Owning rental properties can be a great source of passive income and a significant step toward financial freedom. There's a reason why 90% of millionaires have used real estate investing to achieve their wealth.However, when most people consider the prospect of renting out a house, their minds begin to race about everything that can go wrong. Things like:
- Missed payments
- A nasty eviction
- Being left with a ruined house
These things can happen, but you shouldn't let them stop you if you are serious about owning and managing single-family rentals. Instead, you should take some time to learn the practical steps to minimize your risks and maximize your profits.That's precisely what this guide will teach you. Managing rental properties can be a grueling process for rookie investors that get into it without a proper plan. But the knowledge presented here that seasoned investors use will make your business run like a well-oiled machine.Often, the things that no one thinks about become the most significant issues.Determining the correct rent price, finding the right residents, and minimizing vacancies are things that every landlord should have a plan for before renting out a house.We've covered these topics (and many more) in this article so that you can move forward with your rental property with confidence.
How To Minimize Hassles With A Rental House
The most common hassles with managing single-family rentals are responding to maintenance issues and having trouble finding the right residents. Fortunately, these headaches can be minimized significantly by putting in the effort BEFORE you list your house for rent.Here are 3 ways to prepare your house before placing a resident:
Repair Any Known Issues
If there are issues with the house that are noticeable from just walking through or making light repairs, you can be sure that a resident will find them when they live there. And when they find them, you'll get a call – likely at the most inopportune time. Save yourself the trouble and repair any issues you know of upfront. In fact, it can be helpful to perform a thorough inspection of the property. Making repairs on your own time when the house is empty is much more convenient than scheduling with a resident and working around their belongings.
Replace Items Near Their End of Life
Depending on the price point of your rental house, you may not need state-of-the-art appliances, but you definitely need them to be reliable and in good working order. Landlords are notorious for limping systems along when they should be replaced. Even though the refrigerator is working at this moment and your residents move in with no issues, if it is on its last leg, it will likely go out during the lease term.
Impress Potential Residents With A Clean House
For most rental properties, residents don't care if everything is new as long as it feels new and clean. At the end of the day, someone has to fall in love with your house and be able to see themselves living there. They will have a hard time doing that if the appliances are grimy and there is a layer of dust on the baseboards. Even worse, the residents who are not deterred by an unclean house likely won't take care of it to the level you prefer. Think about it this way:You can spend a few hundred dollars to have a professional cleaning company clean your entire house or waste even more than that on mortgage payments and other holding costs while you struggle to find a good resident.
Managing The Finances Of A Single-Family Rental
Just take the monthly rental income, subtract your mortgage payment, and that's your cash flow, right?Not quite.There are several other financial considerations with rental properties, such as maintenance expenses and paying a property manager if you choose to hire one.(PS. If you’re looking for a property manager, reach out to see if we’d be a good fit for you!)
How Much Should You Charge For Rent?
This is where many rookie landlords fail. Setting the proper rent price can make or break your success as a real estate investor. Charge too much, and you'll have difficulty getting the house rented out. Charge too little, and you'll be leaving precious cash flow on the table.So, how do you determine the market rent for your house? Here are three resources you can use today:
- Zillow. Believe it or not, Zillow is a great starting point. Although seasoned real estate investors would never trust the Zestimate to determine the market value of a house, the Rent Zestimate is usually pretty accurate for rental values.
Beyond that, you can use Zillow to look for nearby homes listed for rent. Look at these houses subjectively and see how your house stacks up in terms of size and finishes, and price your house accordingly.
- Rent Range & Rentometer. Two very similar online resources for determining the correct rent price for your house are Rent Range & Rentometer.com. These sites allow you to property reports that give you a complete rent rate analysis of any address.
- Free Rental Analysis. Here at Evernest, we offer a free rental analysis for any investor or landlord wanting to know their home’s rental value.
→ Simply fill out this form ← Be sure to include your property address and we’ll send you a free comprehensive six-page report that will tell you approximately how much your home could receive in rent, and much more!
