Becoming a landlord is one of the scariest things when you first start investing in real estate. Everyone you know has a friend or distant relative who has some landlord horror story. First off, don’t let these stories scare you. Some of these stories may not be true, but even the true ones probably could of been avoided if the landlord did things differently.
Gina and I are coming up on our 1 year anniversary of being landlords and we have learned so much. If you don’t already know Gina and I purchased a 4-plex that we currently house hack. What that means is that we live in one of the four units and rent out the other three units to cover our mortgage payment and then some. Some people may be horrified by the idea of living in the same building as their tenants, but the bright ones will see the cost savings potential.
Without further ado, here are some of the most important lessons we’ve learned when it comes to being a landlord. Some we’ve learned from first hand experience and others from our years of researching, regardless they are all important to your success as a property owner.
#1. Treat it Like a Business
If you take anything away from this article then please let it be this. When you invest in real estate you must treat it like a business and not a hobby. Landlords that don’t treat their investment properties like a business tend to find themselves in bad situations.
Treating it like a business means sticking to your lease contracts, establishing an emergency fund, separating personal bank accounts from business bank accounts, tracking all of your business expenses, and managing your tenants appropriately.
Lease Contracts
The lease that you establish with your tenants is the holy grail for what both parties have agreed to. When you are creating the terms of your lease make sure you list out the responsibilities of both parties as well as what is not allowed on the property.
For example if pets are not allowed you have to mention that.
If your lease says that a late fee of $50 will be charged after 4 days of late rent, then you need to charge them that late fee.If you give one tenant a one time pass then you have to give all your tenants a one time pass in order to stay compliant with the Fair Housing act.
Doing favors is not always in the best interest for your business. In order to keep a positive relationship with your tenants explain to them that you want to do them a favor, but the law prohibits it. Your tenant may still be unhappy but they will understand.
Stay Organized
As I mentioned before you want to have a separate bank accounts for your business. This will keep you organized and will help you immensely come tax season.
You also want to be sure that you keep all of your receipts and invoices for all business expenses. Services such as Quickbooks and Wave will allow you to simply take pictures of your receipts and upload them right to your accounting book.
Services like those will keep you from losing receipts and allow you to input information easily.
Another helpful tip to stay organized is creating digital copies of important information, such as lease agreements and mortgage paperwork. Having a digital copy as well as a physical copy will ensure that you don’t lose that information.
Gina and I have found that simply staying organized will allow your business to run much more easily.
Understand the Fair Housing Laws
Before investing in real estate you should definitely educate yourself on the Fair Housing Act. These laws protect people from discrimination and some may not seem as obvious as you may think.
For example, did you know that you can not ask a potential tenant how many kids they have? This question could seem as discrimination against the potential tenants familial status. This type of discrimination could lead to court and headaches that are very avoidable.
As you educate yourself on the fair housing act understand that there are seven protected classes:
- Race
- Religion
- Sex
- Familial Status
- Nationality
- Disability Status
- Color
However, make sure you check your state/city laws to make sure there are not more protected classes. For instance some states add political party affiliation as a protected class.
This may seem a little intimidating but don’t let it hold you back from investing. The truth is once you do the initial research and process the information then you shouldn’t have any problems going forward. Problems generally arise when landlords don’t familiarize themselves with these laws.
#2. Screen Your Tenants
If you want to be a successful landlord then you want to take screening your tenants very seriously. These are the individuals that have to pay you rent. Not to mention they are living in your home.
Before you start screening tenants I advise that you create a checklist for the entire process.
đŸ‘‡đŸ‘‡đŸ‘‡Or you can tap the button below and use the exact checklist that we use for screening tenants and make the adjustments that you want.đŸ‘‡đŸ‘‡đŸ‘‡
Understanding the fair housing act will allow you to screen tenants legally. For instance, two things that we screen for are smokers and sex offenders. Because these people are not in a protected class we are not obligated by law to rent to them. For us these are people that we do not want in our home for obvious reasons.
Other things you should do when screening a tenant is:
- Ask for prior landlord references.
- Run a credit report.
- Find out how much income they make and ask for proof of employment.
- Ask if they have pets.
- Ask if they’ve been evicted before.
- Ask how many people will be living in the unit.
Finding a good tenant while being compliant with the fair housing act will allow your tenure as a landlord go much more smoothly. Don’t take this step lightly!
#3. Sweat Equity
Tip number 3 is the all mighty sweat equity. As landlords, your going to have to put in some time for yard work, home improvements, and repair unless you are hiring it out. Either way, it has to get done.
Gina and I have learned that this kind of work is not cheap to hire out. Thus, we attempt to do everything ourselves while we live here, but if it’s out of our league we’ll call a professional.
A great resource to learn how to fix some common house repairs, such as a leaky sink or a broken toilet handle is YouTube. YouTube University has taught us far more than we could have imagined when it comes to fixes around the house.
Making home improvements and learning how to fix things is a very rewarding feeling. One thing that Gina and I have learned in this process is that we are much more capable than we thought.
#4. Prepare for the Unknown
***Cue the horror music***
The great unknown is something that you have to plan for as a landlord. If you prepare then you will be in a much better position to handle scary surprises, such as a tree falling on your house or having to replace a water heater.
These surprises can be very expensive so we recommend you prepare for such surprises with an emergency fund.
With an emergency fund the more you have saved the better. However, a good rule of thumb is to have 3-6 times your monthly mortgage saved. As mentioned before you want to treat your investment property like a business. Your emergency fund should be held in a completely separate account and not mixed with any other funds.
For more information on emergency funds check out this article.
#5. Taxes are Expensive
I’m probably beating a dead horse by this point but your investment property is a business and the IRS sees it that way to. Thus, you’ll have to file a business tax return.
Having your taxes professionally prepared can be expensive so be ready to take that hit. The cost depends on a number of factors, including the experience level of your accountant, property type, and the state you reside in. For us, we paid around $700 to have our taxes professionally prepared.
Of course this seems like a lot now, however once we acquire more properties, the amount doesn’t increase by $700 per property and in some cases the amount won’t increase at all. This is using economies of scale to save yourself money in the long-term.
Another thing to remember, business taxes need to be filed in March i.e earlier than your personal taxes.
Closing Thoughts
Investing in real estate can be very intimidating but it can also be extremely rewarding. So far it has allowed us to eliminate our housing expense and heavily boost our savings rate. This has allowed us to save more capital for future investments and is helping us build our dream life.
These are the 5 best tips for new landlords that we have learned thus far. Our journey continues and with that will come new experiences and new learning curves. If you want to stay up to date with new landlord tips then be sure to subscribe to our mailing list đŸ™‚
For more wicked reads check out these articles:
