Owning rental properties is a great investment, but they have to be managed well to make money. Some people think of rental properties a passive income source, but if you manage properties yourself they are not truly passive. It takes time and work to make sure your tenants pay on time and take care of your property. A landlord must take the time to screen tenants, check on the houses and make sure the tenants pay on time.
For more information on my rental properties and investing strategies check out my complete guide to purchasing long-term rental properties.
Should you manage your rental properties yourself?
Many investors want to manage rental properties themselves to save money over using a property management company. I wrote an article here that describes the work and time it takes to manage rental properties. I managed my properties until I had seven and then I handed over management to my real estate team.
I own single family rentals and they tend to take less management than multifamily properties. Single family rentals have tenants who stay longer, who take better care of properties and they maintain the yard. Multifamily properties have more turnover, more costs and more maintenance; they take more time to manage in my opinion. If you own one rental property then it may take a couple of hours a month or less to manage that property. Many investors can handle managing a couple rentals, but when you have more than five it takes more and more time. The biggest problems landlords face is when they do not have the time to properly manage their properties.
Many of the horror stories I hear about tenants who destroy houses come from landlords who never checked on the tenants or the houses for years. If you don’t have the time to manage your properties; hire a property manager. Hiring a property manager will save you money if you don’t have the time to oversee your properties and your tenants stop paying rent or destroy your properties.
As a landlord you have to keep tabs on your tenants
The worst thing a landlord can do, besides rent to bad tenants, is ignore tenants or their properties. If you never talk to your tenants or never send them anything in the mail they will think you don’t care. Once they think you don’t care they will stop caring about the house and stop paying rent. Landlords cannot assume tenants will pay their rent and take care of properties without any oversight.
When I managed my properties, I had a tendency to be very lenient on my tenants. Some tenants paid on time and took care of my rentals and others always paid late and damaged my houses. I learned you have to be tough no matter what the tenant tells you. After learning my lesson I became very strict on rent being in on-time and scheduled routine check ups on the houses.
I learned the more you contact your tenants the better tenants they will be. We have a maintenance person check every house once a quarter. He checks furnace filters, smoke detectors, carbon monoxide alarms and looks for any problems. It is written into the lease that we have someone check the house every quarter and the tenants know they will have to keep the house in relatively good condition. I said this once already, but it is worth repeating. The worst stories I hear are from landlords who did not check on their houses for years and then were surprised to find the tenants had trashed the house. Not only can tenants trash the house easily without oversight, they have a greater tendency to commit illegal acts at the house or create dangerous situations.
A drug house is a landlords worst nightmare, especially a meth house. If a property is used as a meth lab, the entire interior may have to be gutted costing tens of thousands of dollars or more. If the tenant knows they will be checked on every couple of months, there is a better chance they will not use the house for illegal drug making.
Landlords have to charge late fees to tenants
I wrote into the lease that all rents must be received by the 1st of the month and rent is late on the fifth. If we don’t receive rent on the fifth we start charging late fees. I don’t care why the rent is late, we charge late fees. It is not fair to charge late fees to one tenant and not another.
If you don’t charge late fees the tenants will think they can continue to pay rent late with no penalties. Pretty soon the tenants are one month behind and it is a struggle for them to ever catch up. Once they get too far behind they may stop paying altogether and then you will have to evict them.
For more information on how to buy the best rentals, which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.
Evicting a tenant is never a good situation
I have never had to evict a tenant, but that doesn’t mean I have not had bad tenants. The reason I avoid evictions is I usually come up with a mutually agreeable move out plan for the tenant. If you have to evict a tenant it can be a very expensive and a long process. Here is a great site with more information on evictions.
The eviction process varies in every state. In Colorado it takes about a month to evict a tenant. In other states it takes longer and in a few states it is a quicker process. It is not only the time it takes to evict someone that costs money. To get to the eviction point, the tenant is at least a couple of months behind on rent. People also do not like being evicted and have a tendency to do damage to homes when they are evicted. Here is an article on the cost to repair a house.
If you have to evict someone do not be surprised if it costs you thousands of dollars in lost rent and damages. This is why you account for vacancy expenses when you figure cash flow.
Why a mutual break up is better than an eviction
I have avoided evictions, but that does not mean I have avoided vacancies. I have ended leases early in multiple situations where the tenant could not pay rent or would not for various reasons. Instead of go through the lengthy eviction process we were able to work out a deal where the tenant moved out before their lease was up and I did not hold them responsible for the rest of the lease.
I could have held them responsible for future rent as well, but that leaves hard feelings and there is a better chance they would damage the home. By letting them leave early, they get the feeling I am helping them out. In my rental market I also have no problem renting homes quickly. I would much rather get a bad tenant out right away and get a good tenant in the property. I still try to collect any back owed rent or any damage done to the property above and beyond the security deposit.
How do Landlords get tenants to pay rent?
Most of my tenants are very good about paying rent on time, because they know they will be charged late fees. I still have one tenant that is always late and always has a multitude of excuses and pretends he is not late. The funny thing is he has a brand new Toyota Sequoia and we just got a call from another car dealership because they are trying to buy a second brand new car. Some people do not know how to manage or save money. If I never told this tenant how far he was behind, he would assume he was paying on time. In fact he would probably stop paying altogether and assume someone else had started paying rent for him.
One thing we do is send an invoice every month to every tenant. This reminds them to pay rent on time, reminds them where to send the rent and they have no excuses for not knowing they were behind. If a tenant gets more than one month behind or stops communicating with us we will post a notice to vacate on their door. When you post this notice you do not have to evict the tenant, but it sure gets their attention and if they don’t contact us, it is the start to the eviction process.
Maintaining properties is a key ingredient to being a good manager
Some landlords are cheap and will not maintain their properties or repair their houses. You are asking for problems from the property and the tenant if you do not maintain the property. A house that shows poorly will attract poor quality tenants and if the tenants are unhappy with the home they will be less likely to pay rent or take care of it. If the landlord ignores problems like a bad roof, bad electric or bad plumbing it could cause thousands of dollars in damage or be dangerous. Rental properties do not have to look like a luxury resort, but they should be functional, all the major systems should work and they should look and smell decent.
Maintenance items will come up and that is why it is important to have enough money in reserves to pay for repairs.
Rental properties are a great investment if bought right and managed right. Landlords have to keep tabs in their tenants, maintain properties and be tough when it comes to collecting rent. If you take the time to manage your properties well or use a property manager you can make a lot of money with rental properties.