First, a prospective landlord must find and purchase a suitable rental home, a process that is somewhat different than that for a typical prospective homeowner. The following tips can help them in their search:
- Find the largest loan for which you are eligible to receive at the beginning of your rental housing property search, as this step will limit your search to properties you can afford. Lenders love talking, and they get paid to do it, so don’t be afraid to ask them a lot of questions and shop around. Also, make sure you can afford the mortgage payments if you cannot immediately find renters.
- Look for a rental home in an area where prospective tenants are in large and consistent supply. College towns are ideal for this purpose, as a long-term downturn in tenants is unlikely.
- “Fall in love with the deal, not the house,” Bostwick tells InterNACHI. You are not buying the house to live in yourself, so it doesn’t matter if it’s your dream house. Don’t pay extra for a backyard fish pond that you’ve wanted your entire life if the pond won’t excite potential renters.
- Be patient. As an investor, you probably already have your own place to live, so you have time to spare to shop around for the best deal and make a lot of low bids.
- Carefully consider whether you’ll charge more, less or equal to the local market value for rent. While charging more than market value will increase your initial return on investment, you might wind up with someone who’s irresponsible with money. Charging less than market value has subtle advantages, too; you’ll generate greater interest in the rental, thereby attracting a larger pool of applicants from which to choose, and your renters will be happier and more likely to remain, reducing the strain on you to find replacements.
- Time the collection of the security deposit appropriately. You need a security deposit to deter tenants from causing damage and recoup the cost of repairing any damage they make, but you have options concerning when it needs to be paid. If you charge the full amount upfront, especially if you simultaneously request first and last month’s rent, you will limit your applicant pool because many people don’t have that kind of money on hand. “You want to build trust with your new tenant, and asking for a large sum of money upfront is a step in the wrong direction,” says Bostwick. A smart idea is to ask for the security deposit and/or last month’s rent to be paid in installments, perhaps 20% per month for the first five months.
- Beware of non-conforming bedrooms. Bedrooms must meet certain requirements, mainly to allow occupants to escape in case of a fire. Some landlords rent non-conforming rooms as bedrooms in order to increase their cash flow. By doing so, they expose themselves to the risk of being discovered by the city, in which case they will have to make the building conform, or evict the tenant, both of which would create serious complications.
- Put monthly contributions into an account for repairs, updated appliances, and other ordinary yet unpredictable expenses. This way, you’ll have the savings to pay for a new $6,000 boiler, for instance, if the need arises.
- Prepare the house for your renters. The entire house must be cleaned, rooms repainted, broken fixtures repaired, and any safety hazards corrected before your renters move in. Just because you personally don’t mind a hazardous condition or ugly room color doesn’t mean renters won’t be injured or turned off. It is thus essential that you hire an InterNACHI inspector to learn about lurking hazards.
- Consider living in the house yourself. Many landlords choose to live in the same house they’re renting. You can get a better rental housing or mortgage loan if you live in the house. You are also able to more readily deal with problems as they arise.
If you do decide to take drastic action against a tenant, such as an eviction, or billing them for additional fees due to damage or non-payment of rent, or for housing more tenants than are allowed either by the terms of your lease or by the municipality, be sure you follow local and state laws regarding these situations.
In summary, successful landlords are astute, deliberate businessmen who meet problems with composure, and treat their renters with respect.