Are You Cut Out to Be a Landlord?

Rental property ownership can be a great investment for building a retirement portfolio, as well as an excellent secondary source of income. Buying right and keeping a handle on costs can generate a steady monthly cash flow — plus, the majority of homes should appreciate in value over time.

Those new to real estate frequently buy one or two homes and self-manage to avoid the cost of professional management, but before taking the leap, think through the responsibilities.

Know the law

Rental property owners must follow the law, especially for rental applications, lease agreements, handling security deposit money and eviction actions. Use applications and lease forms that have been examined by an attorney for legality in your state, and make sure they also protect your interests. Include plenty of detail on your forms; should a dispute arise, it’ll be easier to support your case if a lease agreement or other document includes specific information about your requirements.

Practice patience

While many landlord-tenant relationships are relatively problem-free, some tenants can be a bit difficult. They might bring more issues to your attention than you ever anticipated. It’s OK to establish clear rules and instructions about what merits a complaint and when it’s appropriate for them to call you — it’s your building, so it’s your responsibility to set expectations.

Create a budget for repairs

As a landlord, you should anticipate repair issues to be more frequent compared to an owner-occupied home. Set aside a portion of your monthly rent income to help cover the costs of future repairs.

At move-in, conduct a thorough inspection using a detailed checklist to note the condition of everything in the home. Use the same form at the end of the lease to compare conditions. Using your smartphone to record a video of the walkthrough is a great way to avoid tenant disputes at move-out. In the lease, include a detailed explanation of what constitutes normal wear and tear versus damage that must be paid out of the renter’s deposit.

Expect a few late payments

Late rent payments are more common than you might expect. Again, make sure your lease spells out when rent is due, how residents must pay it, what the deadlines and penalties are for late payment of rent, and how you’ll handle notices and terminations. Send late rent notices and collect late fees when appropriate to keep your cash flow on track. The rules must be legal in your state, and both you and your tenants must follow them.

Consider hiring management professionals

If you are considering rental properties as an investment asset, you should know about more than just the numbers. If you’re not willing to take on a few landlord headaches, consider using professional management. It will cost a percentage of the rent, in many cases 8 to 10 percent, but you might find the peace of mind is well worth it.

If you plan on professional management from the start, you can negotiate your property purchases and rents to cover the added cost. A good property management company will market your property, screen prospective renters, collect rent and handle late payment issues. They will have locally vetted leases and proven procedures in case any problems arise.

Once you've decided that rental property investment makes sense for you, weigh your options, be informed and prepared, and determine if you have the time and patience to take on the responsibilities of a landlord. If not, you can outsource the day-to-day details of your rental business to a property manager.