Maintaining a Reserve Account
Beyond paying for set costs (like your mortgage payment) out of your rental income, you should set aside a portion of each rent check to be reserved for unforeseen expenses like maintenance and vacancies. Although making repairs upfront will reduce the number of service calls you have, there will likely still be maintenance issues along the way. Murphy's Law is for real – especially in real estate.Although the amount you set aside can be modified based on your rental house's age and price point, a good rule of thumb is to set aside 10-15% of the monthly rent to cover unforeseen repairs and vacancies when you experience a turnover.Suggested Listening: Major Rental Property Repairs Every Investor Should Know
Calculating Your Return On Investment
The primary metric that the most legitimate house buyers consider when looking at a new rental house is Cash-On-Cash Return (COCR). This value is an indicator of how profitable a rental will be by considering how much of the original investment is coming back in cash flow each year. COCR is calculated by dividing your annual cash flow (after paying all expenses and subtracting out your reserve account money) by the amount invested upfront. The primary contributors to your initial investment will be the money spent at purchase (closing costs and down payment) and repair expenses.This value can help you determine if a new rental property is a wiser investment than other options. Once you begin to build a rental portfolio, you can set a minimum COCR threshold that is part of your buying criteria.Are you looking for a new way of analyzing deals?You can access our NEW rental property calculator. You’ll find that it includes 4 key features: a property calculator, rehab calculator, 30-year analysis tool, and a monthly layout of income vs. expenses.
How To Find Good Residents For Your Rental House
This is where most people start getting nervous. And, honestly, it's for good reason. Having good residents can make owning a rental house a breeze, but bad ones can make it a nightmare. Fortunately, there are practical steps you can take to significantly increase your chances of finding stellar renters.Suggested Listening: How To Find A Great Resident and Keep Them Long-term
Advertising A Rental House
If you’ve got your house ready to rent, your next step in locating the right residents is thoroughly advertising it. Getting it in front of as many people as possible is vital. The good news is that nearly everyone looks on Zillow when searching for a place to rent or buy. Therefore, simply listing your house on Zillow will usually attract a good bit of traffic.However, make sure to take high-quality photos of your home to maximize the amount of interest you get. Pro Tip: Standard phone cameras don't take pictures at a wide enough angle and make rooms look much smaller. Newer phones allow you to zoom out past 1X magnification, which should alleviate this problem. If your phone doesn't have this feature, you can buy lenses that clip to the outside of your phone and convert your camera into a wide-angle lens.A property manager (like us!) can help you during this phase of your rental journey by tapping into our pool of residents. Companies that manage many rental properties will undoubtedly talk to many people looking to rent a house, and this constant contact with potential residents will often enable them to place a resident much faster than you can with a traditional listing.
How To Properly Screen Residents
If you properly advertise your house for rent, you will likely generate a ton of interest. Once you find someone that feels like a good fit and wants to move forward, it's time to move on to the application. As property managers, our process is going to be much more customized. Here’s a high-level overview of our resident screening process:
- We have a partnership with Transunion which allows us to pull each resident's credit score…
- Next, we take a look at each prospective resident’s bank account info/spending to see if it matches what they've told us is their income vs rent ratio.
- Then we run a criminal background check on every prospect.
- Lastly, our team reviews each application and makes sure fair housing requirements are met.
Let’s dive into a few components of the resident screening process that deserve a little more attention to get it right.
How To Review Rental Applications
Reviewing an application can be an overwhelming process. However, there are a few items that you should be looking for. The first is their credit check. Not everyone has stellar credit, and that's okay. But a credit report littered with missed payments and collections agencies is a big red flag. If an applicant's credit report shows that they constantly fail to fulfill their financial obligations, they will likely miss rent payments.On the flip side, don't be so strict that you deny a great candidate for one blemish on their credit report. Mistakes happen, and sometimes they could be a result of a miscommunication with the payee. You must be balanced and use discernment when interpreting a rental application.
