A key part of our strategy to reach an early retirement relies heavily on the income from our four single family rental homes. We’ve been fortunate to have a rental market that continues to be smoking hot for several years running here in Minneapolis. I moved from the suburbs to the city over 12 years ago and since that time, especially as a landlord, I’ve come to know firsthand what living in this city has to offer.
That move to the city over a decade ago also marked my first foray into owning a real-deal homestead. So I had no choice but to become acquainted with home and landscape maintenance best practices. I already knew how to cut the grass and shovel the snow. I had no idea I’d later go on to, for instance, learn how to install a range vent and learn furnace repair. And little did I know how useful where I lived and what I learned from working on my own house would come into play, when we became landlords just a few years ago.
So, readers, if you’re thinking about getting into rental real estate to help you accelerate your financial goals, look no further than these Ten Commandments to inspire the bejeezus out of you. (cue the harps!)
Knowest thou thy Err… Know your market.
Do your research often to know where rents are heading before you purchase a rental, and while you’re managing the property. Craigslist is especially helpful for gauging the market. Use the map feature to isolate pockets of neighborhoods. Sometimes the rent can vary greatly based on proximity to features good and bad (parks, highways, airports, etc.) In my own experience, rents started out around $1,200 for a small single family home back in 2013. They are now at $1,400 and rising. That’s nearly a 20% increase. If you’re not paying attention, you could be missing out on significant revenue.
9. Use the “pay it forward” strategy with your tenants.
Nothing is worse for either you the landlord, or your tenants, when it’s time to find new tenants at the end of a lease. (save for evictions, which I’ve been fortunate to avoid, so far.) It’s a royal pain in the arse to arrange showings for prospective tenants, since you have to coordinate with the current tenants, and, you likely have a day job cramping your schedule.
To avoid the hassle for both parties, I set the tradition in each rental of having the current tenant show the property to prospective tenants. This creates an incentive whereby the current tenant, wanting this process to be done sooner than later, puts their best foot forward. They’ll make sure the house is clean and charm the socks off whomever stops by. They’ve even been known to sing their landlord’s praises. This practice keeps me from having to rush over to do showings myself, where often times, people flake out and never show up at all.
8. Incentivize the long term lease.
Something I’ve been successful at in the last year or so is putting forward an option to sign on to a two year lease, for a slightly reduced rent. For example, a single year might be $1,395 per month, whereas a two year commitment is discounted to $1,375 per month. Sure, I lose out on $240 in revenue per year with a two year deal, but it’s well worth the cost to delay tenant turnover – which is where most of the work occurs as a landlord. Your goal is to make money, but also to make real estate rentals as passive an investment as possible.
7. Meet with your new tenants before they move in, and lay out expectations in the lease
A two-fer. Of course you want to meet your tenants before they move in, but there’s a number of less obvious reasons why. The main thing is to establish a foundation of trust. I like to meet my new tenants at a nearby coffee shop to review the lease and get to know them a little. We go over every every section of the lease and I’m always sure to point out the big items, to make sure there are no surprises.
Early on, I had tenants who called in a plumber as an “emergency situation” to repair a clogged bath drain. Never mind the fact they had access to a second bath/shower in the house. That little repair job ran me close to $500. Now, whenever I have new tenants, I relay this story as an example of how not to engage maintenance repairs. PLEASE CALL ME FIRST, YO! Sigh…
6. Oh, and another thing on those expectations in the lease
I learned early on how crappy it can be when a tenant wants to break their lease early. It happened twice in the same year, at two different properties. I guess a seven month lease was all they really wanted? Now, I’m a reasonable person. If tenants have a reasonable situation for breaking a lease early, I’m willing to listen.
In both of the two instances that one year, each couple simply wanted to buy their own house and not pay rent anymore. I didn’t hold anything over them, simply because I was able to find new tenants and avoid a vacancy. But moving forward, I put a clause in all my leases that more or less avoids any loss on my part with a broken lease. The clause allows the tenant to break the lease early, but for a fee of $400 for every month unpaid. You can see how this might incentivize the 24 month lessees to stick around a while?
5. Inspect your properties at least twice a year
There are a number of things you should check the box on, both in the late fall, and early spring. In the fall, I’ll throw a ladder in the Fit and clean out gutters on a single Sunday in early November. While at each house, I’ll turn off the water to the outside, check the furnace filter (9 times out of 10 that thing is filthy, despite language in the lease requiring a swap out every three months), clear out lint from the dryer line, check smoke and CO detectors, and do a quick walk through. In the spring, much the same, except you’re turning the water back on. The idea is to give your tenants plenty of space, but don’t assume your rental house is running on auto pilot. Things break.
4. Know your limitations
I’ve used You-Tube a number of times to make repairs on washers, dryers, etc. It really comes in handy. That said, you need to make the time to make the repair. Taking apart a washing machine and replacing a part can generally be done within an hour, but you need to be 90% about the fix, otherwise you’re wasting your time and prolonging an inconvenience for the tenant. I think I’ve come to find a balance with this commandment. If my internet research tells me the problem could be one of three causes (a 33% probability of success does not inspire me), I might just call it in to the pros.
3. A good landlord makes his tenants pay for all utilities
Pretty straightforward here. I originally paid for the water and trash removal bills, but after a few years of going “What the F?” with some extravagant water bills, I changed policy. Having your tenants be responsible gives them the incentive to conserve. It also teaches them a key aspect of home ownership – nothing is for free. Now, there is one trade off. In the “What the F?” instance, the high water bill was a clue that the tenants had taken in a third person – which is a no-no without the landlord’s prior consent. This is another reason why 2x per year inspections is important.
2. Don’t allow big pets and don’t allow pets at all when your property is carpeted
Another lesson learned from yours truly. Our very first tenants took in a puppy that turned into a bear. I think it was a Newfoundland, or a bear. They had my permission, but I had no idea what this cute little puppy would turn into. Anyhow, this also happened to be a carpeted rental. Needless to say, carpet and ripped window screens aside, I have a 30 lbs. limit on dog size. I also get to approve the breed before a pet moves-in. To help pay for the long term impact of Fido and company on my non-carpeted rentals, I charge a $200 pet fee, up-front. I know at some point I’ll need to refinish those scuffed up hard wood floors, among other things.
1. Always remember to apply the best customer service possible
Take pride in the work you do on your rentals. I personally will not allow a tenant to live in any of our rentals if I wouldn’t be willing to live there myself. Keep high standards. Return calls and texts from tenants promptly and with courtesy. Help your tenants with home basics. Even if they’re technically responsible for minor repairs under $25, I’ll almost always foot the bill in good faith. You want to build a good reputation, not only with your tenants, but with the city as well. Give a few days on late rent payments. Be understanding when something does break, and don’t rush to conclusions. Houses require maintenance, and the better trust you build with your tenants, the better you’ll sleep at night knowing those homes are in good hands.
Are you thinking about becoming a landlord, or have some fun landlord stories to share? Please comment below!