Whether you have been in the game for decades or find yourself a sudden accidental landlord, there are always new things to learn. How can you become the best landlord you can be and, in turn, maximize your profits? Well, we are here to help! In any business, understanding your strengths and weaknesses is a crucial factor in growth. Below we take an in-depth look at the type of landlord you are, delve into the controversial landlord classes, and see what you can do to be a success.
Types of Landlords, Which One Are You?
There are many reasons individuals invest in real estate for rental property income. Each type of landlord comes with their concerns, goals, and ideas. Understanding where you fall will help align your actions to be successful ultimately. Follow along below as we explore the most common types of landlords and what they mean.
- The Individual “Mom and Pop” Landlord – Generally, these individuals have a smaller portfolio, with investment being the primary goal. They seek out quality and long-term tenants who will care for their property. Additionally, these landlords may negotiate terms for the right tenant and desire a closer landlord/tenant relationship.
- Family Legacy Investors – For those who have gathered a sizable portfolio of investments over generations, this category might be you. A close tenant relationship may not be priority number one, you still like to be involved in leasing and management decisions. Characteristics of these groups include a desire for long term and stable tenants over higher rent and higher turnover.
- Property Developers – Developers are the ones constructing the properties they seek to rent. Therefore, they typically include a more comprehensive range of amenities, such as added security and well-maintained common areas. Landlords falling into this category may be looking to maximize their new property value by garnering long term higher rental rates.
- Money Managers – This category encompasses institutional investors who invest in various asset classes, one of which being real estate investment trusts. If this describes you as a landlord, strong cash flow and high occupancy rates are a top priority.
- Accidental Landlords – Individuals can become accidental landlords by inheriting a property, suffering a financial need, or some other change in circumstances. If this category is where you find yourself, the tasks ahead can seem daunting. Check out these suggestions on where to start below.
You Are an Unexpected Landlord, Now What?
Whether you inherited a home or you are trying to rent out your home own due to unexpected circumstances, welcome to property management! There is a lot to do. Once you have legal possession of the home, begin the process of organizing your to-do list. Continue reading below for helpful tips to jumpstart your property management journey.
- Inspect the property to assess the condition
- Get estimates and hire a qualified contractor to make any necessary repairs or upgrades
- Consider the amount of time and energy you can spare to manage the property
- Find a tax expert to help prepare you for real estate taxes, income tax, and any applicable capital gains
- Start planning a budget and set up an emergency fund
- Purchase landlord insurance
- Consider a DIY landlord software program such as Appfolio or Buildium
- Create a standard of applicant qualifications
- Write an application and have it reviewed for legality by a lawyer
- Create a lease document and have it checked for legality by a lawyer
- Research the local market and set the rent price
- Carefully screen each applicant based on your qualifications
- Consider hiring a professional property management firm
Are You an A, B, or C-Class Landlord?
Holton-Wise’s James Wise and founder of Rentwerx, Brad Larsen, separate landlords into three categories, A, B, and C-Class. The implications of these class ratings vary, but it is safe to say you do not want to be C-Class. As a landlord, if you choose to work with a professional management company, they are evaluating you as much as you are them. Many landlords, both experienced and first-timers, make a variety of missteps unknowingly. Therefore, this is an important subject to discuss. Follow along below and see where you fit. Controversial or not, it serves as great food for thought.
What is an A-Class Landlord?
Just like in grade school, an “A” is the best you can do, and similarly, an A-Class landlord is the best to deal with and the most sought-after for property management companies. That said, they are the best for a variety of easily achievable reason. Continue reading to find out characteristics that make up the top grade.
A-Class Landlord: Coming Out on Top
- It’s a Business. Pure and Simple. – A-Class landlords treat their property as the investment it is; emotions aside.
- Investing in Professionals – Top landlords hire the best property manager they can and trust their expertise.
- No Interference – Successful landlords know a property management firm will have far more experience than them. So, they let them do their job knowing they are looking out for the owner’s best interest.
- Embrace Being Passive – Not being involved in the day to day minutia frees up countless time for other things as an investor. Therefore, embrace the hands-off approach and let the professionals handle it.
What are the Characteristics of a B-Class Landlord?
A B-Class landlord still has some great things going for them. “B” signifies a good job, just with the opportunity for improvement. After all, who couldn’t benefit from a little improvement in one area or another? Class B landlords handle things well overall but make some critical mistakes that can hold them back from the success they deserve. So, is this you? Find out below!
