10 Things You Need to Know Before You Become a Landlord

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Considering becoming a landlord?

Don’ jump in blind.

Here is my list of 10 things everybody who is considering getting into the landlord game should know.

1. Landlording is a Business

It is not about sitting on a beach sipping fruity drinks while tenants write you checks.  Beware of someone selling you a dream as opposed to a business tool.  There are many “guru’s” out there selling a dream.  But, there are also many “guru’s” out there selling valuable information.

Understand that building a successful business requires hard work and hopefully after a few years of hard work you will get to live the dream a bit.

2. Cash Reserves are Necessary

You will need cash at some point, so don’t spend it all on your first project and don’t spend all of your cash flow.  Put some money away for a rainy day.

Things will break.  Things get stolen.

You will need money to fix the heat or that leaky roof or your tenants will leave.  Ultimately leading to a downward spiral that can be hard to pull out of.  Don’t bet on insurance to fix things either.  Too many claims will result in jacked rates and a loss of coverage.

You will need cash to cover unexpected emergencies.

3. Your Landlord Laws

The law will dictate so much of what you can and cannot do as a landlord.  The law spells out what needs to be in your lease, how much of a late fee you can charge and how you must evict.  You can get into a lot of trouble if you just throw someone out or change the locks.

Every state is different.  Every city is different.  Know your laws.

4. Your Local Market

Remember, location, location, location!  You need to know the market you are investing in.  What are good locations?  What are not so good locations?  What are the rental rates?  What are properties selling for?  If you do not know this basic information how will you know you are getting a good deal?

5. There Will be Repairs

Budget for it.  Even if the property has just gone through a major rehab.  There will be some amount of repairs.  The standard measure is to budget abut 10% of your gross rents for repairs.  After years in the business, I can say that, at least for me, this number is spot on.  Budget for repairs in addition to reserves.

6. Other Landlords to Help You

This is one of the major reasons I advocate joining a local REIA group.  Many times you will feel like it is just you against the world in this business.  Having other local landlords to discuss your problems or concerns with or to just vent to can be a big help.  There likely is no problem that other landlords have not hit before and can help you with.

Don’t have a local REIA nearby (or even if you do)? Make full use of BiggerPockets.

7. You Will Never Be 100% Rented All The Time

Budget for it.  We have found in our business that we have a vacancy rate of about 7% to 8%.  The standard is about 10% but it may be higher or lower in your market.  Be sure to budget for the appropriate amount of vacancy.

8. You Make Your Money When You Buy

So many people think that you make the money when you sell, but it is the other way around.  You can’t sell for a profit unless you buy it right and you can’t get good cash flow unless your buy it right.  So be sure you know how to buy it right.

9. People Lie

Potential tenants lie.  They will tell you all kinds of sad sack stories.  Verify everything.  Check them out before you let them in.  People trying to sell properties lie.  Phrases like “great cash flow,” “newly renovated” or “100% occupied” will all sound great but could be pure BS.

You need to understand the numbers of real estate to see through the lies before you get sucked into a bad deal.  One bad deal can be a very costly lesson.  Verify everything with your own research

10. Cash Flow is King

It is just that simple.  Appreciation is a bonus, don’t bet on it. Cash flow will keep you in business through the good and bad times.  Always remember that cash flow is king.

So, what’s in your top ten?  Let me know with your comments.
Photo Credit: [bastian.]

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About Author

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

22 Comments

  1. Kevin, you’ve nailed it. Spot on! Good post! First part is finding a good deal. Applying the 50% rule to come up with realistic cash flow projections for the long run. Second part of a successful deal is good property management. Get that part wrong and even if you got the first part right you’ll be in trouble. Besides joining a REIA you can also look for Landlord Associations. They keep up with landlord tenant laws and can be a real help when you need it. That, plus BP.

  2. Great post Kevin! It is so true about the late night RE gurus you see on TV. Buyer beware!

    I have a small tip to add to the section about repairs: If you put in the rental contract a clause that states the tenant is responsible for any repairs under $150, you will have MUCH fewer calls regarding maintenance.

    • Martin, that’s true, but it can be a double-edged sword. Sometimes the tenant decides not to worry about the small leak or the broken hinge until it becomes a much bigger repair….

