Landlord Guidance: Content & Quiz for Determining if You Are Ready to House Hack

In this article

Real estate investing has many perks over other types of investments, including simply purchasing a home. Since you’ve found yourself here, you might be interested, in what BiggerPockets calls a House Hack. It’s essentially a smart primary residence purchase. You buy a 2-unit property, live in one side and rent out the other to help cover your mortgage.

Better.com offers a HomeReady loan to help you get into a House Hack and start increasing your financial position.

If you haven’t qualified for this loan type yet, visit the loans page on BiggerPockets, to apply for a HomeReady loan from Better Mortgage.

If you are here to read this content and complete your application, before you get started, make sure your property of interest fits these qualifications for the loan:

• Must be a primary residence purchase
• Property must have 2-units

Please note the following; the loan is subject to income qualifications by geography and same basic qualifications as other conforming loan products.

To qualify for the loan, you are required to read all the chapters ahead and pass the quiz found below.

Let’s get started!

Table of contents:

1. Making the Decision
2. Finding Reliable Tenants
3. Collecting Rent From Tenants
4. Getting the Tenant Moved In
5. Maintaining Your Property
6. Taking Care of Your Financial Responsibilities
7. Ending Rental Tenancies
8. Hiring a Property Manager
9. Earning Your Certificate

Chapter 1: Making the Decision

The internet is full of “hacking tips.” I’m sure you’ve seen them, with clever tricks like storing your pancake mix in old ketchup bottles or dipping your Oreos with a fork through the frosting. Sure, those are fun little tricks, but how much do they really improve your life?

Well, what about using this concept on a scale that could change your financial life?

House hacking, when properly implemented, can have a dramatic effect on your wallet and the financial destiny of you and your family. House hacking can allow you to build wealth automatically. It can empower you to live rent and mortgage-payment free, often with extra cash flow as an added bonus.

So what does house hacking entail? Essentially, house hacking means buying a property with more space than you need—a multifamily property with extra units or a single family home with extra bedrooms—living in a portion of it, and renting the rest out. When it comes to multifamily investments, these properties are often called “owner-occupied multifamily properties,” but you’ve probably heard other names for them, like “duplex,” (2 units) “triplex,” (3 units) or “4-plex” (4 units). They are the properties that have more than one unit but don’t quite fit the “apartment complex” category. They exist in every market, every neighborhood, and every price point—and by purchasing one of these small multifamily properties, living in one unit, and renting the other unit(s) out, you can live for free and get paid to do so.

Let’s get started.

Are You Ready to Buy a Home?

Buying a home is not for everyone.

If you are flat broke, up to your eyelids in debt, switching jobs every 2.5 weeks, and can’t seem to avoid calling those late-night infomercials, maybe it’s best to get your life and budget in order first. Buying a home shouldn’t be a light-hearted, flippant decision.

However, if you have decent credit, a stable job, and a small amount of savings, you can enter the homeownership world. And if you’re smart about it, you can enter the real estate investing world at the same time and start hacking your living expenses.

Why Purchase a Small Multifamily?

By purchasing a great small multifamily deal, the rent that your tenants potentially pay each month can cover all of the expenses for the property—and more. For example, if you buy a 2-unit property, live in one unit, and rent out the other for $1,200 a month, you could take that $1,200 and put it towards your loan, taxes, insurance, utilities, and other expenses. Let’s say these expenses come to $1,000 per month. In this case, you would be getting paid $200 a month just to live in your home. Even better, when it comes time to move out into your future home, you can rent that second unit out for even more income.

So, how do you put yourself in this position? Let’s walk through the process of landing a small multifamily property.

Where to Find Small Multifamily Properties

These properties are everywhere.

The easiest way to find them is by speaking with a real estate agent. Ask your family and friends for recommendations and start up a conversation. The best part about working with agents is that it’s totally free for you! The seller of the property typically pays for the agent, which means you can ask a thousand questions and get a thousand answers without needing to pull out your debit card.

Use this!

Keep in mind, however, that you are only looking for properties that have 2, 3, or 4 units. Once you hit 5 units or more, the entire world of real estate changes into something entirely different (commercial real estate). And for the Better HomeReady program, which offers 95% LTV, you will need to look for a 2-unit property in order to qualify.

If you simply want to start looking, you can also use sites like Realtor.com, Zillow.com, or Trulia.com to start looking at properties. With each of these sites, you have the ability to limit your searches to only multifamily properties. Start looking at the cheapest properties in your area and try to find neighborhoods that you would want to live in.

Don’t be scared of homes that are a little “ugly” or have been foreclosed on. Although they may require a few weekends of painting with your buddies, you can often get substantial discounts because everyone else is scared away.

What Makes a Killer Deal?

If there’s only one lesson you learn from this section, let it be this:

Find a killer deal.

You see, if you are trying to “hack” your housing, not just any deal will work. In fact, I’d wager that 90% of the small multifamily properties out there are not going to give you the result you are looking for, which is cash flow.

Cash flow is the extra income left in your bank account each month after all the bills have been paid. If you can get your rental units to pay all the expenses and there is money left over, that money is yours. The trick, therefore, is finding properties that provide this cash flow.

The best trick I know for quickly estimating if a property is going to provide cash flow or not is known as the 50% rule of thumb. Essentially, this rule of thumb says: Take the total income of a property and divide it in half. Those are your expenses. Now take out your loan payment. The remaining money is your estimated cash flow.

Let’s take a real life example of this:

You find a 2-plex for sale for $200,000, where each unit would rent out for $1,600 per month. If you rented one of the units out, the total income would be $1,600 per month. Divide that in half and you are left with $800 per month to pay the mortgage. A loan on $150,000 (you don’t pay full price, and then you pay a down payment) at 4% for 30 years is about $700 per month, which means you could get paid $100 per month to live for free.

Keep in mind, however, this rule is just a rule of thumb—so make sure you use this as a quick and dirty way to filter lots of properties. When you find some great potential properties, look at all the expenses for the property and figure out what all the costs truly are.

How to Fund Your Property Purchase

Maybe you have lots of cash and can simply write a check for a home. In that case, awesome!

However, chances are you are probably not able to pay the hundreds of thousands of dollars needed and are going to need to get a loan (mortgage) from a bank. With any loan, you need to supply a certain amount of money to get the loan, known as the down payment. While the “no down payments” mortgages have mostly gone by the wayside, there are still options for purchasing properties with low down payments, ranging from 3.5% down payments for FHA loans (offered at most banks) to 20% down for conventional mortgages. Better’s HomeReady loan program offers 95% LTV and requires a 5% down payment.

Managing the Property Without Going Insane

After closing on the purchase of your small multifamily property, you’ll officially be a landlord! At this point, it is imperative to learn how to be a landlord and start running your business like a business, not a hobby. Read a few books on being a good landlord, make friends with local investors that you respect, read articles that talk about landlording, and don’t stop learning. If you want a comprehensive view of the landlording process, check out The Book on Managing Rental Properties.

Being a landlord is not as difficult as the horror stories will have you believe—if you follow some very simple guidelines:

• Screen your tenants like you would a job applicant. Keep your emotions out of it and look at the facts. You’ll learn more about this in the next chapter.
• Have a written policy to refer to. Stick to your policy when dealing with tenants.
• Outsource things you don’t want to do. If you don’t want to fix toilets, don’t fix toilets. Find handymen, property managers, or others who can handle the aspects of the job you don’t want to do. If you found a great deal when you bought your property (which you should have!), the cash flow can pay for these things.
• Never rent to family or friends. Rarely does this end well.
• Treat your business like a business, not a hobby. Set up processes and systems to handle the problems that will arise.

Being a landlord is not always the most fun activity, but you can minimize your issues by following these simple guidelines. There are over 20 million landlords in America, so you are not alone in your journey. If you run into any problems, just ask those who have come before for help, and you’ll find most seasoned landlords are more than willing to help.

What Next?

House hacking a small multifamily property can change your life, free up your finances, and start you down a path toward building wealth. This chapter introduced you to the concept, but what about the details of finding tenants, collecting rent, maintaining your property, and all the other aspects of owning a rental? Read on to get a better understanding of how to succeed at owning your first income-producing property.

Further Reading:

• An Intro to House Hacking: Here’s How I Get Paid to Live for Free
• 6 Different Ways to Hack Your Housing (Find One That Works for You!)
• 3 House Hacking Mistakes I Made (& How I Could’ve Prevented Them)

Chapter 2: Finding Reliable Tenants

If you’re hoping to succeed as a landlord, you’ll need an authoritative step-by-step guide teaching the process to get your property rented to great tenants with minimal headache, stress, or costs. In this chapter, you’ll find:

• What Is Tenant Screening?
• 7 Qualities of a Great Tenant
• Setting Your Minimum Requirements
• Pre-Screening Potential Tenants
• Screening a Tenant in Person
• Protected Classes, Discrimination, and Fair Housing Laws
• The Application: Six Must-Include Sections for Proper Screening
• How to Run a Background and Credit Check
• Advanced (and Sneaky) Ideas for Tenant Screening
• Calling Previous Landlords
• Screening Tenants Through Employment Verification
• Screening Tenants Through Personal References
• Should You Allow a Co-signer?
• Denying an Applicant after Screening

What is Tenant Screening?

Screening tenants is about digging into a potential tenant’s background and discovering who they really are. An application can only tell you so much—and can be easily manipulated or falsified. Screening your tenant means looking into the information they provided, as well as analyzing outside information you can discover, and coming to a reasonable estimate on the kind of tenant they will be. It’s a “reasonable estimate” because there are no sure-fire ways to know the future quality of a tenant. As a landlord, it is your job to simply screen effectively and choose the best possible applicant for the property.

As with many areas of landlording, be sure to consult the landlord-tenant laws in your state. Some states may require that you choose the first qualified tenant due to Fair Housing laws.

7 Qualities of a Great Tenant

As mentioned above, there are no guarantees when it comes to the future quality of a tenant. However, there are several key metrics that will help you decide what kind of tenant they will be. To make your life as stress-free as possible, it is imperative that you only rent to the best tenant. The following is a list of the seven traits that make up the perfect tenant:

Their Ability to Afford the Rent Payment

The first and foremost quality of a good tenant is their willingness to pay the rent. Without proper payment, you’ll be forced to evict and be faced with potentially thousands of dollars worth of legal fees, lost rent, and damages. Most landlords require that a tenant earn at least three times the monthly rent from their (documentable) job. Many tenants believe that they can afford more than they really can, so it is the job of the landlord to set the rules. Three times the monthly rent usually is sufficient.

