The rental market is booming and every landlord is winning! If you’re not winning as a landlord in this robust market, maybe this really isn’t your thing. If you are winning or want to win, now is the time to take it to the next level! If you’re a Mom and Pop business with 2 or 3 rental properties, this is the time to start thinking much bigger. You could be planning for 20, 30, or 50 rental properties.
Whether you are a beginning landlord, have some experience, or a lot of experience, you can always run your business more smoothly and for more profit. Having systems and sticking to them are the basics of how to be a landlord. Here’s a quick refresher:
- Create a legal entity separate from yourself.
- Follow landlord – tenant laws.
- Establish and follow a tenant application process so you always have good tenants.
- Establish and follow your own landlord- tenant policies. Tips: always enforce late fees and keep business hours for nonemergency phone calls.
- Resolve conflicts promptly to avoid rent being withheld or tenants moving out without giving notice.
- Manage and maintain your investment properties to assure future success and attract quality tenants.
Determining Your Rent Price
An advanced tip for how to be a landlord means collecting the most rent that you can along with maximizing occupancy. This begins by investing in the right rental properties. Many investors get started by renting their previous home, inheriting a home, or coming upon a deal too good to pass up. But none of those will bring you up to a professional level controlling 30 or 50 rental units.
Landlords must know market rental rates and infrastructure. You need to match the property type to the location. That’s why there are zoning regulations. A condominium next to a high-rise office building can be a profitable rental. But a single-family home grandfathered in-between two skyscrapers isn’t a good investment decision. Neither is the most expensive home in the neighborhood. However, a well maintained home that is the least expensive in the neighborhood will appreciate in value and rent more than the most expensive homes in the same neighborhood.
You also want to know the tenants you are targeting and the infrastructure they desire. This means the schools, shopping, restaurants, entertainment, medical, transportation, etc. You’ll learn a lot of this just by driving and walking around. But doing a door-to-door survey is an advanced tip for how to be a landlord.
A survey is how you learn the “rent range” for the neighborhood. You can also learn about the people that rent in the neighborhood. You don’t need an expensive marketing/survey specialist. You just need to knock on doors and ask the right questions. You want to know what people are now paying and might be willing to pay for rents in the area. This means learning how long a person has been renting the same house. Long time renters are paying less. Those new to the neighborhood should be paying more. If the newbies are paying less, you’re in the wrong neighborhood.
Do the survey when people are expected to be home. In the evenings or Saturday mornings. Use this simple script:
“Hi, I’m an investor in the area and I’m looking to rent out a house nearby. I was wondering if you might be able to share with me how much folks in this neighborhood pay for rent? I’d also be interested in anything else you want to share about the neighborhood? Especially what you know about local businesses and amenities.”
Take notes about the condition and the approximate square footage. Ask about the number of baths and bedrooms. The standard MLS listing is a good example of information to collect.
Cash on Cash Calculation
This is another advanced tip for how to be a landlord. The cash on cash return calculates the return on investment of an income property. The cash on cash return only takes into account the actual cash invested in the property’s purchase (but accounts for debt service).
If you purchase a property using 80% borrowed money and 20% cash, the cash on cash return metric only uses the 20% cash as the denominator. The formula for calculating the cash on cash return is:
Cash on Cash Return = (Annual Pre-tax Cash Flow ÷ Actual Cash Invested) X 100
Calculating the Pre-tax cash flow:
Annual Gross Rents + Other Income – Vacancy – Operating Expenses – Debt Service
The total cash investment is all the cash that you pay out to make your rental property operational. It does not include borrowed money. Cash investment typically includes the amount of money paid to purchase it, closing costs, rehab costs, and loan fees. Be careful with loan fees. Include these if you paid them in cash. Exclude them if the fees were rolled into the loan. Your monthly mortgage cost is the debt service subtracted out of gross rent. This is a value based investing calculation. It doesn’t take into account asset appreciation.
Other rental analysis includes Rental Income and Cash Flow, Vacancy and Occupancy Rates, Cap Rate, and Comparative Market Analysis. You want to be familiar with all these advanced tips for how to be a landlord.
By Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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