B-Class Landlord: Right in the Middle
- Bargain Shoppers – “You get what you pay for,” let that sink in. Every landlord wants to save money, but some bargains hurt in the long run. That said, avoid the mistake of continually looking for cheaper management services, trying to get added discounts or company hopping. When you find an expert company, stick with them, you are paying for the experience.
- Micromanaging – A characteristic B-Class landlord hires a property manager then still wants to be involved in the day-to-day. This not only hinders them from doing their job but creates unnecessary stress for the landlord.
- Nickel and Dimes – Choosing a couple of percent lower management fee? Well, it could end up costing big. Sub-standard companies might mean mediocre customer service, sub-par repairs, and inevitably higher turnover.
- Repairs are Inevitable – If they were not, everyone’s job would be a lot easier. B-Class landlords hound their property manager regarding repairs, often requesting exceptions. Trust here is vital; if your manager says it is needed, there is a valid reason.
What Makes a C-Class Landlord?
Unfortunately, here we are at the bottom. If you find yourself in this category, chances are it may prove challenging to have the cooperation of any reputable property management firm. If that is the case, there are two options, continue to go it alone, or thoughtfully reconsider your approach. Let us take a look at what makes a C-Class landlord below.
C-Class Landlord: Giving Everyone in the Industry a Bad Name
- Repairs? Yeah Right! – C-Class landlords also referred to as “slumlords,” either refuse even to consider repairs or have some friend of a friend providing low cost “fixes” that will only end up costing more to correct later on.
- Blindly Increasing Rent – Despite poor living conditions, these landlords demand their property manager charge rent well above the market rate. Why? Well, because they know best…
- Nobody Likes a Bully – All too often though, that is what the C-Class landlord turns out to be. Domineering tactics towards an inexperienced manager may make them feel the illusion of power at the moment, but they are only hurting themselves in the long run.
- Haggling to the Point of No Return – This type of landlord will not stop harassing the company until they get the absolute minimum management fee possible. However, all this does is guarantee the level of experience and service they will receive, which is not great.
Class C landlords are the worst for a reason. While they are busy hassling the property managers, their property is falling apart right along with their profits. Also, what tenant would want to stay in a high rent, poorly maintained home? Nobody. Turnover is just another added expense, and the lack of care put into making the house presentable will only cause it to sit vacant longer. So, as far as C-Class landlords go, don’t be that.
Successful Landlords vs. Unsuccessful Landlords
In theory, anyone could be a landlord, but not everyone will be a successful one. Maintaining a profitable rental investment property takes knowledge, patience, money, and strategic planning. That said, every situation and property is different, and every investor’s road to success may look a little different. However, check out these universal tips below for how successful landlords run their business.
Habits of Successful Landlords
- It is a Business – Emotions have little place in business transactions. Every tenant must be treated the same regardless of the situation due to Fair Housing Laws. So, stand firm in the provisions of your lease, including late fees.
- Knowledge is Power – Analyzing local markets, cost ratios, profitability, and loan options are essential for any landlord. Great landlords excel in thoroughly researching all angles of a scenario before making their decisions.
- Financial Cushion – Savvy investors work to maintain a comfortable financial cushion. You never know when your tenant may hit hard times, or something will happen. Ideally, landlords should have enough stashed away to cover 3 to 4 months of vacancy or for emergency repairs.
- Accessibility – When tenants reach out with concerns, a landlord’s responsiveness is what sets them apart. A willingness and urgency in resolving the tenant’s issue will not only serve to take care of your investment but also results in happier tenants.
- Maintain Detailed Records – Get everything in writing! But not only that, organize and maintain detailed records of transactions and any tenant communications. Experienced landlords save both virtual and hard copies of signed contracts to avoid any confusion or disputes when issues arise.
- Help is Out There – Even the best landlords can struggle to do every task by themselves. Hiring a dedicated property manager can prove to be well worth the investment in peace of mind alone. They have both the staff and experience to efficiently handle everything from marketing to maintenance.
Reasons Landlords Fail Managing Rental Property
Landlords and property managers can fail for many reasons. However, it can almost always be boiled down to a lack of planning and preparation. Many investors might find it easy to enter the rental business but staying successful in it is a far more difficult feat. Out of everything that could go wrong, read on to discover the most common reasons, so you know what to avoid!
- Expanding Too Quickly Without Proper Infrastructure
- Spreading Themselves Too Thin
- Not Embracing Technology
- Overpaying for Maintenance
- Not Budgeting for Emergencies
Unexpected Expenses of Being a Landlord
Expenses and rental properties go hand in hand. That said, many of the costs you will incur are familiar, but some are not thought of as often. Therefore, planning for the unexpected expenses will set your property management business up for success. Check out these cost areas you might want to give consideration to.