Their Willingness to Pay on Time

While some landlords look at late rent as simply a benefit (and the late fee as a financial bonus to them) a late-paying tenant is more likely to stop paying all together. The stress involved when the rent doesn’t come in is not a pleasant experience and can be avoided by only renting to tenants who have a solid history of paying on time.

The Long-Term Outlook for Their Job Stability

While a tenant may be able to pay the rent and pay it on time right now, their ability to do so in the future is often determined by their job situation. If they are the type to switch jobs often or have long periods of unemployment, you may find long periods of missed rent.

Their Cleanliness and Housekeeping Skills

No tenant stays forever—and when they leave you want the property back in good condition. As such, it is important that the tenants day-to-day living be clean and orderly. They must take good care of the property you have entrusted them with.

Their Aversion to Crime, Drugs, and Other Illegal Activities

No need to expound too deeply on this. Tenants who engage in illegal activities will cause nothing but stress and expense.

The “Stress Quotient”: How Much Stress Will They Cause You?

The final quality of a great tenant is the “stress quotient” or the amount of stress a tenant will cause you, the landlord. Some tenants are very high maintenance and constantly demand time and attention. Unless you are having a hard time finding quality tenants—these types will only cause more problems.

This chapter is designed to help you find and sift through the information about the tenant to find one who most closely fits the above seven qualities of a perfect tenant. Obviously, no tenant is going to be 100 percent perfect, so deciding how close to perfection you will require is a personal choice that largely depends on your desired involvement level and the community in which your property is located in. If tenants are difficult to find – it may be financially advantageous for you to rent to a less-than-perfect tenant in order to fill vacancies. However – if you have plenty of tenants to choose from, you can be significantly more picky.

Setting Your Minimum Requirements

One of the most important steps in screening your tenants and finding the best qualified is by coming up with your list of minimum requirements for the property. This list of standards should be told to the tenant on the telephone, placed on the application, placed in any ad, and told in person to eliminate those who simply will not qualify. The following four standards are commonly used by landlords on BiggerPockets:

1. Must Be Three Times the Monthly Rent

Tenants rarely know how much they can afford. By giving an exact minimum income requirement, you can keep out those who might believe they can afford to pay the rent but really can’t. Requiring income to be three times the rent has been used by landlords, as well as banks and other financial institutions that supply loans, for many years.

2. Tenant Must Have Good References

The references you receive from past landlords are the best indication of the way the tenant will behave for you. A bad review from a past landlord is a huge red flag for most landlords. Also – bad references from personal friends or family are also huge red flags.

3. No Evictions

You may decide not to accept anyone with a prior eviction. Landlords vary on this, but know the risks involved with renting to those with previous issues paying rent.

4. Clean Background

If a tenant has a background filled with criminal activity, take a stance of being hesitant to rent to them. People can and do change, but again, know the risks involved if you decide to go this route.

Pre-Screening Potential Tenants

You’ve begun advertising for your property and have begun receiving calls. Contrary to popular opinion, screening doesn’t begin with a background check or an application. It begins with the initial contact. This is known as “pre-screening.”

Screening is not a flippant activity that you can do in a few seconds. Screening can take a considerable amount of time—and you don’t want to waste that time on every person who shows interest in your property. This is why pre-screening is so important. Think of the screening process as a funnel, like the kind you would use to pour oil into your vehicle. At each step of the process, you are able to narrow down the pool of applicants until only a small few (or just one) match. Pre-screening is the widest part of that funnel and will help to keep away those who obviously won’t qualify.

Pre-screening Through Your Advertising

Your pre-screening efforts begin with your advertisement. Whether you are using the newspaper, Craigslist, Zillow, or another service to market your property, the information in your advertisement can help to weed out time wasters. For example, by placing the location in your ad, you are able to screen out individuals who are looking for another location (don’t worry—if you don’t feel comfortable putting in your exact address, just put a general location or a nearby landmark).

Also, putting the price in the advertisement helps to keep those who can’t afford that price range from calling.

Pre-Screening Through Your First Phone Call

The initial phone call is the next logical step in screening tenants. The first thing you hear is often an indication (though, not proof) of the kind of tenant they might be. If the first words you hear after saying hello is a voice yelling into the phone, “How much do I have to have to move in,” you can assume the tenant might not be a great fit. After all, they are more concerned with getting in anywhere than even asking to look at the property.

When a tenant calls about a property, you’ll probably want to ask them, “What can I tell you about the property?”

This open ended question allows the tenant to begin talking and asking questions. The typical questions are generally:

• “How much is it?”
• “What’s the address?”
• “Do you accept pets?”
• “How much is the security deposit?”
• “Will you work with me on my security deposit?”
• “Can I get inside to see it?”

The kinds of questions asked by the tenant are great indications of the kind of tenant they are going to be. You don’t want to judge a tenant solely on their ability to ask good questions, but it does help point you in the right direction as to the type of person they are. Are they orderly? Do they care about where they are going to live? Do they sound broke?

In the conversation, you’ll probably want to include a few of your minimum requirements, as discussed earlier. Usually, this is easily worked into the conversation such as, “Now, the property does have a minimum income requirement of $____ per month and we do a full background and criminal check to make sure we only rent to upstanding people.”

Many, many times you may simply get a *click* after stating this information. If not, they usually will volunteer how much money they actually make and reassure you that they have never done anything bad in their entire life.

This simple two-minute phone call does two great things:

1. Gets rid of 80% of the “bad apples” and prevents them from wasting your time.
2. Lets the good tenants know you are not a slumlord and only rent to good people.

In both cases, it’s a win for you. This is what makes pre-screening so important. It allows you to save time, avoid nuisances, and project a good image. You may also consider leaving your minimum requirements on your voicemail as well, so when you can’t get to the phone, your tenants still get the message and your pre-screening still works.

Screening a Tenant In Person

The next step of the screening funnel is to meet with tenants and show them the property. This is also a great opportunity to screen the tenant before any paperwork is done. At this point, you’ll want to reiterate your minimum requirements to the tenant in person, just in case they didn’t understand (or chose to ignore) what you told them over the phone.

At this point, many tenants will admit that they don’t quite meet the requirements but ask if you’ll work with them anyway. If you need time to think about it, tell them that you will have to check with the owner (or partner or any other higher authority) and let them know. If you know they immediately won’t qualify, let them know why but still offer the opportunity to apply. Why? You don’t ever want to be accused of being discriminatory for any of the protected classes.

Protected Classes

It’s OK to screen people upon some criteria, but not others.

For example, discriminating against someone who won’t pay rent is acceptable, as is discriminating against someone with a violent criminal history. However, discrimination against someone in a protected class is not only morally wrong—it’s also illegal. This section will let you know what those protected classes are.

Federal Fair Housing Laws

The following was taken directing from the U.S. Department of Housing and Urban Development’s Fair Housing Website, which states it is illegal to discriminate on the basis of:

• Race
• Color
• National origin
• Religion
• Sex
• Familial status
• Handicap

While it is vitally important that you don’t discriminate against those classes, it is also important that you don’t even ask questions about those topics. This means don’t ask what their race is, how many children they have (you can ask how many people will be living there), or if they have a husband or wife. Save yourself the legal trouble and simply do not ask. This also applies for advertising: DO NOT advertise for “no kids,” “great Hispanic neighborhood,” or “home great for families.” This is against federal law.

State and Local Fair Housing Laws

In addition to Federal Fair Housing Laws, your state may also have landlord-tenant laws that must be followed regarding Fair Housing, which might include:

• Marital status
• Sexual orientation
• Gender identity
• Age
• Participation in the Section 8 Program or other subsidy programs

Be sure to check with your State and local laws to ensure compliance to your Fair Housing standards. A simple Google search for “your state” and “Fair Housing” should give you the answers you need.

A Note on Age and Children Discrimination

As mentioned above, Federal Fair Housing Laws prevent discrimination against family status and it is illegal to prohibit children. However, there is an exception to the law, which states that certain properties may be designated as “55+ Communities.” According to HUD, in order to qualify for the exemption, the housing community/facility must satisfy each of the following requirements:

• At least 80 percent of the occupied units must be occupied by at least
• one person 55 years of age or older per unit,
• The owner or management of the housing facility/community must
• publish and adhere to policies and procedures that demonstrate an
• intent to provide housing for persons 55 years or older; and
• The facility/community must comply with rules issued by the
• Secretary for verification of occupancy through reliable surveys and
• Affidavits.

In other words, if 80% of the units in a community owned by you have someone older than 55 living in them, and your visible intent is to provide housing for an older age bracket, and you abide by the laws that govern this exemption, you have the ability to exclude a familial status to include only those who are 55+ in age, thus discriminating legally against those with young children.

For more information on Fair Housing Laws, speak to a qualified attorney.

The Application: 6 Must-Include Sections for Proper Tenant Screening

The application is the window into your tenant’s life. It is important that you ask the right questions—and don’t ask the wrong ones (see Fair Housing, above). The following is a list of must-have sections to include and ask on your application:

• Name, address, phone number, driver’s license number
• Social security number and date of birth
• Current and past landlords with contact info
• Employer and job details with contact info
• Eviction and broken lease history
• Release of information signature

These questions are the most important for knowing the past history of your potential tenant. A good strategy to use is to not ask “have you” but instead “how many” or “when.” This makes it tougher for a tenant to lie. For example, the question, “Have you been evicted?” can easily be answered with a “no,” but a tenant may take more time thinking through, “How many evictions have been filed against you?”

Other Questions to Ask

The following is a list of other questions you may want to ask your tenant to find out more about them:

• Requested move-in date?
• How many animals do you have and what kind?
• What may interrupt your ability to pay rent?
• How many felonies do you have?
• Do you have enough cash to pay the first month’s rent and security deposit?
• What kind of car do you drive?
• Do you have a checking account? Savings account?
• How many people will be living here?
• Emergency contacts?
• How is your credit? Explain.
• How did you hear about this listing?

