So, You Want To Be A Landord?

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Hmmmm…. does anyone really want to be a landlord?  Or do they just want the rewards, positive cashflow, that comes with being a landlord?

I suspect the latter.

Landlording is a tough business.  Yet, when smartly executed, owning income producing properties and being a landlord has some great rewards… and yes… almost all of them have something to do with that positive cashflow thing.

As our real estate market continues to shift, trying to find a point of equilibrium, it is becoming more and more obvious that we are going headed to the lowest homeownership rates since the 60’s.  Along with this shift in the market are some great opportunities for anyone who is seeking long-term passive income — read that as positive cashflow.

What picture do you think most would-be landlords see as they head out looking for their first rental property?  For many of you I bet the picture looked something like…

A nice 3 bedroom/ 1 bath, single family residence in a nice quiet area.  You found the perfect tenant.  Hard working family.  Husband, wife, 1.5 kids.  No pets.  They live easily in YOUR property and there is very little maintenance.  And… the cherry on top is the rental check that arrives in your mailbox each and every month.

Are you now, or were you ever this investor?  My guess is if you say no, you are not telling the truth!

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So, what does it take to be a successful landlord?

I just got this question from a new investor the other day.  He, like so many others, sense the opportunities and are ready to jump, but first wanted the Cliff Notes version of what it takes to be successful as a landlord. 

Here are a few of my responses which I hope will help guide you as move forward as a landlord.

  1. It takes money to be a landlord.  Not necessarily you money… but someones’.  And you need reserves.   Owning a rental property and receiving that monthly rent check is great until the furnace fails or that nice family clogged your plumbing for the umpteenth time.
  2. As as landlord you must run your operation as a business.  Sounds simple doesn’t it?  But by business I mean that as with any business there are many moving parts, and in the case landlord/tenant relationships, even more laws.  You need to figure out what both the moving parts and the laws are, and implement processes and procedures to accommodate both.
  3. “You must be willing to evict a tenant in the month of December”.  Yes, that nice family that you thought would be the perfect tenants just missed their October/November rent payment.  What do you do?  If you take action now, most likely you will be evicting them in December.  Could you do it?  If not…. DON’T BECOME A LANDLORD!  Remember item number two above… you are running a business… not a charity!  
  4. I used to own over 80 rental units.  Today I only own 3.  I can tell you that managing 80 units was much easier then managing just 3.  Why?  Because when you own and manage 80 units you are always in the game.  Your mind in constantly in your business and you have developed the resources and team that can respond to any situation.  When you own just 3, any time an issue arises you must stop what you are doing and focus on your rentals.  It can be a pain in the butt.  Based on the experiences of my clients I see the tipping point between having to shift into your rental business and paying attention to in everyday to be around 10 units.  Once you have 10 units you, your systems, and your team are always prepared to manage as required.
  5. Don’t ever forget this one: no one, and I mean no one will ever manage your properties and be more concerned about the monthly cashflow outcomes then you.  Where am I going with this?   If you have to use property managers, spend as much if not more time screening them as you would a prospective tenant.  It never ceases to amaze me how most property managers always seem to divert your monthly cashflow to their pockets.  It is almost like magic… but it isn’t!  Don’t assume anything with property managers and you should do OK.
  6. This should have probably been discussed first, but instead I will leave you with this item as the last one. The more thoroughly that you screen prospective tenants, actually something just less than a proctology exam should do the trick, the less hassles you will have once this person/family is your tenant.  Don’t let you lack of cashflow contribute to poor decisions.  Take your time and do this right and you will be thankful in the long run.

There are probably dozens of other suggestions that could be listed here… all helping you to become a successful landlord and I would welcome your thoughts based on your experiences.

Best of Luck!

BTW – For any questions about landlording, be sure to check out the BiggerPockets Landlord Forums

About Author

Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.

11 Comments

  1. Good article Peter. But if a prospective tenant showed up with 1.5 kids, I would be concerned.

    Just like you with 80 vs 3, property managers with more properties to manage, the better is my cash flow. I would much rather have a company that manages 5,000 SFRs than one that manages 50 SFRs. The systems that the 5,000 unit PM has in place are AMAZING. Tenants can pay rent online, repairs quests can be made online, I have my rent automatically deposited 10 days after they tenants pays it, and so much more. The economies of scale are amazing. And as an added bonus, the large property management company charges LESS than a small company.

    Thank you for the blog Peter.

    • Mike, I wish I could say that I had a positive experiences with large property management companies. In fact, the one large one I hired emptied a five unit building in just 6 weeks… leaving with no cash flow and having to rebuild the tenant base (only one tenant wasn’t paying rent at the time). Needless to say, I fired his company on the spot. Took several months to recover.

      Pete

  2. I have to agree with the 80 vs. 3 being easier. When I had 3, every problem seemed huge, overwhelming, one missed check and my “business” was in the red that month. Now with 35, no one tenant or problem seems as dramatic. “the problems get diluted” so to speak. And yes, not only is there daily focus, but the fact that I have a much larger income / outgo means it’s really rewarding to spend time shopping around for insurance, re-fi’s etc. Whereas with 2-4 units, the difference is not as big and impact.

  3. Nice article Peter,

    I had an old mentor that would wait until Christmas eve to send the sheriff over to evict a dead-beat tenant. It sounded so harsh at the time but you’re totally right, you have to be business tough, and sometimes its really hard. – John

  4. Pete,
    One thing I’ll add from my own mistakes. Watch for the little problems with a property manager. Its could be a sign of a much larger overall problem. You may not face the issue today, but it could blow up in face a few months from now. I guess the same could be said for tenants. Good article.

    Jason

  5. I have been landlording for 10 years and I don’t think #6 can be stressed enough. Too many times I have seen landlords get so freaked out about no cash flow that they accept the first bum that comes their way. Which brings me to my second point – it is better to price low and get multiple applicants than to price high and get one. In my experience being able to pick the best applicant from a pool for a little less rent more than makes up for the headaches later on from picking the single tenant willing to pay top rent. Plust I don’t trust tenants willing to pay above market rent. If they are that unsavvy with their biggest monthly budget item they are probably crap at managing their finances which will come back to bite you.

  6. Good advice Pete,
    Especially the screening and knowing the laws parts. If I could add one more to that list, it would be to make sure your rental agreement is 100% up to date with all codes and regulations at the time signed. The last thing you want is a tenant that you have to evict for one reason or another that finds a loophole in your contract and you’re stuck footing their bill in the mean time.

  7. You can’t trust property management in screening potential tenants. You have to do it yourself. My friend had experience with renting her place twice through property management and the tenants trashed the entire place each time. Usually property mgmt approve application based only on the credit score and job. They don’t care if the potential tenant looks kinda suspicious. I don’t say to judge people by their look, I’m just saying that if you really care about your place, you should at least meet potential tenants before renting to them. But again, if you have 80 units, not 3, you shouldn’t probably stress out.

  8. Great article!

    One quick question:
    I’ve heard a lot about monetary reserves required for being a landlord. Is there some sort of calculation that is standard practice for reserves? The only thing I have heard was 6 months rent. But is that per property? Per unit?

    Thanks
    Ben

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