It’s a business, owning rental property. Even if you don’t think it is, it is. Watching every piece, every penny determines how profitable the investment will be. Think about it. Investors own an operation that may involve millions of dollars in assets but believe it’s just “something to do” or passive income. Then those investments begin to eat their bank accounts and sanity alive.
People get rich investing in rental real estate. They take charge of their investments by carefully tracking their financial health and realizing good business means careful attention to what happens on and to their rental properties. There’s no such thing as passive income in rental property ownership. That’s even with a management company. Property managers require even more attention than any contractor does. No one will take the care owners will.
Here are six things profitable rental owners do without fail.
1. They carefully screen all prospective tenants
Top tenants help turn a profit for investors and successful investors rent to them, making sure they meet the qualities of “good” tenants. Bad tenants are the most common cause of rental investment financial disaster. As rental owners, we get to pick our customers. With most businesses, it’s come one, come all—please. With rental property, it’s come one and only one, and you’d better be worthy. With rental properties, bad tenants’ slithering expertise comes gets called into play.
Professional bad tenants are professional liars, practiced at sounding as if they are just about the best, nicest, and most responsible person in the history of the world, or the person you should feel most sorry for.
Fortunately. bad tenants give themselves away. They don’t pay their bills, have been evicted, lie on rental applications, and job hop. It’s easy to discover all that with careful screening before accepting rent and handing over the keys.
The two times rental owners most often get in trouble are when they are in a hurry and when they feel sorry for someone.
Rental owners are not in business of saving the world. Their business is to provide decent, quality housing. Turning a $100,000, $200,000, or $300,000 piece of property over to a bad tenant will cost sleep, money and sanity, eventually driving an investor out of the business. Then they tell anyone who will listen that owning rental property “just doesn’t work” followed up by a horror story or two, horrors of their own making because of renting on gut feeling or feeling the applicant “deserved a chance.” But it does work as the millions of successful rental owners can attest.
2. They inspect their properties.
Things break and wear out in rental properties. Tenants ignore them. They have no financial interest in the property, so continued upkeep just doesn’t seem important. In spite of the fact that they tell you about things that need fixing, major problems don’t enter their consciousness. Sometimes those things can end up causing major damage to a bank account.
For example, a tenant probably won’t notice a roof that is missing shingles or is about worn out. After all, it isn’t leaking. But they might call you about a dripping faucet, something that would take years before it cost you any money. A tenant probably wouldn’t say anything about a rotting porch board, as long as it isn’t right where someone has to step entering or leaving. The rotting porch board could be a sign of dry rot underneath, potentially adding up to massive repair costs, not to mention liability.
Inspecting the property every three months with a room-by-room checklist nips problems and expensive fixes in the bud also letting the tenant know that you care about your investment and their comfort.
3. They raise the rent every year.
One rule of thumb says two percent. The every-year part affects future rent increases. Costs rise every year, but owners don’t raise the rent because they have good tenants and don’t want to lose them. Say a property rented for $1000 a month, a two-percent increase would amount to only $20 a month or $240 for the year. Tenant will grumble, but probably won’t move. After all, you can’t afford to move for $20 a month.
What if owners don’t raise the rent? Costs go up and five years later maintenance falls way behind because the owners try to watch their money because rents don’t cover tip-top maintenance. Now, in order to catch up, they would have to raise the rent to $2200 from $1000 even without compounding. Do the math: $20 time 60 months is $1200. Add that to the rent of $1,000. Rent shock is reason to move. And tenants will tell everyone they know about that “money-grubbing” landlord.
Keep good tenants, profits, and maintenance by raising the rent a little every year, not as a last resort.
4. They use checklists.
I don’t know about you, but I can’t remember everything. The most efficient way to make sure you do remember is checklists. Make checklists for tenant selection, move-in procedures, maintaining the property, checking the property, move-out procedures, and anything else you do regularly.
5. They use a written lease or rental agreement.
Do tenants know exactly what is expected and required of them? With a thorough carefully drawn lease there can be no question or misunderstanding.
Local apartment and rental-owner associations provide up-to-date leases and rental agreements prepared by real estate attorneys to reflect all the latest changes in the law. What you leave out of a rental agreement or what you include that shouldn’t be there could cost you a bundle in lost evictions and unpaid rent.
In addition, when a change in the law occurs, first chance update the lease or rental agreement accordingly. Nothing is so frustrating and potentially costly as a misunderstanding. If everything is clearly spelled out in the rental agreement, there should be no question.
6. They update.
Maintenance is one thing. Keeping a property looking brand new and fresh is essential to attracting the best applicants. An updated apartment can mean an extra $200 to $300 a month in rent.
Successful investors package their properties to attract top applicants. Those prime applicants will pay a premium for well-maintained homes—homes they will be proud to live in. New vinyl, carpets, countertops, bathroom fixtures, cabinet doors, modern paint colors, and tidy landscaping all add to the amount of rent you can demand.
Successful real estate investors use these six techniques religiously to guarantee their success in our business. The choice of how we run our businesses is ours. And it is a business.
By Robert L. Cain
