Owning residential income property has its advantages. Additional income, possible tax deductions and future value that can be tapped into. A key decision you will make is whether to manage the rental unit yourself or hire a property management company. You’ll need to understand what a landlord does and determine whether you are up to the task.

Property Management Companies

A property management company will handle tenant selection, repairs, evictions and more. They have intimate knowledge of your local tenant laws. What’s legal in one state may not be in another. As well, the process for evicting a tenant can vary widely. The biggest downside to hiring a property management company is the cost. They not only take a percentage of the rent each month, but they may also charge commission to procure a new tenant. A hidden cost that most new investors are unaware of is the markup on maintenance and repairs. A property management company may have their own staff or pool of vendors. You will find that the charge is higher than if you had put a job out for bid. Of course, the whole point of hiring a property manager is to avoid these tasks. However, it all eats into your profits.

Tenant Eviction Service

Many investors have no problem finding their own tenants and coordinating property repairs. But they don’t want to handle evictions. You can hire a tenant eviction service. Even experienced landlords use them. In some “tenant-friendly” states even a minor eviction process mistake can get the whole case kicked out. It’s cheaper in the long run to pay to have it done right the first time.

Tenant Selection

Tenant selection is the most important task you will perform. Unfortunately, new landlords make the following classic mistakes:

Credit

An excellent credit score does not mean an excellent tenant. The theory is that a tenant with a low credit score can’t be trusted. The real question is: Do they have a solid history of paying their rent? A tenant with a bankruptcy or foreclosure is not necessarily an indication that they won’t pay their rent. A past eviction is more problematic.

Income

A prospective tenant who makes a lot of money may seem comforting but is not a solid indicator of their ability to pay the rent. That fancy car they drive may be leased. They may be in debt up to their eyeballs. Insisting that a tenant must make three times the rent is unreasonable in some neighborhoods. It is not unusual for a good-paying tenant to devote half their salary toward rent. Again, a proven history of paying the rent is the best indicator.

References

Some landlords will ask for personal references but not actually call them. They believe contacting a personal reference is a waste of time as they will give the prospective tenant a glowing review. You would be amazed, however, at what people will reveal about their friend or co-worker. Ask an open-ended question like, “What kind of person is Joe?” Then shut up and let them speak. Some prospective tenants assume you will not call their references and put in bogus names and contact information. A landlord we know recently had one reference say they didn’t know the applicant, the phone number for the other was a fax machine. This is more telling than a bad credit score.

Setting Expectations

Let your selected tenant know in advance that rent is due on the first of the month. That there is a grace period, but if you don’t see the rent on the first, you will call them to find out if there is a problem. Explain that you have a process that is applied to all your tenants. Let them know a three-day notice will be posted the day after the end of the grace period. Even if they call you and say they will be paying late, you will still issue the notice and charge the late fee (which should be specified in the lease). Always be respectful, but firm.

Know Thyself

If you do not have the time or temperament to handle being a landlord, hire a property management company. Spend the time to research a few different companies. Don’t just go with the cheapest one. Check their references. You want a property management company with a track record of installing good tenants who take care of the property and pay their rent on time.

It’s Personal

Buying a home is a critical life decision for most people. I believe in the unique, personal nature of real estate. I will carefully guide you through the process of buying your home – or any other real estate investment. Feel free to contact me anytime, whether it is to get started on helping you realize your goals and dreams, or just to ask a question. I would welcome the opportunity to make a difference for you. Please email me at pthessen1@gmail.com or call 270-745-9900.

-by Perry Thessen