Calling Residents' References
One of the most helpful yet unknown tricks regarding screening residents has to do with their references. Anyone can call the references listed on a resident's application, but the trick is to insist that they list a landlord that they rented from before their current place. If they have been a headache to their current landlord, they will likely tell you anything just to get rid of them. However, a previous landlord will have no reason to hide the truth.Here are some questions you should ask a previous landlord:
- How long did the resident lease from you?
- Please verify the address of the unit they leased from you.
- In the last 12 months, how many times did they pay late?
- Did you keep their security deposit?
- Would you lease to them again?
- Why or why not?
NOTE: The data you hold is extremely sensitive (SSNs, birthdays, etc.) to the resident's identity. Make sure it's in a safe place and that they're not sharing that information with anyone else, even if it's a related resident. With situations like this comes the greater potential for legal troubles.
Should You Allow Pets In Your Rental House?
Ultimately, whether or not you will allow pets in your single-family rental will be a decision you must make for yourself. One thing to consider is that not allowing any pets will significantly shrink your pool of residents. Most landlords operate on a case-by-case basis. It may be beneficial to discuss your options with a local landlord/tenant attorney, because you may be able to collect an upfront non-refundable pet fee or even charge pet rent. This would increase your monthly cash flow to offset the risk of damages.Suggested Reading: Should I Allow Pets in my Rental Home?
Using a Legitimate Lease Agreement
Using a bulletproof lease is extremely important when managing a single-family rental. Unfortunately, countless leases are floating around out there, and rookie landlords often just use the first one they get their hands on. It would be wise to spend a little more time making sure your lease completely covers you and spells out the terms you are looking for. Being property managers, we deal with lease agreements every day. Here are the MUST-HAVES in a legitimate lease agreement:
- Who is the agreement between (the resident and the owner)?
- Location – What is the address of the property?
- Term – The date the lease begins and ends (is it a 12-month agreement or 24 months?)
- Rent – How much rent is being charged per month?
- Security deposit – What is the security deposit amount, and what are the circumstances for forfeiture of that deposit?
- Late fee – How much of a late fee will you charge if your resident pays late?
- Occupants – Who will live in the home (you need everyone’s name)?
- Renewal terms – This should state that both parties are inclined to receive at least a 30-day notice before the end of the term. If nothing is decided, then the agreement should be extended from month to month.
- Utilities and services – All utilities should be the resident’s responsibility.
- Maintenance – You agree to make repairs necessary to keep the property in fit and habitable condition. There’s no quicker way to lose your resident than to ignore their maintenance requests.
- Basic resident obligations – Basic things like keeping the lawn mowed, not disturbing neighbors, not throwing things down the drain that can clog it up, changing air filters and smoke detector batteries, etc.
- Insurance – The resident should be responsible for their own renters’ insurance... that’s not your responsibility.
- Right to access the property – The resident can’t deny you access to the property to make repairs or inspect. Certain states require property managers to give a 48-hour notice if they need to enter a property for certain issues.
- Security deposit – Every resident should pay a security deposit, to be held by you. You might need to make it clear to your resident that this is not the last months’ rent. The security deposit is held until you’ve completed a move-out walkthrough where you’ve had the opportunity to inspect your house, making sure that there isn’t any unusual wear and tear. If the house is fine, you need to refund the resident promptly; our lease says within 60 days.
- Failure to pay rent – the goal is to avoid this entirely. But it does happen, unfortunately.
- Pets – Are you going to require a pet fee? We always have a pet fee of $300 per animal and if the resident sneaks a pet in without authorization, we have the right to fine them $500 per unauthorized pet! And they'll still owe a $300 pet deposit.
- Rent rate adjustment – If you sign a long-term resident and you believe that at some point you’ll want to increase the rent, you need to have it in your original document.
Keep in mind: Just because you put something in the lease agreement doesn't mean that it is legal and enforceable. Once again, this would be an excellent opportunity to consult with an attorney who is well-versed in landlord/tenant law to make sure you have the most air-tight lease possible.
