After years of doing rehabs, I’ve just purchased my first long-term rental property and put it on the market a few days ago…
In preparation, I’ve spent a tremendous amount of time over the past couple weeks getting organized and preparing to be a landlord. I knew that when the day came, there would be a few things I needed to do, but once I sat down and started thinking about it, I realized the preparation list was long and time-consuming. In fact, the whole experience was very eye-opening!
To help other new and prospective landlords out there, here is a quick checklist of things you’ll probably want to start thinking about before you’re ready to rent that first property:
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- Rental Agreement: Having a strong, loophole-free lease agreement is probably the most important aspect of maintaining good, long-term tenants who treat your property the way it deserves to the be treated (or pay the price if they don’t). Don’t skimp on a great lease agreement; while you can write your own using samples from other places, make sure that you get it reviewed by a local attorney who is familiar with all the details of your local landlord-tenant laws.
- Rental Application: A good rental application will give you all the information you need to make an informed decision when looking for renters. Not only do you want basic personal information (name, current address, employment info, ss#, birthdate, drivers license #, etc) so you can do credit/background checks, but this is the perfect opportunity to ask about how many adults/children will be living in the house, pet details (if allowed), basic background info (ever evicted? ever convicted?), and other information that will allow you to make an informed decision about whether to rent to this person.
- Leasing Criteria: Above, I mentioned asking lots of questions in your rental application. These questions should help you determine whether the applicant is qualified to rent from you. But, in order to determine if the applicant is “qualified,” you first need to determine your tenant criteria. For example, here are some of my criteria: No prior evictions, foreclosures, bankruptcies or criminal convictions; FICO score over 600; non-smoker; current salary at least 3x monthly rent; at least 2 years concurrent employment at same job or same field; no pets; good reference from previous 2 landlords; etc. While “gut feel” is important when choosing tenants, nothing replaces strong due diligence, so make sure you have a good list of criteria.
- Credit/Background Checks: Don’t wait until you have an applicant to set up your background/credit screening services. With regulations that were put in place a couple years ago, if you want full access to your applicant’s credit records and FICO scores, you need to do some preparation. This includes an on-site visit (to your office or home-office) by a regulator who will verify that you are prepared to adequately keep and dispose of your applicant’s personal data.
- Separate Phone Line: You probably don’t want your tenants having your personal phone number, especially if they know you’re the owner fo the property (we always tell our applicants/tenants that we’re just the Property Managers). So, be prepared to get a separate line just for your rental business; on the bright side, with services like Google Voice and Skype, this can be done for just a few bucks a month with the new line forwarded to an existing phone.
- Post Office Box: Just like you probably don’t want to give out your personal phone number, you certainly don’t want your tenants to have your personal address. So, stop by your local post office or mail center and get a post office box that can be used as your “business address” and can also be used for your tenants to mail their rent checks.
- Dedicated Bank Account: If this will be your first real estate investment property, make sure you have a separate bank account to manage all your investment finances. From both a legal and tax perspective, you’re going to want to segregate your investment finances from your personal finances as much as possible.
- Legal Entity: I spend a lot of time giving other real estate investors advice on setting up legal entities to hold their investments, and always recommend they talk to a good attorney and tax professional before doing so. In this case, I should have taken my own advice. I purchased the property in an existing corporate entity, thinking that once I spoke with my CPA, I could always move things around. Unfortunately, it’s not that easy — I met with my CPA just a week after the purchase, and realized that the process for rearranging things was MUCH more cumbersome than had I just talked to him before I made the purchase. Don’t fall into this trap; talk to your attorney and CPA before you make your purchase to ensure that you do it correctly.
- Marketing/Advertising: When you’re house is on the market and you’re ready to find a tenant is *NOT* the right time to start thinking about your marketing/advertising strategy. This is something you’ll want to consider long before the house is ready to be rented, so that when the time comes, you can focus on dealing with all the potential renters coming through your door. Whether you’ll be using online marketing (Craigslist, etc), signs, fliers, newspaper advertising or whatever, put your plan together early and be ready to execute when the house is ready to go on the market.