The application must be completed entirely. If not, send it back to the tenant and ask them to finish it. Obviously, if they forget one small section, you can make a phone call to find out, but you can begin training your tenant to follow your policies here.

How to Run a Background and Credit Check

Let’s get down to the nuts and bolts of running background and credit checks.

• A background check looks at the tenant’s criminal and eviction history, as well as looking for fraud or deception.
• A credit check looks at the tenant’s ability to pay their bills and obligations responsibly.

Several years ago, a law was passed in the United States that made checking the credit of a tenant much more difficult and cumbersome. Where before any landlord could simply enter in the applicant’s information and get back their credit report, there are now several hoops a landlord needs to jump through, including an on-site inspection. If this is an approach you want to take, there are several reputable companies you can use.

A well-known screening service known as SmartMove is offered by TransUnion to avoid that hassle. SmartMove is unique because:

• No site inspection is needed
• SmartMove includes both criminal and credit background
• The tenant applies and pays online
• The vital information from the tenant’s report is sent to you, the landlord
• No application process, no site inspection, no waiting period

To run a background and credit check through SmartMove, you’ll need to set up an account with the service, which should take less than two minutes. Next, you’ll enter the property information and the potential tenant’s email address.

Your potential tenant will receive an immediate email prompting them to head to SmartMove and set up an account of their own, which again should take them less than two minutes. They will be required to enter their name, current address, social security number, and a few other pieces of information. After doing so, they will submit their credit card number for processing (though as a landlord, you can choose to pay for this service rather than the tenant).

Almost immediately, you’ll receive an email letting you know their information is ready to view. At this point, simply log into your account and search for the tenant via the property address. SmartMove will let you know its recommendation for renting to the tenant, as well as links to the applicant’s credit report and criminal history.

The Tenant Credit Report

The tenant credit report will contain a wealth of information related to the tenants credit history, including a detailed list of all the tenant’s open or closed credit cards, car payments, monetary judgements, late payments, and more. This information can be overwhelming, but consider looking for the following items:

• Credit Score: Depending on your criteria, you may establish a minimum credit score for your tenants. The particular score may depend on your location and clientele.
• Current and Former Addresses: Oftentimes, a tenant may conveniently “forget” a past address. Verify that the addresses given by the tenant on the application match the addresses on the credit report. The credit report may not include all the addresses, but any listed should be verified. You can ask the prospective tenant about the addresses or simply do a Google search for those addresses and, if it belongs to an apartment complex, you can call the apartment to see if the tenant ever lived there.
• Public Records:This part of the credit report will list any judgments levied against the tenant -which includes garnishments or evictions that have a monetary claim. Note: This does not include evictions without a monetary claim. To find these evictions the process can be a little more complicated. Each state and county has a different way of finding out, but it should be public info in each county. You should be able to search (if your county has online records) for your tenant’s name and/or all previous addresses listed on the tenant’s credit report. Look for any cases that involve a rental company or have the words “eviction” in them. It’s not an easy way, and most landlord’s simply rely on the credit report findings, but it is possible. You’ll also find out when you talk to previous landlords.
• Vehicle Repossessions: Having a vehicle repossessed is strong indication that a tenant cannot handle their money very well. If you notice a vehicle repossession, definitely ask more questions about this.

Advanced (and Creative) Tools for Tenant Screening

Beyond the typical tenant screening steps, you may also want to dig into a few other methods of evaluating your potential renter.

Screening on Social Networks

In today’s world, people often put more information publicly on their Facebook, Twitter, Instagram, or other social network than they would even tell their own mother. You may want to perform a quick search for potential tenants and see if you can find any information that would help you make an informed decision.

Drop by Their Current House Unexpectedly

For extra verification as to the tenants cleanliness, you can drop by their home unexpectedly to ask for an additional signature or to drop off a form. This surprise visit will often tell you interesting things about the way they live and can help you decide if this tenant is worth renting to or not.

Call Previous Landlords

One of the most important things you can do to check on your prospective tenant is to call their previous landlords. In general, the way a tenant has behaved in the past is highly indicative of the way they will behave in the future.

It’s not enough to simply call their current landlord. Many times, the landlord of a problem tenant will lie and give a stellar review just to get rid of a bad tenant. It’s always worth talking with their current landlord, but it is important to take their words with a grain of salt. Always call their previous landlords as well.

As discussed earlier, be sure to take notice of any addresses on their credit report and ask the tenant or simply search Google for the owner of their previous addresses to discover any deception. Additionally, keep in mind that sometimes a tenant will give you the name and number of a friend or family member, with the intent that that individual will lie and claim to be their landlord. To combat this, it is a good idea to call the current landlord first and ask if they have any vacancies. If the person has no idea what you are talking about, you can assume you are being tricked and you can deny that tenant immediately.

When talking with their landlords, there are a few questions you might want to ask, such as:

• When did the tenant live there?
• Did the tenant always pay on time?
• Did you ever have to serve a legal notice?
• Did the tenant have any pets?
• Did you ever have any trouble or damage?
• Did the tenant give you proper notice to vacate?
• Did the tenant leave the unit clean?
• Was the tenant asked to leave by you or your company?
• Would you rent to this tenant again?

You may find that some landlords, especially larger property management firms, will require you to fax them over the tenant’s release of information (which you should have on your application) along with your questions.

Tenant Screening Through Employment Verification

It is also important that you verify your prospective tenant’s source of income. Just as when talking with their previous landlords, you will also likely need to fax over the “release of information” signature from the application before they agree to discuss the tenant. Always be sure to speak with the supervisor or human resource manager when verifying employment—not simply an employee (who are often willing to lie or stretch the truth for their friend).

When talking with the employer, you may want to find out:

• How long has the individual been employed there?
• How much does the individual earn?
• Is this part-time or full-time?
• Is this position temporary or expected to continue?

To help speed up the process, you can also ask that your prospective tenant submit recent pay stubs with their application, allowing you to ask fewer questions to the employer.

What If the Tenant is Self-Employed?

Obviously, if the tenant is self-employed you cannot call an employer. In this case, you can ask for and verify income through the prospect’s tax returns. It is recommended that you ask for at least the previous two years of returns to ensure consistency. Keep in mind, however, that many self-employed people deduct a large amount of expenses, so it can be helpful to have someone knowledgeable with tax returns help you look over the results.

Calling Personal References

Finally, it can be a good idea to call the personal references put on a prospective tenant’s application. While the tenant is able to hand-pick those references, thus making them extremely biased, it still is a good idea to call. While a good reference probably won’t help your decision process much (due to the inherent bias), a bad reference can help immediately disqualify a tenant. After all, if the tenants own family or friends can’t give a good reference, what kind of person do you think you are dealing with?

Should You Allow a Cosigner?

A cosigner is an individual who agrees to become legally obligated for the payment and condition of a rental. A cosigner is used when the tenant can’t qualify by themselves, usually due to income or a lack of rental history. Whether or not you choose to accept a co-signer to help bolster your potential tenant’s qualifications is up to you, but if you do, be sure to:

• Screen the cosigner like a tenant: background, income, employment, etc.
• Check that the cosigner owns property in the county in which you are renting (so they can’t simply disappear like a tenant might).
• Require an application fee from the cosigner as well.
• Fully explain to the cosigner that they are financially responsible for the property and you will hold them responsible should the tenant cause damage or refuse to pay rent.

No matter how great the cosigner, they cannot stop a bad tenant from destroying a property. Don’t use a cosigner as an excuse to put in a terrible tenant that will cause you headaches.

Denying an Applicant

If you decide to deny an applicant, it is vital that you document your reasons why so there can be no question as to whether or not there was discrimination involved. By having carefully defined standards (see above), you have the ability to easily deny a tenant that does not meet your standards.

If a tenant doesn’t qualify because of a bad landlord reference, you have two choices. Which sounds easier to you?

• “I’m sorry Jerry, but your landlord gave you a terrible review and I can’t rent to you.”
• “Hi Jerry, I ran into a bit of a snag in getting positive feedback from your previous landlord, so what I need you to do is go and speak to that landlord and get him to call me with a positive review and we can move on. Can you do that for me, Jerry?”

Jerry will most likely mumble, “Oh, OK, sure” and then disappear, never to be heard from again. You never disqualified Jerry—he simply gave up due to the work you needed him to do.

When you do disqualify an individual, send a letter to them stating exactly why they were dismissed. This can be as simple as a form letter which you check a box stating why they weren’t approved.

Typically, if a tenant applies for a property and fails to qualify, they forfeit their application fee due to the time and cost associated with working their application through. However, if you deny them simply because someone else came first, then you must return their application fee to them.

At this point, you will have learned the exact process for screening tenants. Customize this guide to fit your own style and location, but refer to this guide for reference if you need a reminder or refresher on how to screen your tenants.

Further Reading:

• 7 Advanced Tenant Screening Tips (So You’re Not Fooled by Wolves in Sheep’s Clothing)
• 16 Illuminating Questions Landlords Should Ask Every Prospective Tenant
• 10 Not-So-Obvious Ways to Thoroughly Screen Potential Tenants

Chapter 3: Collecting Rent From Tenants

As a landlord, there are several ways you can collect rent. You’ll likely test out a few options over the coming years to develop a plan that works for you and your tenants, so don’t be afraid to try things out.

For example, in a perfect world, all tenants would pay rent online, but tenants may not have a computer or might not know how to use payment sites if they do. Therefore, you might have to come up with solutions that work for the tenant and that require the least amount of work for you, the landlord.

In-Person Cash

This is a big “no-no.” Don’t collect cash in person. Not only is it the most time-consuming way to get rent, it’s also the most dangerous.

When landlords go door to door and pick up rent on a monthly basis, people notice. “Oh, here comes the landlord doing her rounds. I wonder how much cash she’s got in her purse?” It’s just asking to get robbed. Some landlords boast about the gun they carry around so they can pick up rent in cash and fight off the thugs, but is that the kind of life YOU want to lead?

Picking up rent in person also puts you into the “chasing rent” category, where you are training your tenant that they can tell you to jump and you will to ask, “How high?” You don’t want this kind of landlord-tenant relationship. Maintain authority and don’t pick up rent in person.

The only benefit to picking up rent in person is the ability to check up on your property to see how it’s performing. But there are much more efficient ways to do this than picking up rent in person.

