[dropcap style=”style1, style2, style3, or style4″]B[/dropcap]eing a great landlord is easy, provided you understand what to look out for, how to select the right tenant, and what neighborhoods to buy your investment property in. Also, you must learn where (and where not) to spend money on your rental. This article documents the 5 most important lessons I’ve learned (through trial and error) while becoming a successful, and profitable landlord.
5 Keys to Becoming a Successful Landlord
1. Great landlords have excellent, working relationships with their tenants. The first step in building that relationship is selecting a great tenant, of course. In order to find the perfect tenant(s), you must have a superb screening process. This, by far, is the most important aspect of being a successful landlord as tenants directly impact your bottom line – and the amount of time spent dealing with your property.
As a landlord, you must understand which type of tenant is best for your investment property. Just because a prospective tenant has a great job with reliable income, that doesn’t make them the best fit for your rental property. See my article on how to screen for the perfect tenant by clicking here.
Tenant selection, and the way you treat them, is of the utmost importance. Consider your tenants business partners. They’ll be the ones watching over your investment, after all.
When you are sound asleep, it is good to know your tenants aren’t throwing rowdy parties, and staying up until all hours of the night. Noise complaints are the direct responsibility of the landlord. With that in mind, if you want your tenant to be an asset, as oppose to a liability, and take great care of your property, you have to go the extra mile for them. It is a partnership of sorts, and this is why it is critical you treat them like a business partner. For example, if an appliance breaks, have it fixed immediately. Tenants really appreciate a responsive landlord who deals with problematic issues quickly. Just as they have to build rapport with you, as do you with them.
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2. Unless you’re renting out luxury homes and condos, don’t install any ‘extras’ in your investment property. Avoid having things like garburators put into your rental. Don’t install water purification systems, central vacuums, fireplaces, higher-end fridges (which have filtered water), alarm systems etc. All these things require maintenance, break down, and at the end of the day leave you with the unnecessary cost of maintaining them. Furthermore, these ‘extras’ won’t increase your rental income, so what’s the point? You have enough things to deal with in life, and much better ways to spend your time than by dealing with a tenant complaint because a fork got stuck in the garburator (it happens all the time!).
The premise behind being a landlord is to build equity, and cash flow without committing much time. The first person your tenants call when something stops working, is you. And the person financially responsible for fixing things, is also you.
3. Always buy investment properties for cash flow, and never buy for appreciation. This one is a simple tip which ironically is often overlooked by first-timers. Being a landlord is about getting paid to provide housing.
When looking to purchase an investment property, make sure you know exactly how much you can rent it for (by checking comparables in the neighborhood). Once you figure out the rental rate, deduct the property tax, insurance, mortgage payment, contingency fund (should be 20% of property tax amount if property is within five years old, 50% if property is near ten years old, and 100% if property is near twenty years old). If, after the above mentioned expenses are subtracted from your rental rate, you are in the positive, then, and only then, is the investment property worth considering purchasing. In no instance should you have to make more than a 25% down payment to cash flow. That is my ceiling; and of course, the less you put down the better. Keep your powder dry.
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4. Unless your investment property is in a different city than where you live, manage it yourself. Great landlords don’t hire property managers. This is important for two reasons:
1. No one cares about your investment as much as you do. Chances are, you will do a much better job managing it than someone else.
2. Property management companies eat into your cash flow (typically 8 to 10% of monthly rent). That, in many instances, will eliminate the majority of your monthly profits.
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5. Run it like a business. Being a landlord is a business venture. And surely, if you can successfully be a landlord once, you can do it again. With that in mind, if you own more than one investment property, it is worthwhile to form an LLC, and transfer the ownership of the building or suite to the company. This limits your liability, and protects your own personal assets if the unthinkable happens and someone were to get injured in your suite.
While it does require paperwork and negotiations to transfer title, if you have a mortgage on the property in your name, it isn’t that complicated to get done and is well worth it. Run it like a pro.
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Don’t Be Scared, Educate Yourself & Get Started
Being a successful landlord isn’t hard. Many people will tell you that it comes with a lot of unneeded stress, but I beg the differ. For me personally, it has been the best way to earn passive income, and build my net worth over the long-term. However, the wisdom contained in these pages was paid for, believe me. I made a lot of mistakes when I first became a landlord, but have since learned what works, and what doesn’t. I know that if you follow my rules of a successful landlord, you will maximize your profits, and avoid some of the unnecessary problems I initially had. I strongly recommend you read some of my complimentary articles in the ‘Related Posts’ section below. They will provide you with more tips on property investing, and how to be a great landlord.
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This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to investing in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors, real estate agent and accountant prior to making any real estate investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.