Purchasing income producing property is one of the wisest financial decisions you can make, and it can be a very rewarding experience and give you passive income that can last you for decades. But it can be a big challenge managing if you’re new to the process. I’ve outlined some quick tips that can help you navigate leasing and managing your own rental property.
You know that scene from Indiana Jones and the Last Crusade where Donovan picks the most opulent, golden chalice, thinking it was the Holy Grail, and his entire body melts down to dust? Choosing the wrong income property isn’t quite that dire, but it can feel like that if the property you purchase is beautiful, but doesn’t cash flow, or is over-improved for the size or area. Choose a property first that fits into your budget. Do a quick budget, looking at average rents in the area; the condition, size and location of other units, and make sure the property you’re interested in can reasonably cash flow with minimal improvements. Meaning, make sure your rent will cover your mortgage, HOA, and insurance premiums, and leave you funds left over to stock away for repairs and future improvements. As you pay down the mortgage, the difference between your rent and your expenses should grow steadily. If you’re paying cash and doing renovations, don’t over-improve the home as you may not see much of a return on luxury finishes or upgrades.
Screen and Insure
So many landlords today “wing it” when it comes to tenants, and this can be a huge mistake, costing thousands of dollars for repairs and legal fees for evictions. It’s incredibly important to ensure you have quality tenants who will pay rent on-time, in-full, and take good care of your investment. At minimum, you should require every applicant to fill out a detailed rental application, provide proof of income, and run a credit and background check. You can charge the tenant for this application – it’s typically a $50-100 non-refundable fee and pays for the credit and background checking software. In addition, I highly recommend meeting all of your prospective tenants in person at the property (I don’t like to lease to people who have not seen my property), and make sure everyone who will be occupying the unit is present at the showing. Make sure you’re abiding by the Fair Housing Act and not discriminating against protected families, classes, or individuals.
Once you’ve chosen a tenant, require that the tenant carry renters insurance. It’s a very low-cost way to protect your tenant’s belongings, and reduces your liability for damage after an accident. Many landlords include this in the rent, and will obtain renters policies or contents policies on behalf of their tenants, just to ensure the requirement is met.
The Florida Association of Realtors and the Florida Bar Association have a tested, foolproof lease form that properly protects both the landlord and tenant. This lease has been through court battles, and is very clear about the rights and responsibilities of both landlord and tenant. Many landlords choose to write their own leases – beware of this practice. All of the clauses in your lease must adhere to Florida Law. For example, there are limits on how you can collect late fees, and how much those late fees can be. There are also laws limiting how and when a lease can be terminated. If you don’t have a law degree, it’s almost impossible to keep track of the many nuanced laws relating to residential leasing. The FAR/BAR Lease does it that for you.
Enforce Your Rules
Read your lease. Know it back and forth, and set up reminders so that you are collecting rents and fees on-time. When a tenant requests a repair, make sure they’re doing so as outlined in the lease (usually there is a provision for the tenant to notify the landlord IN WRITING). So often, tenants will send a text letting you know about a repair. If this is the case, remind them to submit the repair request via email or per the terms of the lease so that they take the rules and notice period seriously. And give the tenants the same courtesy by being predictable. Acknowledge receipt of a request, and follow up in the timeframe required by the lease. Charge late fees consistently, and abide by a regular grace period set forth in the lease.
Take Online Payments
This is huge. Nobody writes checks anymore. Most younger people have never even seen a check, much less know how to write a check. Online payments are easy, instant, and verified. 61% of Millenials and 42% of older generations pay all of their bills online. There are even rental payment apps out there that will report to the credit bureaus whether or not your tenant is paying on-time. That can help your tenant build credit and is a nice perk. It also gives tenants an incentive to pay on time when they know not doing so affects their credit rating.
Keep Detailed Digital Records
This should go without saying, but keep rent receipts, maintenance descriptions and invoices/receipts, and all communication between you and your tenants in a digital file. If something ever goes wrong, you want to have a detailed record for any court proceedings.
Hold onto Great Tenants
The cost of procuring a new tenant can be so much greater than the cost of keeping a great tenant. The ideal tenant stays in your property for multiple years, and is usually willing to renew early. If you have a tenant who pays on time, takes care of the home, and has very few complaints, do what it takes to keep them! Keep annual increases to a minimum, offer improvements like upgraded appliances, or fresh paint or carpet. Give them an incentive to continue maintaining the home. Establish positive and frequent communication so they feel like you respect them as a person and a business partner.
Think you’re up for being a landlord? Contact me to set up a detailed search of available investment properties in Central Florida. Rather be a hands-off landlord? Give me a call and I’ll refer you to my favorite Central Florida management companies.
Curious as to whether you will qualify to purchase an income-producing property? Click here to be pre-approved or contact Don Harkins to discuss your options.