Letting Tenants Drop the Rent Off at Your House

Don’t do this. Please. In fact, never give out your home address to tenants. Your tenants might be great people when they move in, but you never know the true character of someone until they are under incredible pressure or going through a difficult time.

Remember, you run a business, not a hobby. The manager of the local pizza place wouldn’t give you his home address, right? When you have a problem with the pizza, you wouldn’t dream of driving to the pizza owner’s house to complain. You deal with business at the business. The same is true for your landlording business. If you have an in-home office, this means issues can be dealt with over the phone or email during business hours. In the event a face-to-face encounter needs to happen, it can take place at the rental. Keep your business and personal life as separate as possible. This will ensure less stress and more safety for your family.

Mailing Rent

One of the most popular ways among landlords to get rent is through the mail. Tenants simply place their rent in an envelope and mail it to you. By having the tenant mail the rent, you don’t need to go pick it up; it simply is delivered to you. If you have a lot of tenants, picking up rent can be a five-minute task with one trip to your P.O. box. (Because, of course, you wouldn’t think about giving your home address to all your tenants.)

Much of the time when rent is late in this case, of course, the tenant lies and simply claims that they mailed it, when the postmarked date is after you’ve called. But other times, the postmark date is actually early enough, and the post office simply delayed the letter for some reason or another. Checks can even get lost for several weeks in the mail, while you’re likely thinking your tenant is trying to stiff you.

Because of these reasons and more, you may find mailed checks are was simply too irritating to deal with.

Tips For Collecting Rent by Mail

Get a P.O. Box

Require that the rent be received by a certain date, not just sent. If rent is due on the first of the month but you have a five-day “grace period” (which just means rent is due by the firth!), then the tenants must mail the rent so that you receive it by the firth. If they mail it on the fourth, they should know they will likely get a late fee. If they mail it on the fifth, they will get a late fee.

Make sure the tenant knows NOT to send cash. Yes, you will need to spell this out for them.

A Local Dropbox

If you own a larger multifamily property, you may consider installing a rental dropbox on the premises so tenants can pay their rent there. Just keep in mind that if people want to break into something, they will. It doesn’t matter how secure it is. Because of this, the risk may be just too great, and you might want to implement other, more modern solutions.

ACH Payments

ACH, which stands for Automated Clearing House, is the system that banks use to talk to one another and send money from one checking/savings account to another. If you have automatic payments set up for some of your home bills (cable, utilities, etc.) and that payment is deducted directly out of your checking account, it’s likely they are using an ACH processor.

The problem with ACH processing is that, while it can be incredibly cheap to do an ACH transfer, it may not be cost-effective for a small-time landlord to set up. You must set up your ACH through the merchant services department at a bank or other financial institution, and there may be large setup fees or ongoing monthly fees. For example, some banks we’ve looked into charge $40 per month for the ability to do ACH transfer, plus another $0.25 per transaction. While $0.25 might not be a big deal, the $40 per month might be crazy if you only have a few units. Therefore, doing ACH transfers directly might be best used when you have dozens of units or utilize a third-party to handle your ACH transactions online.

Online Payments

In the future, there’s a good probability that all rent is going to be paid online. However, that future is not quite here, so the process of collecting rent online is still a bit muddied. New startups in Silicon Valley are being founded on an almost daily basis to address this problem, but no one yet has the perfect solution.

PayNearMe

Now, if a tenant does not have a bank account or will not pay rent online, there is another solution that may come in handy: PayNearMe.

PayNearMe is a way to let your tenants pay rent in cash at a local 7-Eleven, ACE Cash Express, or other business that partners with the company. When the tenant takes their assigned PayNearMe Card with their unique barcode to one of PayNearMe’s payment locations and pays their rent, the landlord is instantly notified when the rent was paid (no more “it’s in the mail!”), and the money is then deposited into the landlord’s bank account.

In other words, your tenant doesn’t need to go get a money order, write a check, get a stamp, address an envelope, or mail the rent. You as the landlord don’t need to wait around and wonder if your tenant really sent it or if they are simply lying so they can wait for their next pay day.

When a tenant uses PayNearMe, they simply go through the following four steps:

1. The tenant takes their cash to an approved retailer.
2. The tenant allows the cashier to scan their unique barcode that you supply them (or they have on their smartphone).
3. The tenant hands over their cash to the cashier.
4. The tenant gets a printed receipt right then and there, while you get instant notification that the rent was paid.

Each tenant’s account is managed online by the landlord, where the landlord can easily issue replacement cards, change the amount owed, enforce the amount owed (meaning PayNearMe will not accept anything less than what is owed) and even suspend payments (preventing, say, a tenant who is being evicted from making a one dollar payment and screwing up the process).

For the landlord, PayNearMe is free, though there may be a small setup fee. For tenants, there is, as of the writing of this book, a $3.99 charge to use the PayNearMe service. In other words, if the tenant chooses to live their life without a bank account, it’s fine—but it’s going to cost them $3.99 a month to pay their rent. This gives the tenant options without hurting you (the landlord) at all.

Collecting Rent: Summary

As you can see, when it comes to collecting rent, landlords have a lot of options besides knocking down doors. Not every option is going to work for you, and you’ll likely develop your own system as you move forward and as technology progresses. The important thing is that you create a system for paying rent and continually try to improve that system to decrease your stress, boost your bottom line, and get paid, every time, on time.

Further Reading:

• #AskBP 098: What’s the Best Way for Tenants to Pay Rent to the Landlord?
• 5 Practical Solutions for Landlords With Rent Payment Drama

Chapter 4: Getting the Tenant Moved In

Your property is move-in ready. You’ve shown it to several potential tenants. You’ve screened your applicants and selected the person that best fits your criteria. Now all you need to do is give them the keys and let them move in, right? Wrong.  

Now is the time for your tenant move-in process, which is almost as important as your tenant screening process. The move-in process is when you get everything in writing, set out the rules and expectations, and lay the groundwork to get your property back in great condition.

The Tenant Move-In Process

When they sign the lease:

1. Print two copies of the following documents:

1. The lease
2. The EPA Lead Warning Statement (if the house was built prior to 1978)

Also print one copy (per tenant) of the EPA pamphlet “Protect Your Family from Lead in Your Home.”

2. Sit down with the tenant.

This will take about an hour. Ideally, you will have a private office to conduct this meeting, but any quiet location will do. During the meeting, read them the lease and the house rules word for word, and have them ask any questions they might have.

3. Include a replacement cost worksheet with the lease.

The purpose of this worksheet is to alleviate disputes arising from security deposit deductions. Include a list of items that typically get fixed or replaced after move-out, along with the associated cost for these items. That way, your tenant will know that if you have to replace a hole in the wall, it will cost them $55 dollars. At the end of the lease term, nobody will be surprised at the total deduction.

4. Have the tenant initial each page of the lease and sign the last page.

Repeat this in duplicate, so you each can keep a copy.

5. Give the tenant the EPA pamphlet.

6. Have the tenant sign two copies of the Lead Warning Statement.

Each party should keep a copy.

7. Give the tenant a checklist for move-in procedures.

This includes:

• Getting renters insurance
• Putting the electricity and gas in their names
• Forwarding their mail

8. Schedule a time to conduct a move-in walk-through.

Inform the tenant that they will not be allowed to gain access to the unit until after they complete a walk-through with the landlord or property manager.

On Move-In Day:

1. Print two copies of the move-in walk-through form.

2. Conduct your walk-through with the tenant.

Take photographs and/or videos. You are documenting the condition of everything in and around the house so that when the tenant moves out, you can make an easy comparison to the condition of the property before move-in.

Note the number of keys that you’ve given the tenant. Notate and sign forms in duplicate, so that you each retain a copy. It’s important that you and your tenant are on the same page regarding the condition of the property upon move-in. Be as thorough as possible and document the condition of everything that could potentially experience wear and tear during the course of the lease.

Record the status of items such as lawn condition, fence condition, exterior items (gutters, roof, siding, sidewalks, mailbox, soffit, and fascia), screens, front door, wall paint colors, light fixtures (model and color), mirrors, vanities, flooring type and condition, plumbing fixtures, smoke detectors, garage door openers, appliances (make and model), water heater (age and condition), HVAC (age and condition), etc. The idea is that you document everything. Make sure you do this with your tenant so that your tenant understands how well you’ve documented the condition of the property before they move in.

3. Email photographs to the tenant to further document the condition of the unit at the time of move-in.

This reiterates the fact that you are carefully documenting the condition of the property. In many cases, this will cause the tenant to be more careful with the property and less likely to dispute a potential charge later because they know you are paying careful attention to all items in and around the property.

The point of having this process in place is to protect your valuable assets by setting the tone with your tenants from the very beginning. Show them that you are a respectable landlord who runs your business professionally and that you expect them to treat your property as if it were their own. Doing some work on the front end at move-in can absolutely save you time and money come move-out.

Further Reading:

• 3 Important Practices Landlords Should Use During the Move-in Inspection
• 7 Types of Tenants I’ll Never Rent to
• 3 Common Mistakes Landlords Make During Lease Signing & Move-In

Chapter 5: Maintaining Your Property

When it comes to properties, it doesn’t take too long for little problems to become big problems. Unfortunately, many landlords aren’t as diligent as they should be when it comes to resolving problems in their rental homes. When these issues worsen, not only do they lead to costly repairs, but they can also result in unhappy tenants who are more likely to move out.

So why don’t things get taken care of in a timely manner? It’s primarily due to a lack of solid systems. Landlords certainly know that a failure to diligently monitor the condition of their properties can lead to expensive damage over time, but they may not realize that using a simple checklist can make staying on top of repairs significantly easier.

It’s time to stop procrastinating. Here’s a quick checklist you can use to keep your properties in tip-top shape.

Interior

1. Have the heating and air conditioning system cleaned and inspected once a year.

You’ll also want to change furnace filters periodically. Completing this task is an easy way to ensure the heating system is running at top performance. Furnace filters are inexpensive, ranging from $5-$20 each. If you have more than one unit to maintain with similar filter sizes, buy them in bulk to save time and money.

2. Replace smoke & carbon dioxide detector batteries.

The recommended standard is to change batteries in your smoke detectors in the spring and the fall at the beginning and end of Daylight Savings Time. The reason is obvious: Change the batteries to ensure your tenants are safe. No one wants a lawsuit due to non-functioning detectors. It could even be beneficial to change them on the off chance that your tenants are inclined to break the detector instead of replacing it to stop the chirping when the battery is dead.

