Landlord Recalls ‘Newbie’ Days & Shares His Top Tips
Kevin Williams* picked up the phone and heard his rattled tenant say that there were flies in his apartment. Kevin said he'd be there soon. He swung by the hardware store for some bug spray and met his tenant at the unit.
Kevin could have rolled his eyes and told his tenant to calm down. He could have told the tenant to buy some insect repellant and send a receipt with his next rent check. But he didn't. Instead, Kevin did what he's done since he bought his first investment property in Illinois nearly 30 years ago. He showed that he cared about his tenant and was committed to first-rate maintenance. Kevin knows that such thoughtfulness will be returned, enhancing his investments.
The retired financial consultant has been an ezLandlordForms member since 2009. He tracks every rental property expense so that he knows the return on investments. Helping a tenant with ants may not boost numbers on a spreadsheet but it will have a payoff – namely tenants who treat his properties with care, pay their rent on time and foster a good relationship with their landlord.
“If they see that you’re taking care of the place and you are quick to respond, they will know that you care and so they will be more likely to care,” Kevin said. “Keeping good tenants and reducing turnover are key to good returns.”
That tip was among many valuable insights he shared in a recent interview with EZ Landlord Forms. Here are some of the highlights.
Don't buy a house in a hole: We’re not talking about sinkholes here. We’re talking about topography, or the lay of the land. Kevin’s very first property was a sweet deal at $26,000, but the home sat at the base of gently sloping hills. As a result, the basement repeatedly took on water. He and his investing partner did their best to fix the water problems, even joking about their “in-ground pool,” but there was no way to avoid the problems with runoff. Kevin said, “Water infiltration is the one issue that I would advise to avoid at all costs.”
Mix it up: Don't dismiss opportunities to invest in commercial, industrial or agricultural property just because you have always bought residential rentals. When real estate values started to tank as the nation entered a recession a decade ago, Kevin's diversified holdings kept him in the black. “My residential assets got killed but the farm assets went the other direction. It made it easier to weather everything,” he said.
Rental properties are a long-term investment: “People think this is a get-rich-quick thing. I don’t see it. I’ve never flipped a house,” Kevin said. “I’d much rather be the tortoise than the hare. Rental investments are great vehicles for building wealth over the long term.” He advised against counting on your investment property value appreciating. If it does grow in value, consider it a bonus, but don’t include appreciation in your initial analysis.
Crunch all the numbers before you buy: Most first-time property investors know they have to consider the cost of insurance, taxes and monthly maintenance along with the purchase price when they're weighing an investment. Kevin said there is more to consider. When calculating your returns, you should also plan to set aside a monthly sum for large repairs and unexpected expenses – Kevin includes $200 to $300 monthly reserves in his return calculations on properties that cost between $100,000 to $150,000. “You will spend that money,” he said. Failing to include it in your initial calculations gives you a false expectation of returns and may lead to a “bad buy.” “I actually pay that reserve amount into an account and it sits there until I spend it,” he said. Otherwise, he said, surprise costs such as a new furnace must come from money you have already paid yourself. That makes paying for the needed repair much more difficult. Further, saving the money in advance of the need makes it much easier to be proactive with property issues. If you have the money to fix little issues as they arise, they are much less likely to become big, expensive problems.
Pay yourself first: “People need to build in a reasonable return to themselves. The reality is, [being a landlord] is work. Your time is your most important asset,” Kevin said. “I can earn 5 percent to 6 percent in dividends on certain trust-preferred shares without lifting a finger. Why should you pour your time and energy into a real estate project unless you’re getting a greater return? In my market, I’m not going to even consider property investment if the property cannot return 8 percent to me annually, and that’s as a cash buyer.”
Keep it professional: It might be tempting to think of your tenants, especially long-term tenants, as family. However, that thinking can impede the business relationship. “You want to be empathetic and you want to have a relationship with them,” Kevin said but, “it’s a contractual relationship. You promise to provide them with a decent place to live and they promise to pay rent.” Be as friendly as you wish but always maintain professionalism in your interactions. Make sure you maintain a business-like tone in all correspondence, including anything you send in email or texts.
Don’t take things personally: If you find that your tenant is trying to pull you into their personal drama, resist. Be polite but firm. It is not the landlord’s job to referee family disputes, listen to long-winded sagas, and so forth. Also, set aside emotions when your tenant violates the lease in a way that seems thoughtless or even offends you. “You can't get emotional when one of your tenants has done something you don't like,” Kevin said. Don’t take a lease violation or unpaid rent as a personal affront. That’s what notices are for. “The ezLandlordForms 5-Day Notice serves to protect my rights as the landlord – and shows the tenant that the situation is serious – without having a confrontation,” Kevin said. [Kevin uses the state-specific Illinois form. A generic Late Rent form also may be used.] “It also serves as a way to start a dialogue about what is causing the late payments. If you can have a conversation about the issues, you can often determine if the situation is temporary or more permanent. When issues cannot be fixed, try to find some mutually agreeable solution, such as early release from the lease in exchange for a quick and amicable move-out. It is worse for everybody if we have to go to court,” said Kevin.
While you’re at it, keep emotional distance from your investments. “Don't fall in love with any asset. You can't. Once you get emotionally invested, then you're going to make a bad decision,” Kevin said.
You’re not a bank: Tenants, like everyone else, can run into difficult circumstances that impact their financial record. Kevin does not automatically eliminate applicants with poor credit scores. “There are a lot of people who have credit problems. It might be due to health, they may have lost their job,” Kevin said. Instead of relying solely on a credit score, he prefers to meet with applicants and speak to them face to face before making a decision. On the other hand, applicants who want to sign a lease but are unable to pay the security deposit and first month’s rent raise a red flag for Kevin. Kevin counseled against allowing applicants to move in and make partial payments toward the deposit, whessentially providing an interest-free loan. “If they can't pay (at the start) it's not going to get better,” he said.
*Name was changed to protect the privacy of the landlord and his tenants.