Create A Move-In Checklist To Eliminate Mistakes
The period between signing a lease and the resident moving in can be quiet, but you should use this time to make sure everything stays on track. This can be streamlined by creating a move-in checklist. Here are a few ideas to include:
- Have the residents switch all utilities into their name
- Have plenty of extra keys and garage door clickers available
- Ensure residents have renters' insurance
- Ensure smoke detectors are operational and a fire extinguisher is present
As of you reading this, we manage over 6,000 houses for 3,000+ owners and have for the last 15+ years. In that time, we’ve built our own checklists to help keep this process smooth for our residents and owners. Lucky for you—we’ve made this checklist completely FREE. You can access our ultimate checklist for renting your house right here.
Managing A Single-Family Rental Once Occupied
If you've done everything well up to this point, you should have great residents in place and will be much more hands-off. However, there are things that you should be aware of as a landlord that will make everything run more smoothly and minimize your risks in the day-to-day management of your property.
What Is the Best Way to Collect Rent?
Here are some factors to consider as a landlord when determining how you’d like to collect rent from your resident:
No-cash policy
You can have residents bring or mail money orders or checks if they’re not in our ACH or online bill pay system.
Make direct deposit the desired method of payment
At Evernest, approximately 25% of our residents are on ACH to withdraw money directly from a resident’s bank account. We are constantly thinking about how we can increase that percentage to 100%
Online bill pay
Banks usually offer account holders online bill pay. The bank will cut a check directly from the resident’s bank account and send it to you. This isn’t very common, but it’s an option worth considering. You will still need to deposit the check, though, and there’s still the whole “the check’s in the mail” discussion you might have from time to time.If you manage your property yourself, there are many options to consider. Unless you just like being old-fashioned and enjoy taking time out of your day to take paper checks to the bank, you will want to find a digital option for rent collection. Several online rental management services have popped up recently, such as Apartments.com. Beyond the convenience of having rent checks deposited straight into your account, these services allow your residents to automate their payments and eliminate the human error of forgetting to make a payment.
Late fees
At Evernest, we charge late fees for any resident bringing their rent into our office after the third of the month. Rent is due on the first and late after the third. This is a policy we take seriously. The late fee is 10% of the total monthly rent, which is sufficient to motivate most residents to pay on time. There are circumstances beyond the control of your resident that you’ll want to take into consideration. Most landlords take them on a case-by-case basis. But when late payment becomes a habit... It's usually not good news.
Celebrate great residents
A strong resident is hard to find. When you do find one, let them know you appreciate them. What does “celebrate” mean? To a property management company, it may mean:
- Sending the occasional gift card just to let the resident know you've recognized something special about them.
- For a landlord with one or two houses, it may mean a simple handwritten note with a gift card inside just saying “thanks for being awesome.”
Keep Constant Communication
Managing a rental property is not a "set it and forget it" type of investment. You own a physical asset and, unfortunately, we live in a world where things tend to move from order to chaos. Issues can arise with the property, and some residents may neglect to tell you about them until they significantly alter their life. However, many major issues can be avoided by addressing problems early on. Therefore, keeping an open line of communication with your residents is necessary. Not only that, but this will also foster a better relationship, which will make things run more smoothly for everyone.
Responding to Maintenance Requests
No matter how good of shape your house is in, there will almost always be maintenance issues during the lease term. Water heaters go out, shingles blow off, and leaks develop. It would help if you were postured to handle these issues as soon as they come up instead of scrambling to get them fixed. The best way to prepare is to have a team of contractors that you can rely on. There are likely things you can repair yourself if you are somewhat handy, but you probably don't want to have to drop everything when a service call comes in. For the DIY investor/landlord, here are some contractors that you should find before any maintenance issues arise:
- Plumber
- HVAC Contractor
- Roofer
- Handyman
- Appliance Repair Service
Working with a property management company like Evernest ensures that you don’t need to find any of these vendors yourself. We’ve built our own local teams to streamline every step of the maintenance process for you.