3. Ensure that lint from the dryer vent has a clear path to the outside.

Obviously, this is applicable to units that have interior washer-dryers. Also, if your complex has shared amenities, it’s wise to check the dryer vents. Start by checking the lint holder in the dryer to ensure it’s free of lint; if there is a large amount of lint, it may indicate that the lint holder is not emptied regularly enough (each time the dryer is used). Remove the hose that attaches to the back of your dryer and check for any build up. If you see any, use a vacuum to remove it. Also check to make sure there are no holes in the vent system.

4. Flush the water heater.

This task may be slightly more involved, but it is vitally important to the longevity and efficiency of your water heater. The water tank tends to hold sediment at the bottom of the tank, and by flushing the water heater, it removes the sediment. Doing this yearly will maintain the efficiency of heating water. Read this article on the Family Handyman website to learn how best to flush your water heater.

5. Clean sinks.

A clogged drain can be a landlord’s archenemy. By cleaning drains out, you help eliminate calls about clogged pipes. An inexpensive cleaning method is to pour in half a cup of baking soda, and let it sit for five minutes. Then add one cup vinegar and a pot of very hot water; let it sit covered for five minutes and then run hot water through it for 30 seconds.

6. Check all windows and doors.

Look for gaps and seal them with a weather-proof sealant to prevent water penetration. These areas need to be sealed to prevent water intrusion and serious damage. This will also help prevent heat loss in your home. Your tenants will thank you.

Exterior

7. Clean gutters and remove leaves.

Depending on the size of your property, this task may be manageable on your own, or it may be something you contract out. Either way, it is important to make sure that the gutters are clear and drain water properly. Any leaves on the ground can be mowed over using a mulching mower. This serves a dual purpose: improving the appearance of the yard and fertilizing the grass.

8. Check the siding and roofing for visible signs of problems.

Walk around the home and check for any damage or potential problems. Wind can cause branches to damage the siding and roofing shingles.

Keep all wood on the exterior of the home painted. Failure to keep these areas painted will lead to softness and deterioration of the wood, which can quickly become a costly repair.

Monitor your roof for damaged or missing shingles. You should be especially vigilant after bad storms and high winds. Damaged or missing shingles can allow water penetration, which inevitably leads to damage on the interior of the property. Dampness from even a small roof leak can allow mold to grow in your attic or behind the drywall. Mold is often a serious and costly problem to correct.

9. Check the sump pump and make sure it’s still operational.

A sump pump is a small pump in the lowest part of a basement or crawlspace. Its job is to help keep the area under the building dry and to prevent it from flooding.

A sump pump can be a true money saver if there is water from excessive rainfall or melting of snow. You want to make sure the outdoor drain is not clogged or blocked. Simply make sure the sump pump turns on when it needs to.

10. Trim the landscaping.

Cleaning up the landscaping has many advantages. Trimming branches that might be encroaching on your home keeps the window screens protected. It also removes dead branches that could break off during strong winds. Above all else, it will make your property look nice, which can attract ideal tenants if the property becomes available for rent.

Routinely inspect any trees on your property for dead limbs or limbs that may be hanging down. Also keep an eye on the base of your trees. Any trees that are rotted at the bottom need to be removed before they fall on your house or a neighbor’s house. Trees can cause damage to the property, and dead limbs can become a liability if they fall and injure someone.

11. Inspect the crawl space; look for bugs and water leaks.

It may not be the most fun chore, but taking a look at your crawl space can save you money. Even a small problem can destroy a month of cash flow. Go into the crawl space and see if there are any creatures that may have made it their winter home. Also check to see if any of the wood shows indications of water damage.

12. Take a look at your foundation.

Make sure the dirt around your foundation properly slopes away from the foundation and not towards it. Fill in any holes around the foundation, and if necessary, add dirt backfill around the foundation to ensure that water drains away from the home and not into a basement or crawl space.

Some of these items may not be applicable to your property depending on its size and style, but following the steps that do apply to your rental will help keep it as free of issues as possible. By doing regular maintenance, you keep a close eye on your property. The preemptive maintenance work fosters trust between you and your tenant by demonstrating that you are concerned about the upkeep. It is also an opportunity to connect with the tenant and see if they are happy with the unit.

Further Reading:

• The 10 Most Common Rental Property Repairs (and How to Deal With Them)
• 4 Common Maintenance & Repair Mistakes Property Managers Make
• 5 Things to Show Your Tenants About Their New Home (to Save You From Costly Repairs!)

Chapter 6: Taking Care of Your Financial Responsibilities

The fact is, most landlords severely underestimate the costs of owning rental properties.

Landlords who actually lose money each month (i.e. have negative cash flow) are not uncommon. They fail to understand the math, and it leads to their financial ruin. They buy properties based on emotion, gut, or bad math and then wonder why they keep losing money.

And where are they losing the most money? Expenses.

This chapter is designed to help you make smarter decisions by enabling you to accurately estimate expenses on your next investment property purchase.

How to Accurately Estimate Expenses on a Rental Property

Sure, if you already own a property in the area, it’s simple to find out what costs are—just look at your other properties.

However, most of the time, you’ll have no idea because you don’t own a property in the area. Instead, here are a few simple tips for uncovering the future potential expense on your rental property:

• Ask local property managers. Most property managers will gladly give you this kind of information, knowing that the more helpful they are, the greater chance you’ll use them as a management company someday. Simply call them up and say, “Hi, I’m looking to buy a rental property in the ____ area and am just beginning my research. Do you mind if I ask you a couple quick questions about expenses?”
• Make some phone calls. Feel free to simply call the company who issues the expense and ask them! For example, not sure what water will cost on your next rental house? Call the company or government institution in charge of water billing and ask them! Most of the time, they will give you an average on the property for the previous few months or at least give you a good ballpark.
• Ask other investors. Reach out to others who own rental properties in the area. You can find them through local real estate clubs, by looking up public records, by asking your real estate agent for referrals, or by simply connecting with them on BiggerPockets. You can use BiggerPockets.com/meet to find investors in any zip code in America. Reach out to them and ask for help!

Now you know how to find out about the expenses. So what expenses do you need to account for?

Step #1: Identify Fixed Expenses

The first thing you’ll want to look at are the fixed expenses. Fixed expenses can be a little confusing because they are not always “fixed” per se, but they are regular expenses incurred while running your rental business.

Below is a list of the most common fixed expenses you are likely to experience with your rental property. Not every single one will apply to your property, but this should give you a pretty good idea.

Water/Sewer

Often connected on one single bill, water and sewer are charged to you by the city. On homes, this is often paid by the tenant rather than the landlord, but this is not true in all cases, so be sure to check with the competition in your area and find out if you can get away with offsetting this charge to the tenant.

Property Taxes

As they say, the only things sure in life are death and taxes, so of course you’ll need to account for this expense. Property taxes are sometimes included with the mortgage (along with insurance), but not always, so be sure to check on your property. Taxes are typically paid in two halves, usually in the spring and again in the autumn. When estimating your property taxes, be sure to always look at next year’s property tax bill—not last year’s. Taxes almost always go up each year!

Electricity

Although electricity is usually paid by the tenant, many multifamily properties still cover this expense for the property or part of the property (such as parking lot lights or storage areas).

Garbage

Garbage can also be paid by either the tenant or the landlord, depending on the arrangement.

Natural Gas/Wood/Other Heat

This is another expense that is often paid by the tenant, but be sure to investigate.

Insurance

Insurance (along with property taxes) is usually included with the mortgage payment, but if not, be sure to set aside money for insurance expenses each month. Insurance is typically paid in one lump sum once a year, but many insurance companies do allow monthly payments, oftentimes for an additional fee.

Homeowners Association Fees

If your rental property is located within a Homeowners Association a.k.a HOA (which is a collection of neighbors who are legally bound to uphold certain rules to live within the area), you will have to pay a Homeowners Association fee. This is most common with condos or upscale neighborhoods.

Special Assessments

Many times, a homeowners association or local government municipality will enact special assessments that will cost you each month. There is no great way to predict future special assessments, but talk with the neighbors to see if there are any current assessments in the neighborhood.

Other

Besides those fixed expenses listed above, there may be other expenses that are unique to your area. Again, talk with local landlords, property managers, and others in your local real estate market to find out, and be sure to include those.

Property Management Fees

Property management is, of course, when you hire someone else to manage your property for you. However, it goes deeper than that. If you decide to manage yourself, understand that this is the “business” side of your investment and, as such, there will be costs associated with it (paper, gas, your time, etc.).

You may decide to include an expense for property management whether or not you plan to hire someone else—because it’s still an expense. Besides, someday you will be successful, have numerous properties, and will be unable to manage them all yourself. You might as well start budgeting for that day now!

To determine how much to allocate for property management, simply call up your local management companies and find out what they cost. Keep in mind: Most management companies include both a monthly percentage and a fixed fee every time they rent out a unit. So a property manager who rents your property for 10% of the rent and has to fill your unit once every year will cost you more than 10% because of the extra fee. The most common fee is equal to half of the first month’s rent, though some management companies may charge more (up to a full month’s rent). To be safe, add 1-2% to whatever the monthly rate is. In other words, if a manager charges 8% of the rent collected each month, budget 9-10% just to be safe.

Step #2: Identify Variable Expenses

You’ll break down these expenses differently than those above because these are generally “percentage-based expenses” instead of single cost expenses, as above. In other words, these expenses are calculated by using a percentage of the rent that comes in.

Vacancy

Your property is not going to be occupied 100% of the time. Sorry. Rather than complain about it, budget for it! This is why the “vacancy” factor is so important to include in your calculations. Generally, the vacancy rate is given as a percentage based on the income that comes in.

Therefore, a property that is empty one month every year would be 1/12 = 8.3%. Vacancy rates differ dramatically between various markets and property types, so be sure to do some research from local landlords on what you can expect.

Repairs

Repairs are another tricky expense to nail down because you never really know. Some months you could spend $100 on repairs, and other months you could spend $500 (or $0). However, over time, on stable properties, maintenance expenses do tend to level out on an annual basis.

