Managing Your Own Rental Properties as an Investor
You might think of your investment property as a way to earn passive income, but a rental property takes more work than other more typical kinds of investments. A successful investment property requires an active role. Of course, becoming a landlord may not have been part of your investment strategy.
Luckily, there are plenty of ways to ensure that you’re getting the most out of your property. Managing a rental doesn’t have to be a full-time job, but it does require some planning.
Why Not Hire Help?
Many property investors hire a property management company to handle the day-to-day needs of their rental properties. While this is a great way to take a hands-off approach to your property, the costs will eat into your overall profits.
Property management fees vary depending on where you’re located, but you can expect to pay standard fees:
- 8-12% of the monthly rent payment even if the property is vacant
- 50-100% of one month’s rent lease-up fee to find a new tenant
- 10% markup on maintenance and repairs
Let’s say you have a single-family home for rent for $2,000 monthly ($24,000 annually). A property management company is likely to charge $1,000-$2,000 to find the tenant. You’ll also pay between $160-$240 per month ($1,920-$2,880) in fees. The general rule of thumb for maintenance is 1.5x the monthly rate, so you could expect to pay $3,000 per year in upkeep costs.
Overall, you could expect to pay $5,920-$7,880 annually. Of course, a long-term tenant or fewer repairs could increase profits. At the same time, tenant turnover and additional repair costs can raise the total cost.
As you can see, paying a property management company is a great way to reduce your workload, but it is easily your most significant expense. The margins on some rental properties might make paying a management company unprofitable.
If you own multiple properties, a management company can be a godsend. You might find handling your investments is a full-time job. On the other hand, managing everything yourself could be the most cost-effective option if you own a smaller number of properties/units.
DIY Property Management
The good news is that you don’t have to be a real estate professional, contractor, or management pro to handle your rental property. Being a landlord does require time and effort, but with a proper understanding of your role and a plan on how to proceed, you can manage your investment on your own or with minimal help.
In general, three areas fall under a landlord’s responsibility:
- Managing tenants
- Managing the property
- Managing finances
Getting the right person/people into your rental can make or break your landlord experience. The right tenant can reduce your overall costs and turn your investment into an almost passive income. Of course, a bad tenant can cost you more time and money than it’s worth.
To make your life as simple as possible, you need to learn how to find good tenants, create a legally sound lease, and maintain a positive landlord-tenant relationship.
Find a Tenant
The first step to managing your property is to find a renter. There are tons of ways to find the right person. You may only have to put a sign out front with your phone number in the current market. There are also countless places to list your property for rent, like Craigslist and Zillow.
You might even find that word of mouth is more than enough. In a market where rentals are plentiful, you can hold an open house or invest in a photographer who can take quality photos and create a video tour to show off your property.
Ultimately, your goal is to get potential renters to fill out an application to ensure they meet your requirements. You may also want to ask about pet ownership, smoking habits, bank statements, or anything else that will help you make decisions.
Always consider the applicant’s rent-to-income ratio before approving them. Read our previous article “How NOT to Attract Horrible Tenants to Your Rentals,” where we explain important screening techniques in depth!
Your application will also give you a chance to run credit scores, perform background checks, etc. There are various tools to help landlords accomplish this, like Zillow’s Application Tool, Zego, and NestEgg. It’s often worth the small monthly fee for an app that does all of the work for you, but you can save some cash by completing these tasks on your own.
Sign the Lease
The next step is to sign a lease agreement with your new tenant. There are tons of sample leases available online, but you may want to consult an attorney to make sure your lease is legal and fully protects your interests. It’s not a bad idea to find legal counsel you can trust to help with issues that may arise. Each state has different laws regarding fair housing, repair obligations, eviction proceedings, and more.
Your lease will spell out critical information about the property and act as a contract between you and your tenant; it’s also what the courts will look at if any conflicts make it that far. Important information includes everything from when rent is due to how utilities are handled to how the lease can be terminated.
You may decide that there is no smoking allowed in your property or that pets must be under a certain weight. You can include anything that is important to you and the care of your property. You can even negotiate with the tenant to create a lease that works for everyone.
Of course, in an owner’s market, you have control. Make sure any agreements are put in writing in the lease. Finally, give your tenant a copy of the signed lease and store your copy in a safe place.
Maintain the Relationship
Most tenants don’t want a landlord who is always looking over their shoulders. At the same time, they don’t want a landlord who is never available to address concerns. The challenge is finding the right balance.
The biggest issue landlords run into is the non-payment of rent. You want to make paying the rent as easy as possible. Accepting payment online or via an app like Landlordy, Zelle, or even Venmo is a great way to simplify the process.
