It’s well known that real estate is one of the best ways to become wealthy. As a form of passive income, it’s an appealing way to make money as it can be both flexible and manageable when you have a day job.
However, it’s still a responsibility that requires time and energy as you have to be able to manage your tenants and properties. If done correctly and prudently, being a landlord is a great way to bring in additional cash flow. Take a look at some of the basics of becoming a landlord to understand what is involved before taking on any financial commitments.
What Makes a Good Landlord?
1. Communication
The key to being an effective communicator is the ability to convey your needs and wants while taking into account other people’s perspectives. As a landlord, you will often be working with intermediary professionals including real estate agents and/or property managers as opposed to dealing with tenants directly, so being a clear communicator will make this process run much smoother.
2. Clarity
You need to ensure you are clear about your goals, whether its timely payments and arrears to be paid by the tenant, or maintenance that needs to be done on the property due to damages. Also, being clear about what needs to be communicated with your tenants in a timely manner will enhance the relationship and keep the property rented for longer periods of time.
3. Transparency
It is important that you are upfront and honest when dealing with your tenants and agencies. As much as we’d like to think that this trait would be a given, it often arises as an issue particularly in times of financial turmoil.
If there are issues with the property, such as maintenance issues, local permits required or restrictions to the property that you know of, these need to be clearly stated, particularly when letting the property and finding potential tenants. Hiding faults or issues with the property will only come back to haunt you at a later stage so remember, honesty, at all times, really is the best policy.
4. Keep your distance
Tenants generally do not want to be dealing with their landlords on a regular basis. People need their space. Whether you live nearby, next door, or on the other side of the world, calling by phone or dropping by the property to check on it regularly will not only annoy them, but will infringe on their right to privacy.
Do not, however, invite yourself in, or expect an invite just so you can view the property for faults or damages. Leave this up to the real estate agent or Property Manager. Although you are keeping your distance, be sure to still be available should they need to contact you by phone or email.
5. Trust
You need to learn to trust the tenants and the property managers that look after your property. Perhaps this is your first investment property, something you have spent a long time saving for, or perhaps you own a few by now. Either way, you need to trust in real estate professionals and leave them to do their job, (that’s what you’re paying for really).
Just like any business, trust is a crucial component of relationship building, not only you trusting in others, but others being able to trust in you as a landlord. By being transparent, clear and showing a little kindness now and then, you can create sustainable and profitable relationships that mutually benefit both parties.
6. Respond promptly
There are often maintenance issues that your tenants will need you to respond to quickly and effectively. The method a tenant uses to raise a maintenance concern, alongside the average response time, should be outlined in the lease agreement.
If you have hired a property manager, they will often have their own online system by which tenants can raise maintenance issues. A broken water main, leaking toilet or electrical problem needs to be responded to quickly and smoothly to keep your tenants renewing their lease agreements and ensure the continual profitability of your property.
7. Get organized
Keep a diary, either electronic or manual, with the dates of rental and mortgage repayments, council rates, bills to be paid etc. Get a good financial adviser to help you with this, to ensure you are maximizing your repayments and cash flow from properties.
In the event that something goes wrong, e.g. a tenant believes they have paid when they have not, or they are claiming they didn’t cause damages to the property etc., you need to ensure you have records that are clear and easy to find. Ensure you:
- Keep all documentation in organised files
- All email communication can be organized in folders
- All physical documentation such as invoices and receipts need to be kept in one place and labelled.
A Step-by-step guide to leasing your property
Step 1. Who to inform if you want to lease a property
Mortgage providers
If you are currently paying off your mortgage, you will need to inform your mortgage provider with the details of your lease agreement. This could be of benefit as there may be ways you can improve upon your mortgage repayments based on the terms of your lease.
Licenses
In some states, you will require a rental license to lease your property. This will depend on your state and district, as well as the type of occupancy and ownership of your property. Some states may require you to license your property as a small business. Check with your local city council offices for more information regarding the type of license you need.
Step 2. Know the law
It is important to know what laws surround the leasing of your property to ensure you, and your tenants aren’t breaking any laws.
Landlord-tenant law
- The landlord-tenant law is grounded in both property and contract law, and is often set out in the lease agreement. Aspects of the landlord-tenant law include:
- The landlord-tenant relationship and the covenant of quiet enjoyment: to ensure tenants are not disturbed by landlords (giving them space).
