Flip Thy House

Random Thoughts on Being a Landlord

I’m still very much a relative newbie as far as the whole landlord gig, but we have been renting assorted houses for nearly two years now, and I have been singing the praises of acquiring rental properties of late, so a quick post on my thoughts on being a landlord in general is probably overdue.

I get asked a lot if I think now is a good time to get started in real estate investing, and I usually say “yes” (or “maybe” or “hell no” depending on how bad that day’s housing/economic news is), but with the caveat of only if you’re looking to buy a duplex or a rental property or a home that you plan to live in and fix up yourself. Unless you live in very specific regions of the US or have a ton of experience as a flipper, I think it’s pretty much a terrible idea to even consider buying a house to flip in 2009, as way too many factors are working against you.

Buying a rental property, though, is a whole other ball of wax. If you plan to hold it for 5+ years, timing the market is much less of an issue, and you can miss the bottom by a year or two and still make a nice profit, especially if you’re really in it for the long haul and not looking to sell for 10 years, etc.

Owning rental property is a tried and true way of making money in real estate, but most people are scared off by the prospects of being a landlord. And understandably so, as it can be less than fun at times and it’s not a path to quick riches. With no futher ado, my random thoughts on the experience so far of being a landlord:

• Deal with problems immediately. If your tenant calls to tell you that something is broken, fix it. Immediately. If it can’t be fixed immediately (such as a furnace that just kicked the bucket), show your tenant that it’s being dealt with as quickly as possible and make sure they know the timeline for repairs (”I’ve scheduled for a replacement of the furnace but it can’t be done before 3:00 PM tomorrow afternoon.” No landlord likes dealing with the unexpected, especially when things break and unexpected costs arise, but hiding your head in the sand accomplishes nothing, and shows your tenant that you don’t really care about them or the condition of your property, which is a dangerous precedent to establish.

• Be real. We don’t use a property management company so I meet all prospective tenants myself, and I go out of my way to talk to them like a potential neighbor, and not the looming, never-present Landlord, with a capital L. I wear jeans and a t-shirt, make sure they see my truck with its usual assortment of ladders, paint cans, and tools in the back, and work into conversation that I’m only a real estate investor on the side. Be professional, be organized, but leave your ego at home. Tenants who can see themselves in you are much more inclined to take care of the property and pay rent on time as opposed to tenants who you try to overwhelm and intimidate from day 1 with your unholy power as Landlord, deeming whether or not they are fit to live in your house, etc.

• Don’t be judgmental. Tenants who dropped out of high school, work sixty hours a week at two jobs, don’t have a bank account and pay the rent with a money order are often much, much better tenants than someone with two PhDs who makes $120,000 a year.  Your ideal tenant is someone who takes care of the house and pays rent on time and never bothers the neighbors.  That’s all that really matters.

• Trust your gut. It’s better to have a house sit empty for a month than to rent it to someone you have misgivings about, for whatever reason. If you’re offering an attractive rental at a fair price, more prospects will come along. If someone seems interested but hems and haws about the price, about paying the utilities, don’t budge. It’s better to let them walk away and later reduce the price if you need to, as you want tenants who want to live there at the advertised price, not someone who feels like they’re overpaying and that they’re somehow “owed” something because of it.

• Don’t be scared off by a lack of credit history in tenants. I didn’t realize this until experiencing it myself, but not everyone fully embraces the good ol’ banking system in the US. For various reasons, some people don’t have bank accounts, credit cards, or any credit history. That’s not necessarily a bad thing, as it simply means they have no credit history, and not that they’re hiding something or have a bankruptcy, etc. That’s not to say that they’ll make a great tenant, just that if you run a credit check and it comes back completely blank, it’s not a red flag in and of itself.

• In sight, in mind. Being a landlord is sort of strange as when things are going well, you never even know you have a rental property. Rent arrives on time, nothing breaks, you don’t lift a finger. It’s tempting to extend that to not regularly checking up on your rental properties, as if everything is going perfectly, no good can come of driving by the property, as you might see problems if you do. I shouldn’t have to point out how dumb that is but I mention it because I do it from time to time, despite knowing it’s dumb.

• Keep a separate bank account for your rentals. This helps with bookkeeping as well as with motivation. Assuming you’ve got cash-flowing properties, it’s nice to be able to see it build up over time, and helps justify the occasional headaches that arise from being a landlord.

• Calls those references. All of them. I hate talking on the phone, too, but there’s a reason you should always ask for references and a reason you should call them.

• There’s a time and a place for lease option agreements. If your primary strategy is a lease option, ignore this, as you’ll obviously be focusing on that. If you’re not actively trying to lease option a rental, don’t get overly excited if a tenant mentions wanting to buy the property, and don’t overly complicate things with extensive lease option contracts, haggling over a purchase price, etc. Most lease options don’t result in the tenant buying the property, and that’s unlikely to change in 2009. A quasi-hybrid on the lease option that I used with our current tenant in House #2 was to sign a normal lease, but to also give him a signed letter stating that we’d credit him with $50/month for each month’s rent if he bought the propety in two years. No agreement on a purchase price, no option fee, no official contract to purchase the house, just something to reassure him that he’d get a little something for being a good tenant, if he did end up buying the house. He got a bit of incentive to take care of the property and a bit of a discount if he does prove serious about buying the house, and it took all of a few minutes to draft the letter and sign it.