- Insurance – Do you need to have landlord insurance? Yes. Is that the same thing as homeowner’s insurance? No! Actually, not only do coverages vary, but there is a cost difference between homeowners and landlord insurance as well. The premiums for a rental property are around 25% higher than a standard homeowner’s policy. So, budget accordingly and shop around for the best coverage and premium to suit your needs.
- Trouble Tenants – Unhappy or irresponsible tenants can wreak havoc on your property and your wallet. Bad tenants can cause damage, pay late, or even force you to evict them, all of which affect your bottom line. So, put in place a thorough applicant screening process, and don’t forget to check references!
- Legal Services – When it comes to writing a legally binding lease, dealing with disputes, or understanding Fair Housing obligations, a lawyer is invaluable. Their experienced legal advice may save big in the long run, but budgeting for these legal services is not cheap.
- Renovations – Maintenance is something every landlord knows will happen, including the occasional emergency repair. However, making sure your property is in good condition from the start will help cut down on the constant small calls from the tenant. Those trip charges and repairmen add up! Consider investing some money in upgrades to major systems or general repairs before the unit is rented.
Ways to Lessen Unexpected Rental Property Costs
- Thoroughly Screen Applicants
While you may be eager to fill a vacancy, the wrong tenant is just as, if not more, detrimental then a vacant unit. Therefore, screen every tenant carefully for income qualifications, creditworthiness, rental history, and criminal background. Ask for references, and do not skip contacting them; this will be worth your time.
- Conduct Inspections
Sometimes avoiding unexpected charges starts with an ounce of prevention. Conducting semiannual maintenance checks serves several purposes. It allows for routine maintenance on major systems and gives you a chance to find any small issues before they become a big one.
- Overestimate Expenditure
The phrase “better safe than sorry” is a great mantra when it comes to budgeting for maintenance expenses. As you estimate potential yearly costs to set up an emergency fund, stick to the high end. It is better to have money left over at years end than be scrambling in an emergency.
Helpful Tips to Increase Rental Property Profitability
Getting the most return on investment involves equal parts planning and proactive action. If you have multiple properties, the same for one might not be accurate for another. So, take a close look at your investment strategy and incorporate some of these tips below.
- Quality Advertising
- Consider a Pet Policy
- Strategic Rent Increases
- Minimize Turnover
- Repairs and Preventative Maintenance
- Do Not Ignore Late Fees
Take high-quality photos or video tours to showcase your property attractively. Gone are the days where putting up a “For Rent” sign was all you needed to do. Online advertising plays a vital role in reaching a broad group of potential applicants.
Consider a Pet Policy
Statistics show more than 50% of renters have at least one pet. While accepting pets does come with added concerns, consider adopting a pet policy. Not only will you reach a wider pool of prospects but you can increase income with added pet fees.
Increase Rent Strategically
Increasing rent prices for long-term tenants is beneficial, but only if done right. Review comps in the area as well as your tenant’s history with you when it is time for renewal of a tenant’s lease. Keep in mind the average acceptable rent increase is between 3% and 5%. That said, don’t overdo it; asking too much (especially for the neighborhood) may drive your tenant to seek out other options.
Property turnover is a costly endeavor for landlords. Tenant screening is an essential step to finding respectful and long-term tenants who will treat your home as if it were their own. Additionally, stay in contact with tenants through the duration of the lease and address any concerns they may have.
Repairs and Preventative Maintenance
Increased profit is easily boosted by decreasing expenses. Regular inspections every six months will help discover any potential maintenance concerns. This preventative maintenance allows you to correct problems before they become severe and, inevitably, more costly.
Do Not Ignore Late Fees
Rent collection should proceed in a standard and orderly way. To comply with Fair Housing Laws, every tenant must be treated the same. Your lease should have a late fee clause; if it does, stick to it. Not only do late fees generate additional income, but it also encourages tenants to pay on time and in full.
Rental property management is a complex undertaking, drawing in all types of investors and owners looking to cash in on the industry’s profitability. Success directly links to your choices, and whether you find yourself a sudden accidental landlord or established, there are always new things to learn. So, ask yourself, am I an A-Class landlord? If not, take the first step in elevating your business strategy and reach out to a property management professional near you. Bay Property Management Group has the experience and resources to handle all aspects of rental management from single units to large portfolios. Contact us today!