- The agreed length of tenancy and termination procedures
- Limits imposed on the tenant in subleasing or possessing the property
- The tenant’s duty to pay rent and consequences incurred if unpaid
- The correct eviction process.
Knowing which laws are relevant in your state can help to prevent future issues, so check with your Property Manager or Real Estate Agent as to which laws are applicable to you.
The Fair Housing Act
Another important law you need to know about as a landlord is the Fair Housing Act, set out by the US Department of Justice. This ensures you cannot refuse to lease your property or negotiate with any person due to race, color, religion, gender, familial status or national origin.
In 2014 the owners and operators of Woodland Garden Apartments in Fremont, California were forced to pay $80,000 by the justice department when they lost in a discrimination lawsuit filed by tenant families with children. As Federal law guarantees families with children the right to equal access to housing, the law found the owners of the housing complex were in breach of these laws and were required to pay up.
So landlords beware! Ensure you are not discriminating against your tenants and are keeping within federal and state law.
There are important steps to take if you believe your tenants might be acting illegally (for example, setting up a drug lab or selling drugs from your property). Consult this guide from the Department of Justice if you believe there may be illegal activity occurring on your property. You can also read our article about how marijuana legalization affects landlords and lease agreements.
Implied Warranty of Habitability
This warranty is written into the lease agreement, and requires landlords to keep their property ‘habitable’. It ensures both parties are doing their duty; the landlord by maintaining a habitual space and tenants by paying the rent by the due date.
Step 3: Take precautions and get insurance
Ideally, you need to obtain a landlord-specific insurance policy for your property. Unfortunately these policies are often slightly more expensive than a standard homeowners insurance policy, but they should cover you for damages arising from fires, storms, theft and vandalism. The type of insurance policy you choose will depend on the lease agreement and the length of your tenancy.
Homeowners Insurance vs. Landlords Insurance
Short term rentals/ Primary Residence: Business Policy
If you plan on renting out your home for a single occasion, your existing homeowners insurance may be sufficient. However, if you plan on renting your property out in the short term, (e.g. like an Airbnb-style scenario) your insurance company may perceive that your property is a business, and as such you will need to take out a business-specific policy. Check with your insurance provider to ensure you are getting the correct policy for your situation.
Long term rentals/ Second Home: Landlord Policy
If the property will be leased over a longer period of time, e.g. six months or more, you will need to take out a landlord or rental dwelling policy. Beware, landlord policies tend to cost 10 – 20% more than regular homeowner policies. A landlord policy usually provides coverage for 3 things: Structure, Belongings and Liability.
- Damage caused by a fire, wind, lightning, hail, ice or snow
- Personal property use for maintenance or tenant use such as household appliances like washing machines, dryers, snow blowers and lawn mowers.
- Liability: if a tenant or guest is injured on the property, including legal fees and medical expenses
Note: Your tenant’s personal property is not covered by your landlord policy, so be sure to inform your tenants to invest in their own insurance prior to signing the lease, to cover themselves in the event that something goes wrong.
Step 4: Advertising your property
Advertising your property properly and effectively is one of the key steps that ensures you get the tenants you want.
Rental Listing Platforms
Free Internet Listing Services: HotPads, Oodle, Trulia and Vast. There are many easily accessible rental listings on the internet. Your ad may compete against other listing in the area but the platforms are usually reliable in catering to the desired area for recruiting tenants. Craigslist is a free classified listing service, and a popular medium for users to buy and sell items. It’s one of the many places potential tenants will utilize for their house-hunting.
Paid Internet Listing Services: Lovely, Trulia Pro, Rentals.com
Services like these are paid, but there are benefits to it. The marketing for these paid platforms tend to be more competitive, leading to better exposure for a greater quality of potential tenants.
Local Property Listings
Local property listings include newspaper classifieds, military housing, student housing websites, and others can assist in exposing your property to a local market. Some cities might have certain local sites that are more popular in that area. Since they are localized listing, tenants tend to be from the area and can view the property more readily.
Step 5: Tenant screening
One of the key things to ensuring a smooth landlord job is to recruit the right tenant. What makes a good tenant? A good tenant will ideally:
- Pay rent on time
- Be responsible, considerate and honest
- Will not damage the property and keeps it in good condition
- Abides by lease agreement
- Doesn’t cause any trouble with the neighbors or agents
As any landlord should, it is advisable you go through a tenant screening process and conduct a background check to avoid bad tenants.