Still, when estimating expenses for a rental property, you may prefer to average these out on a per-month basis. For example, you might spend $500 this month, $100 next, and nothing for the following 10 months (which is fairly typical). This means you spent $600 for the entire year. Divide that by 12, and you get $50 per month. If the property brings in $1,000 per month, that would be a 5% repair budget (because $50/$1,000 = 5%).

CapEx

Perhaps the item most often ignored in expense calculations, CapEx (short for “capital expenditures”) refers to the big-ticket expenses that occur only occasionally. These are not “repairs,” but actual improvements to the property that add significant value. This includes putting on a new roof, redoing the driveway, updating the electrical or plumbing, and more.

Obviously, the amount of CapEx you will or will not have will greatly depend on the age and condition of the property. For example, a property built just this year will probably require far fewer major improvements than a property built in the 1920s.

So. how much should you estimate for CapEx?

While there is no rock-solid number, you can estimate 5-7% of the gross rent. In other words, if you’re looking at a 6-unit property that rents for a total of $2,400 per month, you would set aside between $120 and $168 per month for CapEx. This works out to between $240 and $336 per unit per year.

Other

Once again, in your area, there may be other miscellaneous monthly charges that are not monthly or annual. Be sure to ask local real estate investors what you might expect in this area.

Step #3: Put It All Together

Finally, it’s time to put all your numbers together and see what you get. At this point, it’s as easy as addition, subtraction, and a little multiplication.

To make things easier, consider trying out a very helpful tool: The BiggerPockets Rental Property Calculator.

This tool allows you to fully estimate your expected return on investment, cash flow, and more from your next property. Simply walk through the simple guided steps, and you’ll discover your total expenses in no time. The BiggerPockets Rental Property Calculator is designed to make the analysis process much easier—and give you a professional document to showcase your property to lenders, partners, and more. Check it out today at BiggerPockets.com/analysis.

If you are doing these calculations on your own, simply add up the numbers and discover how much your property will likely cost you each month. Remember, these numbers are averages over time, but your calculations should give a fairly close guess at what the future will hold for your property.

Another Option to Analyze Rental Properties: The 50% Rule

OK, great. Now you know how to spend 20 minutes figuring out the expenses on a rental property. But what if you just want a rough estimate? After all, if you’re screening through dozens of properties every day, you can’t spend all this time analyzing every single one.

Enter: the 50% rule.

The 50% rule is a very simple rule-of-thumb calculation that allows you to quickly estimate the expenses (and therefore cash flow) of a rental property. Basically, this rule says that half of what you make in income will leave in expenses, not counting the mortgage payment.

So, a property that rents for $1,000 per month will likely have $500 per month in non-mortgage expenses. If the mortgage is $400 per month, you could potentially assume $100 per month in cash flow.

Now, how accurate is the 50% rule?

Well, it depends. It is just a rule of thumb, which means you should never make a decision based on it. Sometimes you’ll find expenses in the 40% range. Sometimes in the 60% range. It depends on a lot of factors, which is why this is just a rule of thumb. However, you can use it to quickly screen through properties so you can decide which ones you want to dive into deeper.

Want to Build Wealth? Learn to Do the Math

Want to succeed in real estate investing?

Wealth creation through real estate starts with correct math.

Understanding how to calculate expenses is vital in making sure your math truly adds up. Obviously, there is no perfect way to predict the future of your investment property, but taking a simple, mathematical approach to estimating expenses will help you hedge your bets in the best way possible.

Further Reading:

• The Top 8 Real Estate Calculations Every Investor Should Memorize
• How I Do My Real Estate Math (Accurately) in Just 10 Minutes
• Rental Property Numbers So Easy You Can Calculate Them on a Napkin

Chapter 7: Ending Rental Tenancies

All landlords hope to avoid costly (and stressful) tenant evictions. In reality, sometimes evicting a tenant just comes with the territory.

If you’ve found yourself wondering how to evict a tenant—or if perhaps there’s another way out of your predicament—you’ve come to the right place. This step-by-step guide will walk you through the entire eviction process, from hiring an attorney and notifying the tenant, all the way through to your court date and tenant removal.

How to Evict a Tenant: Three Rules to Understand

1. Not paying rent is a serious thing

The tenant is stealing money from your bank account. You wouldn’t let your neighbor, friend, or even your own family gain access to your checking account and remove hundreds of dollars against your will. So, why would you allow a stranger to do so?

Don’t think of late rent as a mere inconvenience. Recognize it for the serious issue that it is.

2. This WILL happen to you, and there are answers

This is a very normal thing, so don’t freak out. You’ll get through it. But nevertheless, it’s best to have a system in place and know exactly how to deal with it when it occurs. This way, you can jump on it immediately, giving you the best chance for recovering that rent. This guide will teach you how to evict a tenant with as little pain as possible.

3. Eviction rules are incredibly state-specific

The entire eviction process is governed by the rules and laws of each individual state. Therefore, how to go about evicting a tenant is dependent on where your property is located. The information included in this guide, however, is just general practice.

Find more state-specific information about landlord-tenant laws online:

• Alabama (State Website)
• Alaska (State Website)
• Arizona (State Website)
• Arkansas (State Law)
• California (State Website)
• Colorado (State Website)
• Connecticut (State Website)
• Delaware (State Website)
• Florida (State Website)
• Georgia (State Website)
• Hawaii (State Website)
• Idaho (State Website)
• Illinois (State Website)
• Indiana (State Website)
• Iowa (State Website)
• Kansas (State Website)
• Kentucky (Federal Website)
• Louisiana (State Website)
• Maine (State Website)
• Maryland (State Website)
• Massachusetts (State Website)
• Michigan (State Website)
• Minnesota (State Website)
• Mississippi (Third Party)
• Missouri (State Website)
• Montana (State Website)
• Nebraska (State Website)
• Nevada (State Website)
• New Hampshire (State Website)
• New Jersey (State Website)
• New Mexico (Third Party)
• New York (State Website)
• North Carolina (State Website)
• North Dakota (State Website)
• Ohio (State Website)
• Oklahoma (State Website)
• Oregon (State Website)
• Pennsylvania (State Website)
• Rhode Island (State Website)
• South Carolina (State Website)
• South Dakota (State Website)
• Tennessee (Third Party)
• Texas (State Website)
• Utah (State Website)
• Vermont (State Website)
• Virginia (State Website)
• Washington (State Website)
• West Virginia (State Website)
• Wisconsin (State Website)
• Wyoming (State Website)

What to Do Before Filing Eviction on a Tenant

Evicting a tenant is a messy business. It can be expensive, stressful, and overwhelming—especially if you are new to the process. Therefore, I believe it is in your best interest to solve the problem outside of the eviction courts first (if possible).

This doesn’t mean letting the process drag on for weeks, but there are some quick actions you can take to avoid an eviction. Let’s talk about those now.

Preventative Eviction-Avoidance

If you are trying to figure out how to evict a tenant, most likely you are stressed and angry at that tenant. However, understand that in most cases, evictions can be prevented with proper landlording practices.

For example, by carefully screening potential tenants, you can avoid the most disastrous ones. By being firm but fair with your tenants in regard to late fees, you can avoid allowing your tenant to get months behind in rent. But sometimes, no matter how great of a landlord you are, certain tenants just suck.

The Phone Call

When a tenant’s rent is not received by the due date, the first thing to do is call them. If they are a repeat offender, however, you might skip this step.

Can’t get in touch with them via phone? Try email.

If you can get in touch, it’s often, “Sorry, I forgot. I’ll pay that today.”

Remind them about late fees. It’s not about being a good guy or a bad guy. Late fees are designed to train the tenant to make rent a priority. Waiving it would demonstrate that you have the power to waive it any time they ask

If you get in touch with the tenant and they don’t have the rent, you have a problem. Should you work with them to resolve it or take steps to evict them? Let’s talk about that next.

Should I Work With My Tenant or Evict Them?

Many tenants will request that you “work with them” when they know the rent will be late. Deciding to work with them is a bit of an art form. The best strategy shouldn’t leave you in the lurch if something goes wrong.

What are the most common reasons rent late anyway?

Priorities

One reason for late rent is the fact that there are more than four weeks in a month. In April, the tenant might get paid on the third and the 17th. Then in May, their paychecks may land on May first, 15th, and 29th. Then in June, they are paid the 12th and 26th; in July, the 10th and 24th. As you can see, paydays sometimes come more often than twice a month, and tenants have a hard time budgeting for that.

In the dates above, the tenant would likely use their May 1st paycheck for May rent.

Then, they hopefully would use the paycheck from the 29th of May to pay their June rent.

But then that check on June 26th comes around, and the tenant realizes they still have a full week until rent is due. They really need that money for something else, so they say, “I’ll just spend this paycheck and use the next one for rent.”

The next one doesn’t come until July 10th though. So, the tenant calls a few days after rent’s due and says they can’t pay until such and such date when they get their check. This is extraordinarily common.

Illness or Job Loss

Despite what the media might have you believe, job loss and illness are actually pretty uncommon reasons for unpaid rent. But when this is the case, it’s incredibly difficult to navigate.

Naturally, most landlords want to be kind to people and help others out. However, it can be tough to know what is true versus what’s just a “sob story.” There isn’t an easy-to-follow guide for deciphering this.

Whatever the case (or excuse) might be, think about whether it should be your responsibility. You’re running a business. You cannot be profitable if you cater to everyone’s problems. By being strict during difficult times, you may help keep their priorities straight and encourage them to work harder to get a new job or pay their other bills some other way.

As a landlord, for your business to function the rent must be paid. So, the question becomes, pay the tenant’s rent out of your own personal checking account? Or make the tenant pay it? This mindset helps to separate feelings from reality.

If a situation arises where you would write a personal check to a tenant for $1,000 because you wanted to help, then that’s a real enough situation where you might consider “working with them” on their $1,000 rent. But if it’s not, don’t.

Let’s say you fully understand a tenant’s situation and decide to work with them after all. Explain the two-week paycheck problem to them, as was discussed above. Make them walk backwards with you through their paychecks if needed, so they understand that getting paid every other week actually means they should be ahead on their rent. Then, find out exactly what day their paycheck will come in, and hold them to paying you on that date.

Never let a tenant get more than two weeks behind. Only work with them within the bounds of the law, protecting yourself.