Perform Routine Inspections
One of the worst feelings ever is walking into a house that has seen a year or more of abuse and knowing that you will be responsible for getting it back in rent-ready condition.So, how do you avoid this?Your most practical option is to perform routine inspections. That way, you can mitigate issues while they are small instead of letting them fester. One way to perform these inspections covertly is to specify in your lease agreement that you will be responsible for routinely replacing the air filters in the house. Your residents will likely appreciate you covering that cost, and you will have the opportunity to check out the property regularly.
How To Minimize Your Rental Property’s Turnover Time
If your rental house is empty, you aren't making money, which is an obvious problem. So, how do you minimize the time between residents?One of the best things you can do is be clear about your current residents' intentions. This all goes back to keeping constant communication. You should be talking with them a few months before their lease ends to see if they want to renew or are planning to move out.One thing to consider when renewing a lease: It is essential to reevaluate the rental market and adjust the new rent price accordingly. It's not unheard of for the market rent of a house to increase by over a hundred dollars over the course of a year. Don't be too pushy with this, though. If they are good residents, they are saving you a lot of time and money by keeping you from having to market the property again.If your current residents are not looking to renew their lease for another year, you must be mindful about the time of year they will be moving out. You don't want to allow them to go month-to-month for a few months and then miss the prime moving window when families are looking to relocate during the summer months.
Establish Relationships To Increase Your Success
When it comes to finding success in rental property investing, the old adage rings true:“It’s not what you know that counts; it’s who you know.”When managing rental properties, some professionals will make your life much easier by having them on your team, and some you cannot do without. It is important to build these relationships well before you need them.
Dependable Contractors
We've already discussed the essential contractors to have on your team, but how do you find them? One easy way to get started is by joining your local real estate investors association (REIA) and asking around. These organizations often have Facebook groups where members can ask for recommendations. Once you find one good contractor that is reasonable and dependable, ask them if there are contractors in other disciplines that they often work with and would recommend.
Accountant/Tax Advisor
Unless you have a vast understanding of tax law, you should not attempt to do your own taxes when owning rental properties. There are many deductions available to real estate investors, and you don't want to miss out on these because you wanted to save a few hundred dollars when filing your taxes. You should find someone that is experienced with your unique situation.
Landlord/Tenant Attorney
Fear often comes from uncertainty. Mix uncertainty about landlord/tenant law with landlord horror stories, and most people shy away from the idea of owning rental properties. A consultation with an attorney specializing in landlord/tenant law can clear up much of this uncertainty and allow you to move forward confidently. These professionals can also be a gold mine when developing your lease agreement or if you ever need to file an eviction.
Lenders
Hardly any real estate investors rely solely on their own cash for all of their real estate investments. Leveraging other people's money is the fastest way to increase your Cash-On-Cash Return and grow your portfolio. The type of lender you decide to work with will depend on your financial situation and the deal you are working on, but here is a list of some of your options:
- Traditional Lender
- Hard Money Lender
- Private Lender
Property Manager
It is totally possible to manage a single-family rental yourself. People do it all the time. However, if the steps discussed in this guide have overwhelmed you, you still have options to be a successful landlord. A property manager (like Evernest) will handle the bulk of the responsibilities outlined in this article for you. As property managers, we generally charge a percentage of the monthly rent price for our services, but a good one is well worth it. Our job is to manage the entire process of advertising and screening residents, coordinate all service calls, and maintain all necessary communication with the residents. If you are looking to grow your rental portfolio, having a stellar property manager on your team is a must.
Should You Be A Landlord?
Owning rental properties can be a great way to bolster your finances and supplement your income. However, a significant amount of work is involved, and you must manage them properly. If you follow the advice given in this guide, you will be well on your way to success. Join your local REIA and network with other landlords for more local knowledge about managing single-family rentals. Also, don't feel bad about delegating tasks you don't feel comfortable with, such as property management (wink, wink).