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How to Be a Profitable Landlord

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Landlord and Tenant LawAbout eight years ago, if you were a Bargaineering reader, you were treated to a series of posts in which I talked about the home buying process. Until that point, it was one of the biggest financial decisions of our life and it looks like we’re going to take the next step.

We’ve been looking at homes on and off for fun the last few months, going to open houses for homes we liked, and just being casual. This past weekend, we started looking at them more seriously with our realtor friend (Christina Elliott at her firm Cornerstone Real Estate) and I was wondering what we could do with the home we’re in now.

One of the options is to keep this house and rent it out. So, I turned to my friend Josh, who happens to run BiggerPockets, easily one of the largest real estate investment sites out there. We talked about it briefly on the phone but I thought it would be so much better if he wrote a guest post about it. So here it is!

How to Be a Profitable Landlord

“Landlord” is a scary term.

For many, it conjures up images of a mean-old man pounding on the door, demanding his rent. For others, it brings to mind those horror stories of tenants, evictions, and disgusting plumbing that I don’t need to repeat here.

The truth is – “landlord” doesn’t have to be a scary word. Being a landlord is actually a learnable skill and, if you are using real estate investing as a tool in your financial planning, becoming an effective landlord is key in maximizing your returns. This post is going to walk you through some tips on getting started as a landlord and ensuring you don’t lose your mind – or your wallet – in the process.

Screen Like Your Life Depended On It

The first step in being a profitable landlord is keeping out the duds. This may seem like an obvious thing – but it is the first lesson most landlords easily “forget” and probably the worst mistake a landlord can make. It may take a longer period of time to get a unit rented, but being picky when choosing tenants is vitally important to the long term success of your rental.

When choosing tenants, it’s best to set clearly defined criteria for what you will or will not allow. For example, many experienced landlords require that:

  • The tenant must earn 3x the monthly rent
  • The tenant must have no prior evictions
  • The tenant must have good references from all previous landlords
  • The tenant must have good credit

By defining your criteria upfront, you are able to quickly weed-out the potentially difficult tenants. Now – it’s true that not all tenants with bad credit will make bad renters and not all tenants who earn only 2x the monthly rent won’t pay their bills. However, the tenants who don’t meet the above criteria are far more likely to become problem tenants and if you want less stress as a landlord – renting to those tenants is not a risk you should take.

When you find potential tenants that meet your requirements and prepare to move forward, be sure to verify all their information (many tenants will lie in order to move in.) This means actually calling their employer and their past landlords and asking questions. This also means running a background check and looking into their credit and payment history.

Training Your Tenant From the Start

You would not expect to be hired by a large company and immediately be thrown into the fray of day-to-day business without a solid introduction to how things are done. The same is true with your future tenants. Tenants, like employees at a company, must be trained in the way you want them to perform. Without a clear understanding of the rules and the way you expect a tenant to live, their failure to live up to your expectations can be blamed on no one but yourself.

This training begins with a thorough screening (as discussed above,) letting the tenant know that you are the kind of landlord who expects excellence.

The tenant training continues with the way that you sign the lease and move the tenant in. Will you make them sign a formal lease and give them all the required state and federal forms, showing that you are running a legitimate business, or will you just let them move in with a handshake and show that you don’t really care about rules?

Managing Effectively

Once your tenant has moved in – your job is not over. To maintain a quality relationship and be a profitable landlord, you need to manage your tenants effectively. The following three tips, which I call “The Three Bes,” are vital for maintaing a strong and profitable relationship between you and your tenants

  • Be Knowledgable: As a landlord, it’s important that you are aware of the rights and responsibilities between both parties. Being knowledgeable doesn’t mean paying for expensive training or get-rich quick seminars. In fact, most education can be done 100% free – by reading books, listening to podcasts, reading real estate forums, and networking with other investors. By being knowledgable, you are able to know the right and wrong way to deal with the situations that will come up.
  • Be Strict: It may seem mean, but tenants often operate under the “if you give a mouse a cookie” principle. By being flexible and lenient your tenant will continually reach for more and more freedom. A perfect example of this is the late fee: if you allow a tenant to pay late without a fee, you can almost guarantee a late payment more often.
  • Be Responsive:If you are going to have rules and be strict – you need to also be responsive to the needs of your tenants. If there is a repair needed – repair it (or hire someone who can.) Return phone calls promptly, address tenant concerns, and be above reproach in all aspects of your business. Earn the good relationship that you want with your tenant to ensure a profitable and long lasting tenant experience.

Don’t Fear Landlording

Landlording doesn’t need to be a scary concept when done properly. By screening for the best prospects, training your tenants to perform the way you want them to, and managing effectively, you reduce the amount of hassel and stress that many landlords find overwhelming. If you have any questions about becoming a landlord or tips that you’ve used to make the process easier – please leave them below.

Joshua Dorkin is the founder and CEO of BiggerPockets.com, the premier real estate investing social network. For more tips on finding, screening, and leasing to quality tenants, see the Ultimate Guide to How to Rent Your House.

(Photo: umjanedoan)

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9 Responses to “How to Be a Profitable Landlord”

  1. Aaron says:

    As a landlord myself – these are excellent points. Especially the part about treating this as a legitimate business and “training” your tenants.

  2. Anonymous says:

    can a landlord go after a tenants property, with a writ of distress or a lien, to collect back rent?

  3. Hey Aaron – Thanks for the feedback. It is just so frustrating to see people treat their landlording business as a hobby, as doing so often-times leads to problems. Good landlording!

  4. Awesome info! Great simple way to take the stress out. It might be tough at times, but I think real estate and being a landlord are fantastic investments and skills to have. I hope to become a real estate investor in my personal time soon.

  5. Thanks Edgar. When you’re ready to get started, we’ve got all the help you need — free — on the site . . .

  6. Randy says:

    I was a property manager for several years before I just decided to go back to school full time. I can tell you this is great advice. I need to forward this to some of my former co workers, because some of them never screened at their proeprties, and it always leads to problems

  7. Melissa says:

    What a great article. I am considering renting out my current townhouse (so that I won’t have to take a loss) in the burbs and buying one in the city. The rental market seems good in my area, so I know I can cover my costs (mort, taxes, HOA fee, and maybe get another $100 that I plan for maintenance.) I AM afraid of bad tenants recking my house, so these screening tips seem like great advice. It looks like your website has some useful tools.

  8. Hey Randy –
    I’m glad you found the article valuable. We actually put together a comprehensive guide on tenant screening that I think you and your former co-workers will certainly find valuable.

    Check it out and let us know your thoughts:
    Tenant Screening: The Ultimate Guide

    (Jim – If you need to take down the link above, I understand.)

    Regards,
    Josh

  9. K says:

    As a renter the majority for the majority of my adult life, I have to disagree on many points.

    While checking credit, no prior evictions and good prior references are valid,I don’t know anyone who makes 3 times their rent in a month (and I while I might have been late for credit card or other payment, NEVER for rent as that has always been #1 priority and should be for all renters).

    While clear expectations and good communications are great guidelines, but pushy and overly controlling landlords have only made me push back, especially since it was unwarranted. A tenant has the right to “quiet enjoyment” and in the state I live in, by law, the landlord needs to give at least 24 hours notice before entering and their be a reasonable cause.


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