Should I Hire an Attorney to Evict a Tenant?

In most cases, yes, you should probably hire an attorney to evict your tenant. While you technically can do the job yourself and save a lot of money, you could potentially cross one “t” incorrectly or dot one “i” the wrong way and lose weeks or months of work.

The eviction process can be complicated. In most areas, the courts will not be as friendly to you as they are to the tenant. It’s already an uphill battle. To do it alone is dangerous.

To find a good attorney, ask for references from other landlords. This is one of the benefits to jumping into the BiggerPockets Forums and building relationships. If you are a BiggerPockets Pro member, you can also use BiggerPockets Meet to find investors in any zip code in America, and send them a message asking for a referral to a good attorney.

Another way to find a good attorney is to call your local county administration building and ask to speak to the person in charge of evictions. When you get him or her on the phone, ask which attorney files the most evictions in your area. This person will likely be a good attorney to talk with.

As you get more experienced with evictions (or if you are broke and you absolutely cannot afford an attorney), you could choose to do the eviction yourself. But again, it’s not recommended.

How to Evict a Tenant: The Step-by-Step Eviction Process

You’ve thought about everything, and you are ready to evict your tenant. This person has refused to pay or is completely unable to do so. As tough as it may sound, it’s time to begin the eviction process.

Step 1: Post or Deliver the Notice

The first “legal” step in evicting a tenant comes in the form of hand-delivering (serving) a notice to the tenant, letting them know of their grievance and explaining what you are doing. The kind of notice served will depend on the reason they are being evicted.

• If they are being evicted for non-payment of rent, you will serve a “pay or vacate” notice (also known as a “pay or quit” notice) to their home. This notice lets them know that they have a certain number of days (depending on your state’s laws) to pay the rent or they will be evicted. The notice should also explain the rental amount due, along with the late fees or penalties that are being charged.
• If they are being evicted for other reasons, such as violating the terms of their lease (i.e., they moved in a pet, late-night partying, etc.), then they are served a “notice to comply,” which states that they have a certain number of days to rectify the situation or else be evicted.

Each state has different requirements for the notices that must be served. Find out about your state’s process online.

In most states, the notice can be taped to the door of the rental unit if no one answers the door. However, if taped, most states require that a copy of the notice also be mailed to the tenant.

If you mail the notice, be sure to send it certified with a return receipt from the U.S. Postal Service. This way, you can prove the document was delivered, and the tenant won’t need to sign for it.

If you hand inform the tenant directly, it’s also a good idea to record the date and time that the notice was served and whether it was handed to an adult in the home or taped to the door.

Be careful to follow your state’s exact rules with regard to how this notice must be served. For example, in some states (like Washington) the owner of the property is not allowed to serve the legal notice themselves.

When it comes to the late-rent “pay or quit” notice, understand that once a notice has been served, collecting any amount of rent will likely start the clock ticking again, meaning new papers must be served going forward. Therefore, think twice before collecting a small amount from the tenant.

In addition to this notice, consider sending a personal letter to the tenant with the official notice to soften the blow a little. Legal notices can be very cold, causing anger and confusion. The goal of the personal letter is to motivate the tenant to communicate with you rather than simply burying their head in the sand (which is the common reaction). If the lines of communication are open, there’s potential to figure out the situation without getting lawyers involved.

Step 2: File Eviction With the Court

After the minimum number of days have passed (as defined by the notice you served), it’s time to move forward with the eviction. If you hire an attorney, this is where the attorney will likely take over the process, letting you get back to your life.

Be sure to give your attorney:

1. A copy of the tenant’s lease
2. Copies of the notice that was served
3. A brief summary of the situation

If you plan to do the eviction yourself, the second step is to officially file the lawsuit with the court. (Yes, this is a lawsuit you will be filing, and it is also known as an unlawful detainer.) This is done at your local courthouse, though you may need to make some phone calls first to find out exactly where to go and what paperwork you’ll need.

Once filed, the court administrator will issue a court date for you and your tenant to show up in court and plead both sides in front of the judge. Of course, if you are using an attorney, the attorney will show up in court. If you are doing the eviction yourself, you will likely need to be present.

Step 3: The Lawsuit is Served

Once the lawsuit has been filed in court and the court date is set, the tenant will be served the official “unlawful detainer” lawsuit. Most likely, this will need to be served (delivered to the tenant) by a third party.

Most of the time, it must be delivered directly to the tenant. Taping it to the door is generally not allowed unless special permission is given by the court, which could set the eviction back several weeks. Optimally, the server will get the document directly into the hands of someone living at the property.

Step 4: The Court Date

When the court date arrives, you and/or your attorney will need to be prepared. Here’s what you’re going to need:

• The lease agreement
• Any written communications between you and the tenant
• The tenant’s original application, if you have it
• The notice paperwork that was served
• Written documentation of everything you’ve done so far with the tenant in regard to the grievance and eviction
• The lawsuit that was filed

Generally, if the tenant does not show up to court and doesn’t respond to the lawsuit, they automatically lose. This is not uncommon.

If the tenant does show up, the judge will hear both sides and rule either in the favor of the landlord or the tenant. If you lose, it’s likely you didn’t have all your paperwork in order. You might have to start over at the beginning.

However, if you did everything right and you win the case, a judgment is issued against the tenant for the amount of money owed in rent, plus additional fees, such as court costs, attorney’s fees, late charges, and back rent. Additionally, the court will order the tenant to vacate the premises within a certain number of days (depending on the state).

This is done through a document known as a writ of restitution or writ of possession. This writ gives the landlord the legal right to remove the tenant. Usually the writ will allow the tenant a certain number of days—often between 24 hours and one week—to completely vacate.

Keep in mind, in some states, evictions during the cold winter months can be put on hold until warmer weather. There’s simply not much you can do about this.

Step 5: Schedule with an Authority Figure

Someone has to serve the writ. Someone has to be the authority for the law. Plus, looters will come out of the woodwork to pick through the stuff placed on the curb. Someone has to keep these looters away until the eviction is over. This person could be a sheriff’s deputy or a process server, depending on how things are handled in your jurisdiction.

Present the writ to the proper authority figure. You will likely be charged a fee and required to fill out various forms. After that, an eviction date will be set. The tenant is often notified by the authority ahead of the planned date and time the eviction will take place.

Step 6: Remove the Tenant (with Help)

Generally, the tenant will leave before the scheduled date. However, it’s entirely possible that they’ll still be there—and angry. The job of the sheriff’s deputy or other authority figure is to supervise the situation and physically remove the tenant if needed. Plus, having an armed professional on-hand in a heated situation such as this can do a lot to keep things calm. If you aren’t being escorted by someone armed, don’t hesitate to call 911 if things start to get hairy.

The sheriff’s deputy or process server isn’t going to assist with any of the physical labor of removing the contents of the property. Instead they will simply supervise you and the crew you’ve (hopefully) assembled to help move everything.

How many people do you need? Hard to tell, but bring at least two. There is always a mattress or some other large and cumbersome piece of furniture that needs to go.

Use your smartphone or another recording device to make a video of the whole process, documenting the property’s contents. Start recording everything the moment you enter the property behind the sheriff in case there is some sort of court action later on.

To keep things moving as quickly as possible, bring some boxes and heavy duty trash bags with you. These items will come in really handy, especially when taking items like dishes, glasses and clothing to the curb.

Usually, the tenant’s stuff will be placed outside on the nearest public roadway. In other instances, the tenant can request that the landlord store their belongings (yes, really). Of course, the tenant would be required to pay for this, but there is no clear rule on when they need to pay for it. The reality is you may end up storing it and never getting paid back for the expense.

Once all of the tenant’s belongings have been removed, you have to change the locks to the property. Do not think that the tenant is going to be cooperative and return your keys to you. And do not take the chance that they will also return all copies to you.

If you do not change the locks, you run the risk of your angry tenant coming back later and causing serious damage. Sure, they could do this anyway, but why make it easy for them? Change the locks! The property is yours again.

How to Recover Money You Are Owed by Evicted Tenants

Of course, this whole process can be very expensive and stressful. There may be ways to get back some or all of the money owed, since you do have a judgment. But collecting past-due rent (and other costs) is like trying to squeeze blood from a turnip. Still, you can report judgments to debt collectors (although they will take a portion of any money they recover).

How to Potentially Save Money and Time with Cash for Keys

Cash for Keys is a controversial process debated often in landlord circles. Cash for Keys is giving the tenant money to leave the property. Why would you want to do that? Because (1) you could avoid the eviction process altogether and (2) paying the tenant is cheaper than paying an attorney for an eviction.

Plus, evicting a tenant can take a month or longer, depending on your state. So in addition to several thousand dollars in legal fees, you’re likely to lost money on rent for at least a month or two, as well.

Additionally, you have to deal with the clean up of a tenant who was just evicted. Often, it isn’t very pretty. All in all, an eviction could cost around $5,000 or more.

What if you could just offer your tenant $500 to leave the property in good condition?

The amount you offer will depend on the unit, the tenant, and the circumstances. But $500 is usually enough to encourage someone to leave.

If you are going to try Cash for Keys, use the following seven principles:

1. Explain to the tenant, in detail, what they need to do to get the cash (i.e., the unit must be left in move-in ready condition, so they have to clean it).
2. Give the tenant a specific date to vacate (four days out is usually sufficient).
3. Give a three-day notice to pay or vacate anyway (more on this below). This way, just in case they don’t leave, you will not have lost much time.
4. Never give the tenant money until they are completely out and have turned over the keys.
5. Meet the tenant at the property and verify that the unit is in good order.
6. Be safe. Take someone with you when you meet the tenant.
7. If all looks good, have them sign a letter documenting that they are relinquishing their tenancy effective immediately. Have them sign and date it. Then, give them the cash.

Yes, Cash for Keys can sort of seem like the bad guy is getting away with the crime. It feels so un-American. But the truth is it’s not personal, it’s business! And this method can sometimes be a simpler alternative to an eviction.

That said, Cash for Keys doesn’t always work. Some tenants will refuse it. Some tenants will ignore it. In that case, you’ll need to continue the eviction process.

How NOT to Evict a Tenant

Trying to evict a tenant is dramatic enough. Don’t compound it by making yourself look like the bad guy.

