Here’s how to avoid common mistakes of first-time landlords.
First-time homebuyers are a declining group. Historically, 40% of homebuyers have been first-time buyers, but that percentage continues to shrink, even as millennials continue to show more interest in becoming buyers (eventually). If you’re already a homeowner, your wheels might be spinning right about now — if people aren’t buying starter homes, then the rental market has to be booming, right? It is in many areas, particularly where unemployment is low, the population is high, and homes are not overpriced. But before you start searching for a home to rent, you should think about the responsibility that comes with being a landlord — and learning by trial and error is not the best way to go about gathering intel (or a steady income).
1. Ideally, you want to live near your rental property
Living close to your property allows you to check on it periodically (after giving your tenants proper notice), take care of repairs yourself, and show the property when it’s time to list it for rent again. Research the best investment areas — but even if you don’t live in a prime rental region, you can still invest in one by hiring a property manager to take care of day-to-day details and use online tools to make finding a tenant easier.
2. Know landlord-tenant law
Most states have specific landlord-tenant provisions that cover issues such as security deposits, level of access to the property, and how much notice you need to give your tenants when you want them to leave. There also are federal laws you need to know, such as habitability and anti-discrimination laws. “Many landlords gloss over housing discrimination laws because they assume that as long as they’re not racist or sexist, they needn’t worry about fair-housing violations,” says Ron Leshnower, real estate attorney and author of Fair Housing Helper for Apartment Professionals. But fair-housing liability traps can arise in many ways, so it’s important that you fully understand the law and ensure that you aren’t breaking it.
3. Make sure you can enforce that the rent is paid on time
This seems like a no-brainer, but believe me, if you get too friendly with your tenants, you might just let them slide a couple of weeks beyond the first of the month, or allow a partial payment when they’re between jobs. Before you know it, your tenants are six months behind and you’re struggling to make the mortgage payments. But being firm doesn’t mean you shouldn’t treat tenants with respect. Cultivating a good relationship with your tenants often goes a long way to ensure rent will be paid on time and that repair requests will be easier to deal with. There are also online payment tools that can make collecting rent easier on both parties.
4. Screen potential tenants
It’s worth the time to do a background and credit check on all potential tenants: online tenant-screening services are convenient, and you should be sure to check potential tenants’ credit scores. A credit score alone shouldn’t be the sole reason to accept or deny an applicant, but it is a useful screening tool: For instance, if your renter is fresh out of college with a solid job offer, they may not have enough credit history to warrant a good score—but could be a great rental candidate.
You should also conduct an interview to make sure you’re comfortable interacting with them, and check references, especially from employers or past landlords. But be advised, it’s hard to find the perfect tenant. According to Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, it’s important to have a thick skin, and advises people not to buy rental property if tenant shenanigans will “drive you crazy.” Case in point: Fleming once had an evicted tenant break into the house, change the locks, and move back in!
5. Customize the lease
If you don’t hire an attorney or a property manager, you can use a standard lease form from Nolo, for example, but you should tweak it to fit your situation. For example, if you allow pets, specify how many, what kind, and any rules that apply. Your lease could state that tenants should leash their dogs when outside the fenced-in yard and stipulate that pets should not become a nuisance to neighbors.
6. Inspect the property regularly
“Have language regarding inspections clearly written in your lease documents,” says Timmi Ryerson, CEO of Smart Property Systems. She suggests taking pictures to establish a baseline (and document the move-in condition) and conducting an inspection at three months. If you find problems, Ryerson recommends that landlords “issue a notice to comply and set another inspection in one week.”
7. Understand this is not a get-rich-quick scheme
Being a landlord is not just sitting around collecting a big wad of cash each month. You’ll need to spend some money to ready the property for tenants, buy landlord insurance, and pay property taxes. If you’re taking out a mortgage, be prepared to fork over at least a 20% down payment. Think of being a landlord as part of your overall investment strategy and be realistic about your goals — most landlords aim for about a 5% return on their investments.