The dream of every aspiring landlord: build a multi-property investment portfolio and retire on a passive monthly income stream. Sounds nice, right? But, a successful property portfolio brings great responsibility. Many prospective landlords fail to recognize the commitment that is involved when it comes to owning and managing rental properties. So, we have made a list of the main factors every property owner should consider before they pull the investment trigger.
Without further ado.
1. The Dollars
Many landlords underestimate the ongoing expenses tied to property investments. Once you have secured your loan, and signed the papers, the costs don’t stop. It is recommended that property owners keep a reserve fund of at least $5,000 – $8,000 handy for unexpected repairs, for each property. This is a conservative number.
2. Around The Clock
As a property manager, landlords are on call 24/7. If there are any maintenance emergencies, you are obligated to respond. For example, say your water heater blows out at midnight. You’ll need to send an emergency repairman out to the property to fix the water heater. If it needs to be replaced, you’re paying for that too, not to mention the transportation and installation fees. Such a repair will typically cost anywhere from $1,800 to $3,000. Remember that reserve fund we talked about!
3. Collection Agency
Sure, you have tenants that pay on time. But, what about those notorious tenants that go off the grid at the end of each month. You don’t receive the rent and can’t get ahold of them by phone. It’s your responsibility to decide when to evict that tenant. This can be stressful if you don’t feel comfortable handling such situations. Not to mention, each day without collection means more lost revenue.
4. Finding quality tenants
Naturally, landlords want their properties filled as quickly as possible. However, this need to find tenants fast often comes at the expense of quality. As a result, landlords often find themselves stuck with poor tenants that damage their properties, disrupt their neighbors and don’t pay rent on time. This inevitably leads to stress, eviction, high turnover and increased vacancies. None of which are good for the bottom line.A study conducted by All Property Management indicates that the average uncontested eviction costs around $2,000, including legal fees, lost rent, and property repair costs. Landlords need to focus on developing an efficient screening process. We’ve outlined a proven screening process below:
- Employment verification
- Credit check
- Background check
- Tenancy record
- Past landlord referrals
- Clear leasing policies
- Compliance with Fair Housing laws
5. Marketing Rental Properties
The age old saying of “build it and they will come” definitely does not apply here. In order to build a qualified pool of prospective tenants, landlords will need to have a marketing strategy in place. This is crucial, because every landlord wants to have options when it comes to choosing the right tenant for their rental property.
6. Property Taxes
Yes, we know this one sends a shiver down the spine. But landlords need to be aware of the impact that owning a rental property will have on their taxes. Depending on the state, buying a rental property could more than double the amount of property tax you are paying at the end of the year. Make sure you know this figure, and plan accordingly. On the flip side, you may find yourself in a good position because of the benefits of depreciation. Consult with a good accountant to see how depreciation and expenses within real estate can benefit your bottom line.
7. Type of Property
When it comes to investing in rental properties, the two main options are single family and multiplex. Both properties have their own distinct pros and cons that need to be given special consideration. Figure out which property fits into your portfolio best before shelling out the cash.
Accounting doesn’t end at collecting rent and paying for repairs. Landlords need to keep record of key financial statements (income statement, balance sheet, statement of cash flows), keep copies of all completed work orders, and file appropriate tax returns at the end of the year. Documenting all expenses, and realizing cost savings based on tax breaks can be a complicated process, especially for landlords with multiple properties. It is also wise for property owners to keep security deposit funds in an escrow account. This can help avoid comingling funds which can be dangerous.
9. Attorney Landlord
We cannot emphasize this one enough. When it comes to screening tenants you need to make sure you are strictly following all Fair Housing laws, otherwise you could find yourself in court. Fair Housing laws make it illegal to screen based on race or color, national origin, religion, sex, familial status, or disability. In some circumstances the landlord is obliged to make reasonable accommodations for people with disabilities.
Property management is a full time job. Many busy landlords don’t have the time or the resources to effectively manage their property portfolio. As a result, many landlords opt to employ a property management company to handle the day-to-day management of their rentals. This not only allows them to focus their time on expanding and growing their business, it also ensures that they maximize the return on their property investment. Property managers will help landlords:
- Find quality tenants
- Reduce vacancies by as much as 40%
- Market rental properties
- Handle rent collection and eviction
- Perform needed maintenance
- Ensure all contracts are legal and in accordance with Fair Housing laws
- Manage and prepare all accounting documents
If you were a landlord would you seek the services of property management company?