You have purchased your first rental property. After the grueling process of negotiating the price, getting your mortgage loan approved, and completing all the paperwork, now what do you have to do to manage the property and get the cash flow through the door?
There are property management companies that will list your property and manage the unit for silent investors for a fee typically 10% of the monthly rental income. Another option is to manage the property yourself to save costs. Eventually, we could see ourselves using these services but for this blog post, I will talk about self-managing your rental property.
1. Advertising Your Property
The most common way to find renters is by advertising your unit for rent on sites like Craigslist, Facebook, or Zillow. If you wanted to use a real estate agent, it would cost about one month's rent for the service fee. As mentioned in another blog post, if you know the demographic of your rental property, you can utilize tools to best target your audience. If it's a younger demographic, utilizing web services such as Facebook or Craigslist could be effective. If the demographic is families, using sites like Zillow or finding real estate agents could be more useful.
For my rental units, I used Zillow Rental Service and was surprised to see how many applicants there were. Part of the reason was the hot rental market, but also the location where there are many young people wanting to live in the City of Chicago.
2. Performing Background Checks for Tenants
Once you’re contacted by your prospective tenants, you’ll need to perform multiple screenings to find the best tenant for your unit.
Is the candidate an ideal fit for your unit?
You know the unit and what type of tenant it's suitable for. Setting an initial filter to select the suitability for the tenant can save you trouble and time later on. For example, if it's a small studio, not selecting a family who may be unpleased with the unit size could be potential issue months down the line.
Ask for a Credit Report
Tenants are able to access their credit scores and reports from many sources including their bank features. Avoiding applicants with scores below 600 could be a red flag. They may have a history of not paying their bills and rent on time.
Ask for References and Verification of Income
Not everyone will have references but it doesn't hurt to ask if they have it on them by chance. It may be a simple written letter or phone number. Not having one doesn't preclude tenants from being qualified but if the candidate is defensive about providing one, it could also be a red flag. You can also utilize websites to verify your credit history.
Verification of income can be provided from many forms such as a pay stub of the past few months, or a W-2 to prove income. The application should closely match this form of verification. Tenants are able to upload any documents they want to provide on their application, and sometimes they upload a recent bank statement that shows the initial fund and extra funds as a cushion. Not having enough funds to cover the first few months of rent and the security deposit could be a red flag.
For Zillow applicants, a brief credit history and a form of income verification are provided as part of the application. A tenant with a decent credit rating, a good previous rental history, and a stable and sufficient income will eliminate most potential problems.
3. Complete the Lease and the Paperwork for HOA
Once you have screened and selected a prospective tenant, they will need to complete a lease application as well as other paperwork required by the HOA.
The process should start with obtaining a pro forma copy of a lease agreement that’s legally compliant in your state. It will spell out the terms of occupancy, including who will occupy the home and for how long, and what the rent and security will be. You can add in any and as many stipulations as you like but starting with a city-provided official lease application should protect you from many legal issues.
Additionally, HOAs require various paperwork to complete.
4. Set up Payment Option with Tenant and Receive Security deposit
If the tenant is satisfied, you can proceed to figure out the best form of payment and the process. Many payment services such as Zelle, and PayPal, can be connected to your bank. There are also other services you can utilize to organize the payments you receive from tenants. Initially, you’ll need to obtain the security deposit, along with the first month’s rent, before the tenant moves in.
We keep a separate bank account for mortgage payments and rent collection to avoid mixing personal funds with rent payments to provide ease of tracking expenses for tax purposes.
5. Finding Ways to Perform Repairs
The goal of real estate investing is to make money, not to lose it. Investing in fixer-uppers will eat up a lot of your reserves on repairs and updates. Unless you’re in the fix-and-flip business and you can afford costly home improvements, avoid properties that require a ton of work.
6. Limit your Liability by Converting Your Property to an LLC
Be sure to familiarize yourself with landlord-tenant laws in your state. Those not only provide certain protections for tenants, but also for landlords.
For example, you’ll need to know what the laws are regarding eviction, as well as your responsibility to maintain the property in a legally compliant way. In most states, you’ll be required to maintain the property in a safe and livable condition. If not, the tenant may have grounds to break the lease.
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