• Don’t go “outlaw” and take the eviction process into your own hands.
• Don’t change the locks.
• Don’t remove the windows and doors.
• Don’t shut off their utilities.
• Don’t take their stuff.

Follow the rules, follow the laws, and let the eviction process work.

Why You Shouldn’t Change Your Mind About Evicting Someone

When judgment day finally comes, people—especially tenants—can really start to sing a different tune. They will say how sorry they are. They will claim they will get you the money. They may even have the money then and there. Do not take it, and do not listen to any of it. Remember, none of this is your fault.

It is their fault that they are in this position, and if you listen to their stories now, if you take the money now, if you lessen your resolve now, guess where you are likely to be again in the very near future? Yep, right back here doing the same thing all over again, now just a bit deeper in the hole. Keep your resolve strong and get them out of there!

Frequently Asked Questions About Evictions

How Long Does an Eviction Take?

In most states, as long as everything goes as planned, an eviction takes about a month. However, in some “tenant-friendly” states, evictions can take up to six months.

How Much Does an Eviction Cost?

The state-required legal fees involved with an eviction are fairly light, usually no more than a few hundred dollars. However, the attorney fees and lost rent are the big cash-flow killers. You’ll likely spend between $1,500 and $3,000 on attorney’s costs, plus incur several months of lost rent and damages to the property.

Can I Evict a Tenant Without a Rental Agreement?

If you don’t have a rental agreement with your tenant, it is still possible to evict. In most states, a tenant without a lease is treated the same as a tenant on a month-to-month lease. This can actually be a good thing for you, in that an eviction could be avoided by simply not “renewing” the month-to-month lease. In this case, ask the tenant (with a notice, usually 20 or 30 days) to vacate.

Where Do I Get an Eviction Letter?

Before filing the lawsuit, you will need to serve the tenant with a notice, also known as an “eviction letter.” This is either the “pay or quit” notice or the “notice to comply” letter. These can be obtained from an attorney or online through sites like ezlandlordforms.com.

Further Reading:

• 10 Invaluable Lessons I Learned From My Very First Tenant Eviction
• My Botched First Eviction (Or Why You NEED to Study Landlord-Tenant Laws)

Chapter 8: Hiring a Property Manager

When you purchase an investment property, you have two management options: property management or self-management.

Regardless of which you decide to go with, rental management includes all tasks related to rent, tenants, property maintenance and repairs, business operations, and more.

Hiring a property management company means you will pay a percentage of your monthly rental income (usually 8 to 10 percent) to someone else to fill vacancies, respond to maintenance requests, collect rent, and get the property ready for the next tenant after a lease ends.

Rather than paying a property management company to complete these tasks, some investors choose to retain that management fee as profit and perform all the rental management duties themselves.

On the surface level, self-management seems pretty straight forward. You collect rent, coordinate maintenance and repairs, and find new renters when the current tenants want to move out. Simple, right?

But below that shiny surface of easy landlording are the nitty-gritty details of rental management. What happens when you have a problem tenant? Or when the rent is always late? Or if the rent doesn’t show up at all this month?

What about when your tenant decides to move out when you have a vacation planned? Or when a renter drives through the front of the house, leaving you to coordinate a major repair?

It’s in situations like these that deferring the hard work to your property manager pays off. The fact is, there’s no one way—or correct way—to do it. Here are the advantages to each route.

Advantages to Using a Management Company

Property managers specialize in the the day-to-day operations of maintaining a profitable rental property and the once-in-awhile nightmare rental scenarios.

Even if you don’t have nightmare renters, a couple middle-of-the-night maintenance calls can suddenly be worth paying 10 percent of the rental income to a property manager to handle.

Consider these perks of hiring a property management company:

Infrastructure Is Already in Place

Early on, you won’t have an office or policies or a staff—or anything else that property management companies generally have. But management companies will have all the leases, applications, notices of entry and other such documents, as well as screening procedures and knowledge of the landlord-tenant laws in your state (at least they should).

Management companies will also have an extensive list of vendors and contractors to use. If you self-manage, you’ll have to research, vet, and coordinate with all these people yourself.

There’s Only So Much Time in a Day

The more time you spend managing, the less time you have to look for other potential properties to buy or other business opportunities. Plus, you lose out on time to simply enjoy life!

Opportunity cost comes into play here; everything you choose to do means you can’t do anything else at that given moment. If you can find a quality management company, it can free up time to pursue other things.

Opportunity to Outsource Headaches

At times, property management can be a huge headache. Dealing with frustrated or angry tenants requires thick skin. Remedying maintenance issues isn’t always a snap, and some tenants will lack patience. Raising rent can incite pushback from residents, too. Suddenly you become the target of tenants’ anxiety, stress, anger, and frustration.

Fortunately, lots of tenants are a dream; you’ll never hear from them. But with others, it will be one thing after another. The bad apples and discontents will eat up a substantial amount of your time and energy (and sanity)—unless you choose to outsource these tasks to a property manager. Headache averted!

Avoid Being the “Bad Guy”

Evictions come with the territory when it comes to rentals. If a tenant is failing to pay or breaking the rules of the lease in some other manner, someone has to evict them.

Evictions are a long legal process. You must first identify the lease violations and give your renter the opportunity to fix the violation. If the tenant does not pay rent or move out on the specified date, you file for an eviction. If the eviction goes to court, someone—either you or a property manager—will have to show up to the hearing and then follow through with the ruling.

Not only does all of this require beaucoup time and energy, but it can also be challenging to navigate. Each state has different eviction laws and processes. A property manager will be trained on your state’s.

Plus, since your property manager is working for you, they will be obligated to follow the lease in a clear black-and-white fashion and won’t give in to excuses or sob stories from your renters. Can you be sure you’d have the same conviction?

Vacancies Won’t Be Your Problem

When your tenant moves out, you need to put a new one in place with as little downtime as possible. Vacancies are one of the scariest prospects to your bottom line and can be one of the biggest cash-flow killers to your real estate investment.

There are several tactics you can employ to avoid rental vacancy, including managing lease expirations rather than waiting for a tenant to send you a notice to end tenancy. But this requires you to really stay on top of things—which again, is time-consuming.

Instead of waiting for a renter to send a 30-day notice, a manager will contact the renter 60 to 90 days prior to a lease expiration date to find out their plans to renew or move. If the renter is planning to move, they’ll market the property for you.

Do you see how this can add up to a lot of work? The more properties and lease agreements that need to be maintained, the more time you would need to devote to self-managing tenant move-outs and vacancies.

Advantages to Self-Managing

Obviously there are perks to managing properties yourself, too. Self-managing a rental property is a great way to stay connected to your portfolio and your tenants. And if you have long-term tenants and low maintenance (read: new) properties, the job can be fairly easy.

Here are the good things about choosing to DIY managing responsibilities.

Chance to Save Money

Management companies generally charge 10 percent of collected income and the first month’s rent for each new tenant. This is a substantial expense that you can save by managing the property yourself.

Maintain an Elevated Level of Control

It’s a lot easier to make decisions and implement them yourself or through your employees than it is through a third party, even if they really are interested in following through with your plan.

Avoid Instances of Fraud

Unfortunately, not every property management company is run ethically. Some receive kickbacks from contractors, pocket rent from “vacant units,” or engage in other such unsavory activity. Some are simply negligent when it comes to repairs or other issues, potentially subjecting you to a big mess that could’ve been prevented. Managing yourself can make it easier to avoid falling prey to these types of things.

Learn and Grow from Experience

It is extremely important to know the ins and outs of property management, even if you are not the one doing it. And it’s much easier to evaluate how well others are managing your properties if you know how to do it yourself through experience. Managing properties will also give you a better perspective on an area, which can help fine-tune your buying criteria.

You Care More Than Anyone Else

This is debatably the most impactful perk. Consider it a universal truism that no one will ever care as much about your properties as you do. And caring translates into effort. That extra effort can potentially be the difference between a performing property and one that bleeds money every month.

Becoming Your Own Property Manager

If you choose to manage yourself, make sure to talk to an attorney and familiarize yourself with landlord-tenant laws and fair housing. Compliance is key; it’s important to be intimately familiar with all applicable rules to avoid any pitfalls.

You will also need to gather or create the necessary documents (lease, application, etc.). You can find standard forms at most office supply stores or online. If you make one yourself, make sure to go over it with an attorney.

You will also want to come up with general policies. For example, when to file for an eviction, when late fees will apply and how much will they be, whether you will accept payment plans, and so on. These policies are important, as you can use them as an anchor to hold onto when tenants try to pressure you into something.

Vetting a Property Manager

If you choose to hire a manager, the best place to start is to ask for referrals from other successful investors. If a manager has a proven track record with another investor, it’s much more likely they’ll do well for you, too.

Regardless of how you find a property manager, it is critical to vet them thoroughly before hiring them. You should interview them, ask for references, and interview those references, as well.

Make sure to select a manager that specializes in the types of properties you own. If you own C rentals, a management company that specializes in A rentals most likely won’t suffice and vice versa.

Questions to Ask Potential Property Managers:

• What are their management fees?
• How long have they been property managers, and how many properties do they manage?
• How many evictions do they have each month?
• How long do properties usually stay vacant before being leased?
• How do they screen, and do they accept people who’ve had evictions?
• How do they handle maintenance requests?
• What is the minimum charge for a maintenance visit?
• What do they do when a tenant doesn’t pay rent?
• How do they intend to market my property?

Don’t go easy on them. Getting the wrong management company can be disastrous. And if you hire a management company that isn’t working out, do not be afraid to make a switch.

Investing in real estate isn’t without its challenges. Management is certainly one of those, but don’t let it dissuade you from getting into it. All it takes is a diligently executed plan, whether managing yourself or carefully hiring a property management company to manage for you.

Further Reading:

• 6 Advantages to Hiring a Property Manager (& Why I Wish I Did Sooner)
• Should You Hire a Property Manager? Here’s What to Consider
• 20 Questions to Ask a Prospective Property Manager

Chapter 9: Earning Your Certificate of Achievement

Wow. That is a lot of information!

Now that you understand the basics of becoming a landlord, it’s time to take the quiz. You are required to get an 80% or higher to pass and receive the certificate of completion.

One you have your certificate, send it to your Better Home Loan Expert to get the application for the loan started.

Happy investing!

Take HomeReady Landlord Quiz!

 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.