Being a Landlord
Last week I provided details about the journey from Renter to Real Estate Empire, and how it is our mission to help our clients achieve this.
This week I would like to talk about what being a landlord actually looks like.
This is a big subject, it won't fit into this one article, but I'll give you some highlights.
High Level View First:
Why would you want to be a landlord?
Because by providing a well-priced, decent, honest, ethical and compliant residence to others you render a great service to many people and in return, they pay your mortgage and build your wealth.
In the USA we have a huge shortage of homes, approximately 4 Million homes (!) according to Realtor.com.
But in reality, it is worse than that: in California, where we are based, the immediate shortage is about 820,000 homes but, to take care of future growth and bring housing back to an affordable level, California Policy Makers estimate that an additional 3 Million homes need to be built!
This is just California alone! Imagine what the number of homes would be for the rest of the nation!
Being a Landlord is one of the professions of the future that has a tremendous longevity, and all you need is proper preparation.
As a landlord, you will need to do a number of important tasks such as:
Improving your property, so it is ready for rental.
Maintaining it pro-actively so as to keep its value.
Setting the rental price .
Advertising for rent.
Receiving and screening tenant applications.
Running background checks on tenants.
Selecting tenants.
Signing legally sound lease agreements.
Collecting rent.
Providing adequate, timely, compliant and friendly customer service.
These tasks need to be done, and they need to be done well.
The good news is that there are many online websites that provide extensive landlord tools that make this process easier than it ever was in the past.
Some of these websites are:
• TurboTenant
• Buildium
• AppFolio
I especially like TurboTenant.
There are others too, and a quick online (AI) search will provide them if you are looking for specific tools.
What these platforms do for you is provide tools for the complete landlord and tenant experience, including:
Tenant screening,
The ability for the tenant to pay their rent online,
Submitting and handling maintenance requests.
TurboTenant also lets you advertise your property on different platforms for free. Landlords of ages past would have only dreamed about this!
Other crucial tasks that you will need to perform in order to make your rental investment profitable:
1) You need to buy your rental property at the right price:
Your investment will not be profitable if you don’t buy it at a price that makes sense in relation to the rents you will be able to get for it.
2) Know your neighborhood and be aware of what is being offered for rent.
Be wary of only using online tools. These tools use mathematical models and neighborhood do not behave that way.
3) Know your numbers:
This is tricky because you need to consult professional sources. Just to give you a taste, this is what calculating the bottom line looks like:
Gross Rental Income
- Principal & Interest
- Property Taxes
- Property Insurance
- Allocation for Repairs
- Allocation for Reserves
= Net Cash Flow
Non Professional landlords do not take into consideration reserves or allocation for repair—this comes back to haunt them at the time they want to sell.
4) Rules of Thumb:
Over the years, professional real estate investors have developed Rule of Thumb formulas:
Capitalization Rates also knows as "Cap Rate"
Gross Rent Multiplier or "GRM"
Cash on Cash Returns or "Cash on Cash"
Debt Service Coverage Ratio also known as "DSCR"
You cannot rely on just one of these, you need to calculate all of them and know what they mean!
5) Local Government:
Cities, Counties and Municipalities may vary greatly on their approach to their treatment of properties offered for rent.
For example, the City of Santa Monica in Los Angeles, is one of the most difficult places to be a landlord in. You can succeed but you need to spend the time in educating yourself on their rent control laws.
6) Gut Feeling:
Once you have driven and physically walked the neighborhood, gone to a few open houses, done your research online and really see what's available for rent, for sale, what rented and what sold and do this for a couple of months, you will develop a "gut feeling".
Without having to calculate anything, you would be able to look at a property, see the price and almost immediately know whether or not it is a good deal.
This is why buying on another State, specially sight unseen, is generally not a good idea. In most cases you'll end up overpaying.
7) Buy a property that needs some improvement:
In order to do this, you will need some artistic vision and good relationships with people who can do the work well and at a reasonable price.
Keep in mind that because of supply chain issues, many raw materials have dramatically gone up in price in recent years.
8) Savings & Reserves:
After you get a tenant in your property and they start paying you rent every month, I always advise people to save up six months of operating expenses (maintenance, tax payments, mortgage payments, etc) for your property, in a separate bank account, before you start paying yourself any profits.
This takes care of any unexpected emergencies such a maintenance issues or whatever else can happen in life. It is good practice to have such a cushion.
9) Tenant Selection:
Always, always, always and always, screen your tenants, run background checks, particularly in California - because of the Rent Control Laws.
Once you let a malicious tenant into your property it is extremely difficult and expensive to get them out.
I have personally evicted squatters, scammers and anti-social tenants. I have personally researched their backgrounds, met them in Court and sat with them, face to face, while they gave me all their reasons why it is OK to scam the Landlord.
One of the last ones I confronted in Los Angeles, California, told me to my face "...that's why I go after Mom and Pop Landlords, because I can talk my way in and they don't check me out".
This one was a "professional". The way he "earned" his living was from jumping from landlord to landlord, scamming them out of tens of thousands of dollars.
Oddly enough, that cost him money and lots of work. But instead of using this amount of energy to work and earn an honest living, he used his "talents" to scam people.
I had another one who was an attorney from Spain. An articulate and clever individual. Because he knew the law, he was the hardest to get rid off. You would think that someone so able and talented could use these gifts to earn a good living, right? but no, he used his talents and energy to scam people.
Moral of this story, no matter WHO it is, always, always and always screen your tenant thoroughly.
Thankfully the Landlord Applications I mentioned above, can do this heavy lifting for you. Something that in the past was cumbersome and expensive, today thanks to these systems, it is relatively inexpensive and quick.
When it comes to selecting tenants, the gut feeling test also applies.
In the end it is you who gets to have the final decision, and you may have a relationship with this tenant for many, many years to come so you want to make sure it is a relationship you will enjoy.
Having a good, long-term tenant who will actually take care of your property well while living in it is worth a lot!
For these reasons, I never tell people that being a landlord is passive income.
It does require real knowledge and work!
But it is a skill that will pay you many times over and may lay the foundation for that ultimate step that comes after the Real Estate Empire stage:
Legacy.
That Real Estate Empire you’re creating may one day be the foundation of your kids’ future financial success, and their children and grandchildren too!
Even the skill itself is something worth investing in and passing on.
I hope this has given you some more to think about, and I look forward to answering any questions you might have about the journey from Renter to Real Estate Empire!
