, you probably can’t afford to have multiple months with no renters, so come up with a plan and budget beforehand.
In both of our scenarios we had renters lined up before we did the deal. With our house purchase, we had confirmation from our relative that they would move in when the place was ready. They were on a month-to-month lease and could easily get out and move into the house when the time was right. As for our townhouse, we had a couple of options for renters before we even put an offer in on the house we were buying and moving in to. Plans changed a little before we moved out, but since we had multiple options, things worked out fine. We’ve had to find additional renters since then, but we had things lined up before taking the initial plunge.
We have had great experiences posting our properties on www.rentals.com. Within the first couple of days posting on there, we had multiple inquiries and showings lined up. There are fees for a landlord to post their listing, but the renters we have gotten have worked out well, so a one-month fee is worth the cost in my opinion. We have also posted on Craigslist to cast a wider (and free) net. A ton of traffic has come from there, but it just so happens that the renters we have chosen have not come from Craigslist.
Screening and Paperwork
For many people, they are giving keys to a property to someone they do not know. That is scary. However, by being on top of things you can do your best to lower the risk. For our current property, I charge an application fee and have the applicant fill out a rental application. In most cases, a quick Google search of “rental application” or something similar can get you the information you'll want for your application. I’ve found the application to be extremely helpful because it gives you a good look at their employment and rental history. By charging a small application fee, it will help to offset the cost of you doing a background check and will hopefully bring forth the parties that are truly interested in your place.
Once an application and payment have been submitted, run the background check. You’ll have to decide what parameters you’ll want to use to determine what is acceptable. The townhouse complex we are in does not allow renters with crimes against others (assault, burglary, etc) so we obviously stick to that as the bare minimum and fortunately have not had to have further discussion about it. If the background check works out, call their employment and rental references. You need as much information at your disposal as you can get, so take the time to make the calls.
I've also resorted to seeing if they have a public Facebook profile. If they do and they constantly are posting party pictures, they may not be the tenants for you. I also saw an applicant put a job on their application, but on their Facebook page they posted 2 days prior that they had quit that job. We didn't end up going with them for other reasons, but these are the details you need to know. This is your property and you want to gather as much information as you can.
If you decide to move forward with someone, it’s best to have them sign a lease. That way you can list out what is included, what the expectations are, how they are to submit payment to you, etc. It’s important to spell out what the terms are so that it is clear to everyone. The lease that we used was modified from a Realtor that we knew who used it for their rental properties. We adapted it so that it works with what we want as well as following the guidelines of the association of the townhouse complex we are in.
Maintenance and Upkeep
Depending on the type of property you have, there will be maintenance and upkeep. You must decide who is going to do the work. Will mowing be done by the renters or done by you? If you live in the frozen tundra like we do, what about snow removal? Clearly state this in the lease. If you are taking some of that on, you’ll need to account for it and plan it into your budget.
Our first house I took care of all lawn care. It was a small yard and it was located between my job and our house, so it was convenient. However, it was always just one more thing that I had to do every week. On the other hand, our townhouse has all exterior maintenance included in the association fees. It has been great to not have to deal with the year-round obligations.
What happens if the toilet breaks, the garbage disposal gets clogged, or a spring breaks on the garage door? These are all issues we had to deal with. Are they calling you or are you hiring someone else to do it. These decisions will make a significant difference on your bottom line, so think through them in advance. If you are quite handy, it will save you money to do it yourself. If you’re not, then the finances still better make sense for you after factoring in these costs to hire it out.
All in all, we’ve had great experiences renting out to
others. I know there are horror stories out there, but we have been lucky. That’s
not to say we won’t have one in the future (and if we do, you better believe it
will probably make its’ way in a blog post), but we’ve been fortunate. If you
have additional comments, don’t hesitate to leave them below or drop me a line. Happy renting!