Tenant screening and background check includes:
1. Having a pre-screening process to filter out unsuitable candidates
2. Using a rental application gather and assess the finer details
3. Performing a thorough background and credit check to ensure the tenant is stable
4. Ensuring landlords do not accept any payment upfront due to scams
5. Insisting on a face-to-face meeting to confirm their stated identity
6. Having your expectations and responsibilities written in a formal agreement.
Step 6: Leasing the property
Lease Agreements
Lease Agreements are essential for the tenant and landlord in ensuring a pleasant rental and leasing experience for both parties. Critical components a lease agreement should cover but are not limited to:
-
- What the premises is
- Who the landlord is
- Who the tenant is
- The amount of rent
- The security deposit
- The term of tenant’s stay
- Expectations and responsibilities
- Fees & payments
- Attorney fees should there be a disagreement
- Insurance liabilities
- Late rent fee
- Utilities Payments
Security Deposit
Having a security deposit from your tenants is an essential step in protecting your rental. A security deposit is a one-time refundable fee that you collect along with their first month’s rent.
How much should you ask for?
While the maximum amount of security you can request depends on where your rental property is located, each state does allow you to collect a security deposit. Some states have no limit, while others do, so be sure to research accordingly.
It is always advisable to collect the security deposit in lump sum before the tenant moves in. That way, it not only proves the tenant’s financial capability but covers any liability costs or damages that may occur after move-in. As a landlord, this will provide a sense of security should anything happen to the property or lease agreement.
Unless the security deposit was later used to cover any costs of damages, the amount itself is supposed to be refundable. Each state has a specific time for when you must return the deposit upon termination of the lease. Likewise, there are also specific laws that state if and when you are legally allowed to keep this security deposit.
Property Safety and Inspections
As a landlord, you will have to maintain the property for safety and health reasons. You need to ensure the property is kept in optimal leasing condition as there are a range of liabilities you are responsible for. It is absolutely vital to keep in mind that these rules and regulations differ state by state and are based on local areas, so be sure to do additional research for what may apply to you.
Gas Safety
Required gas safety obligations include:
- Ensure and check that gas pipework, flues, and appliances are in safe and good condition
- Conduct an annual gas safety check on each appliance flue
- Make sure you have a record of each safety check
Electrical Safety
Required electrical safety obligations include:
- Making sure all electrical installations are maintained in a safe condition, especially for duration of the tenancy
- Any appliances you provide must be safe and certified
- Periodic inspection and test must be carried out by a registered electrician
Fire Safety
- Required fire safety obligations include:
- Follow fire safety regulations to ensure tenants have access to escape routes at all times
- Ensure all furniture and furnishings supplied are not flammable
- Provide and install fire alarms, carbon monoxide detectors, and extinguishers
Maintenance and Management
Although leasing out a property is passive income and not a typical “day job”, regular property maintenance and management tenants will be required.
Property maintenance can include, but is not limited to: mowing the lawn, shovelling the snow, lawn maintenance
Tenant management can include, but is not limited to:
- Handling phone calls or emails from tenants during any time of day
- Dealing with any issues that may arise
- Addressing tenant problems and possibly use out-of-pocket money to cover costs (e.g. fixing the sewage)
Utility Management and Payment
As a landlord, you have the option to decide whether the utilities should be part of the rent or have the tenant take care of it themselves. There are pros and cons for paying utilities yourself. Utilities can include: Gas, electric, sewer, water, and trash.
When it comes to deciding which utilities you want to include or not, be sure to take into consideration your finances and management. For example, gas bills may have greater fluctuations throughout the seasons, hence gas may not be a utility you want to include in the rent. On the other hand, including utilities in the rent may seem enticing to prospective tenants. So overall, you want to make a decision that is convenient for you and makes both property and tenant management easier in the long term.
Although the notion of becoming a landlord appears to be a novel idea, it is important to note that there are a variety of requirements and qualities needed to ensure the sustainability and profitability of your property. Knowing who you need to inform, laws, insurance, tenant screening and Lease Agreement inclusions will hopefully prevent your property from misuse or damage.
Being a good landlord requires you to do your research, get organized and keep communication clear and simple to ensure a smooth leasing process with your tenants. Remember, managing your properties takes time and effort, so ensure you are ahead of the game by keeping your investment, and ultimately your cash flow, in check.
