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How to Be a Profitable Landlord

Posted By Jim On 01/29/2013 @ 7:15 am In The Home | 9 Comments

About 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 [3]. 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 [4]) 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 [5], 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 [5] social network. For more tips on finding, screening, and leasing to quality tenants, see the Ultimate Guide to How to Rent Your House [6].

(Photo: umjanedoan [7])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/profitable-landlord.html

[3] home buying process: http://www.bargaineering.com/articles/a-roadmap-to-my-search-for-a-home.html

[4] Cornerstone Real Estate: http://www.ChristinaElliott.com

[5] BiggerPockets: http://www.biggerpockets.com

[6] How to Rent Your House: http://www.biggerpockets.com/renewsblog/2013/01/04/how-to-rent-your-house/

[7] umjanedoan: http://www.flickr.com/photos/umjanedoan/497345293/sizes/z/

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