You can also set up reminders that tell your tenants rent is due. This could be as simple as an e-mail, text, or contact through an app like TextYourRent.com. Using late fees is another way to motivate tenants to pay on time. No one wants to pay more for something than they have to, but check with your local laws to ensure your late fee policy is appropriate.
You can also schedule regular inspections. These inspections can happen a couple of times a year and serve as a chance for tenants to address any concerns they have with the property. They also give you a chance to make sure the tenant is upholding their end of maintaining the rental. Keep in mind that most states require at least 24 hours’ notice before the landlord can enter the property.
Managing the Property
As the landlord and owner of the property, you have a legal obligation to maintain a safe and habitable property. If a property isn’t well maintained, you’ll have a hard time finding reliable tenants. More importantly, updates and repairs can increase the value of your property and extend the life of flooring, appliances, and fixtures.
The landlord and tenant share responsibility for routine maintenance tasks. Make sure that your lease spells out how these duties are shared. Do you handle lawn care, snow removal, etc., or is the tenant responsible?
Ensure that the property has working smoke detectors, carbon monoxide detectors, and fire extinguishers in the appropriate locations.
Some other general tasks to consider:
- Check for pests
- Inspect the roof after heavy snow, hail, or windstorms
- Clean gutters
- Trim trees near structures or power lines
- Change filters in your HVAC systems
- Flush water heater
- Clean dryer vents
- Prompt emergency service
While regular maintenance can prevent significant issues from arising, accidents and emergencies can happen. It’s your responsibility to handle these issues promptly:
- Broken HVAC
- Gas leak
- Electrical issues
- Water leaks
- Clogged sewer lines
- Bed bugs
Prepare a List of Contractors
If you’re handy, you might be able to manage maintenance and repairs on your own. Some states have laws dictating that certain tasks must be performed by a licensed professional. In that case or in areas where you are less skilled, it may be necessary to hire a contractor.
It’s always a good idea to create a list of reliable contractors who can help with common issues. You don’t want to be stuck looking through the phone book late at night to find a plumber who can repair a busted water pipe.
Consider creating a list of at least three local options that can handle plumbing, HVAC, electrical, and general maintenance. You’ll also need a list of contractors who can help prepare your property between tenants (carpet repair, painting, etc).
Make sure that all hired personnel are supervised. The last thing you want is for a tenant to claim something was damaged or stolen while repairs were being made. You also want to make sure the job is done correctly.
One of the most essential elements of managing your investment property is overseeing the financial side of things. Recordkeeping is critical, so you should store all documents safely. That includes a copy of the lease, property insurance, rental applications, rent receipts, and more. Some states have requirements about which documents are kept and for how long, so check with a legal expert.
In general, there are three main areas that you should consider for managing your rental finances.
There are endless ways you can collect rent. The easier you make this on the tenant, the more likely they are to pay on time. You can also impose reasonable late fees for payments that don’t make it on time.
Another aspect of rent is knowing when and how you can raise the rent. Your lease will define the initial price, and it can’t be changed without a new lease. Most states allow for a percentage increase each year so long as it doesn’t violate the lease.
Security deposits are funds the tenant gives to you that help cover any costs associated with restoring/repairing the property after moving out. Security deposits are not counted as additional income.
Make sure you properly store security deposits and comply with state laws regarding deposit limits and return regulations.
Due to the complexity of federal and state tax laws, you should hire an accountant who can help you navigate managing your rental property’s finances come tax time.
Ultimately, you’ll have rental income from monthly payments and any potential future payments. These will be claimed as income on your taxes.
You’ll also have several deductions associated with your property:
- Landlord insurance
- Maintenance and repairs
- Rental licensing, registration fee, etc.
- Property/rental income tax
- Mortgage payments
- Basic utilities that you pay for
- Property taxes
- Marketing or advertising fees
You may also have deductible fees for your accountant, property management companies, and eviction costs. If you have more than one property, there may be additional forms to complete. It’s best to work with a tax professional to ensure everything is completed correctly and on time.
Learn to Be a Landlord
Regardless of what leadership or management training you may have, it takes work to learn to be a landlord. It’s worth taking time to read books, join online communities, listen to podcasts, and more to allow yourself to become a great landlord.
If you’re not interested in being hands-on with your investment property, there is always the option of hiring a property management company. This approach may cut into your profits, but it can free up your time and energy, especially if you own multiple rental properties.
If you decide to manage your property yourself, make sure to focus on finding great tenants, proactively and adequately maintaining your property, and keeping accurate records. You’ll find that being a landlord is not only a profitable experience but an enjoyable one.