      • Kevin Perk

        Ben,

        I tend to agree with you based upon my experience. But I have landlord friends who claim such a policy works very well and saves them a lot of hassle. I think I would rather know that the “small things” have been repaired before they become “big things.”

        Thanks for helping out with the discussion,

        Kevin

    • Kevin Perk

      Martin,

      Gurus can be good or they can be bad and when they are good, they are good, but when they are bad…oh boy! :)

      I am going to agree with Ben that what you are advocating can be a double edged sword. I do not use such clauses but have landlord friends who do. I think it all depends on your market and the type of tenant you have. You want to be careful that needed repairs actually get done and not ignored because they have to pay for it. If it works for you though then go for it. It can be a real time (and money) saver.

      Thanks for reading and commenting,

      Kevin

      • Kevin – I can see your point about little things becoming large problems. So far, I have not had any issues (knock on wood) and it has definitely made my life easier.

        Of course I stay on top of major things like the roof, electrical issues, major plumbing, etc., but I expect the tenants to be able to take care of unplugging their toilet and the like.

        • Kevin Perk

          Marin,

          Glad it is working for you. I agree with everything you say. Especially the point about staying on top of things. You just have to in this business.

          Thanks,

          Kevin

  3. I would sum up the hardest part of my experience to the following:

    If you have a demanding full time job, actively managing an expanding portfolio is difficult. If everything was already set up and rented, it’s possible.

    Add outside management or downshift the job, anything is possible.

    • Kevin Perk

      Ryan,

      Yes, as you acquire more and more units it does take more and more time. If you want to truly expand, you need either to have less job or better property management. Each one can be difficult to attain but is not impossible.

      Thanks for reading and commenting,

      Kevin

  4. Great article Kevin,

    The only one I have any issue with is number 8, and it’s more the wording than point. Too many investors think they have to win when buying and cause the seller to lose.
    If you’re buying smart in areas with good potential growth and plenty of tenants to rent to, even if you don’t get a deal below market value you still made money by buying right long term.

    Regards,
    Bill

    • Kevin Perk

      Bill,

      I have seen the type. I try to keep a win/win attitude. For example, I will offer a price that works for me, if that works for you great! If not, it’s just business and we can both move on down the road. No harm done.

      But I would still say you make your money when you buy, even if you plan to hold long term but you are right it is not about making the other guy “lose” so to speak.

      Thanks for reading and for commenting,

      Kevin

  5. This is a good list. I would expand number 6 to include others who can help you – people from real estate agents to contractors, repair people, attorneys, etc.

    If you do your own management, it’s critical that you develop a network of people you know. If you use a property manager, they’ll have referrals. But ultimately, if you’re writing the checks, you’ll want to make sure you find the best people you can. And it’s much better to develop contacts before there’s an urgent situation.

  6. Interesting article, escpecially for someone like me looking to get started in REI. I do have one question though. How do you know when to transition from being a landlord to using a property management company? Passive income isn’t truly passive if you’re spending a lot of time on it.

    • Kevin Perk

      Chris,

      That is a tough one to answer. Some folks like to manage, some go to a property manager, some build a management business. It will all depend on your skills, aptitude and what you enjoy doing.

      No matter what though, don’t think that hiring out a property manager gets you out of the landlording biz. Using a property manager just means you have a new landlording job, managing the property manager which is a whole different set of issues and a topic for future posts.

      Thanks for reading and commenting,

      Kevin

  7. Great list and wholeheartedly agree with all your points.
    I especially like the points about reserves and 10% for repairs.
    You see so many people buying new construction or recently renovated places and not budget anything for reserves and maybe 1-2% for repaiThat

    That might hold up the first couple years but sooner or later some stuff will break, and if you are in it for the long hall you’ll need to replace some of those new big ticket items.
    If you are doing this and projecting such a good cash flow that it still works well with less optimistic numbers okay. However usually you see this getting “acceptable” returns.

    The person projecting $250 monthly cash flow on $1000 rent with 3% vacancy, 1% repairs and no reserves are just a 2 month vacancy and 1 mid level repair from being roughly breakeven for the year.

    • Kevin Perk

      Shaun,

      Preaching to the choir here. I have seen more folks go down because they used numbers like you describe.

      Thanks for helping to make a valuable point. I hope people hear it.

      Thanks also for reading and commenting,

      Kevin

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