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| © Getty Images Two people getting the keys to their new rental. |
By Laura Agadoni, The Motley Fool
I got into the rental business by being an accidental landlord (circa 2008). The housing market crashed (remember that?) just as I planned to sell my childhood home. Since the house suddenly was worth half as much as it was just months earlier, I decided to turn it into a rental property instead of selling when the market was at its lowest.
I was not a profitable landlord with that house. The experience, however, was worth it: I sold once the market recovered, but even more important, I learned how to be a profitable landlord.
Profitable landlords are number crunchers
If you don't love doing calculations now, once you realize that a little math can make the difference between making a profit and not, you'll start to embrace your inner accountant.
Being an accidental landlord, I didn't know what I was doing yet. So, when a neighbor recommended a nice couple who wanted to rent the place, I wasn't prepared about what to charge for rent. I just picked a number out of the air, without doing any research. When the couple eagerly accepted the terms, I realized what I was charging was below market rates.
Here's the way a profitable landlord does things:
They research area rents and the local vacancy rate. The presence of too many vacant units isn't good. You can find this information by looking online at how long rental listings have been sitting or asking local property managers what their vacancy rates are.
Once you know how much rent you can expect, you then need to figure your expenses:
- Mortgage
- Property tax
- Insurance
- HOA dues (if applicable)
- Maintenance costs
- Vacancy rate (about 8% of the rent)
- Repairs
- Property manager (optional)
Now you can determine whether you'll have cash flow and how much. Simply subtract your total projected expenses from your total projected income.
Profitable landlords know about real estate
A profitable landlord doesn't need to be a real estate agent, but it helps to know as much as possible about the local area. Renters, for example, typically want to be near amenities like public transportation, dining, shopping, medical buildings or hospitals, and parks. Suburban renters, in particular, want to be in a good school district.
Do as much research as you can about an area to determine whether the property you're considering is in a desirable neighborhood. An up-and-coming neighborhood is also good, because you can usually get the property for less than you could in an already developed neighborhood.
Profitable landlords aren't nice (but they are fair)
This concept was difficult for me to grasp in my first attempt as a landlord. Don't get me wrong -- I'm not advocating for being a jerk or being condescending to your tenants. And you can never discriminate based on race, color, religion, national origin, gender, disability, or familial status.
But being nice ... well, you know the saying, "Nice guys (ahem, and women) finish last." If you're nice, you'll let your tenant be late with the rent, move four cats and three large dogs in, and paint the living room purple. Let's just say, I didn't allow purple paint. But the other stuff, well, let's move on.
The best attitude to have with tenants, instead of being nice, is to be professional, confident, reliable, and fair. Some tenants will like you for this, and some won't. But you can't worry about that or let that matter if you want to be a profitable landlord. Do what's expected of you regarding repairs and maintenance in a timely manner and expect your tenants to do what's expected of them, which is to abide by the lease terms.
Profitable landlords keep their emotions in check
Landlords and tenants often develop a combative relationship. They both view the property as "theirs."
The truth is both sides have a point. You own the property, so it is yours, but once you collect rent, you give up your right to have complete and unlimited access to the property.
Landlords often feel as if they have the right to come over any time they like to check on the place because they own it. The reality is you need to give your tenants their space and privacy. Let your tenants feel at home, and they will be more likely to be longer-term renters -- and that helps you become a profitable landlord.
Profitable landlords are organized
The more properties you own and manage, the more important it is to be organized. It helps to set up a system that makes it easy to keep track of cash flow, expenses, repairs, and maintenance.
Here's a start:
- Keep a copy of each lease agreement.
- Make sure the rent is being paid on time.
- Pay the property taxes.
- Keep up with insurance.
- Have a schedule of when you will visit each property for an inspection, which should be at least once a year, but usually no more often than quarterly. The more proactive you about routine maintenance, the more you can save in repair costs.
Read more: The Unexpected Risks Of Real Estate Investments
It's worth it in the end
Real estate often appreciates, but to a landlord, that's just icing on the cake. Landlords are usually in the business for a steady income stream. And if they do things right, that income stream can last for many years to come.
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