September 2002 Owners Update

What Does It Take To Be a Landlord?

Owning rental property can be a nightmare—or a good way to build steady wealth. The difference between a profitable investment and a disaster, experienced landlords say, is often in the amount of work an investor is willing to put in. Not everyone is cut out to screen potential tenants, track down overdue rents and field middle-of-the-night repair calls.

Adjust your expectations — Ignore those late-night infomercials, the ones that promise huge returns with no money down. Experienced landlords agree that the up front costs are usually higher, and the returns lower, than those promoters would have you believe. “Lenders typically expect down payments of 20% to 25% for rental property,“ said Bill Moore, co-founder of
Landlord.com, “and some lenders want as much as 40% down.” Your loan will be more expensive than a typical residential mortgage, as well, because lenders believe investors are more likely to walk away from rental property than they are their own home.

How big a loan can you get? “Lenders usually will take into account 75% of the rent you could charge for units in determining how much they’re willing to lend you,” said Robert Cain, publisher of the Rental Property Reporter newsletter. “If you bought a duplex and rented each side for $500 for example, the lender would consider 75% of that total —$750—in determining
how much you could borrow. If you rented one side and lived in the other, $375 would be added to your monthly income to come up with the size of your loan.”

Find good tenants. Not everyone is so delighted with being a landlord. Scott and his wife bought a duplex in Lakewood, a suburb of Cleveland, two years ago. Strapped for cash, they rented the upper unit to the first couple who showed up on their doorstep. “We knew we probably should have run a credit check,” Scott said, “but we needed the money to pay the
mortgage.” The couple turned out to be the tenants from hell. When the husband wasn’t punching his wife, he was punching holes in the walls. The couple sold drugs, stole Scott’s tools and had screaming arguments in the middle of the night— right over the heads of Scott’s two children. They also stopped paying the rent. The tenants were eventually evicted, but so
were Scott and his family. They had fallen so far behind in their mortgage payments that the lender foreclosed.

Other landlords say such disasters can be prevented by putting in more work up front. “The key is screen, screen, screen,” Carolyn, a landlord in Houston , wrote recently on the Star Investing Community. “Verify references, ask questions.” In addition to running credit checks, Carolyn calls previous landlords to ask whether tenants paid their rents on time and kept their apartments clean. She believes such diligence is one reason she’s only had to evict once in seven years.

“Credit checks can be done for less than $10,” said Cain, who offers such services on his web site. A more complete report, which includes a public records search for lawsuits, previous evictions and criminal convictions can be had from tenant-screening companies for about $20. Cain takes the extra step of making sure the phone numbers applicants list for their
employers and previous landlords actually match the publicly listed numbers. That can help ensure the applicants isn’t simply directing him to a friend who’s been instructed to provide a phony reference. “I always tell people there are two primary times when a landlord gets into trouble,” Cain said. “When he’s in a hurry, or when he feels sorry for someone.”

You can, of course, hire a property manager to do all of this for you. The manager can also handle the repairs, tenant disputes, midnight move-outs and neighbor complaints, all for a flat fee or a portion of each month’s rent. Some landlords have good experiences with property managers, while others feel that no one cares as much about their investment as they do.
Such an arrangement also can eat up 10% of your rental income, which could consume most of your profit, depending on the property.

Get educated. “If you’re still interested in being a landlord, you have an important task ahead: learning the landlord-tenant laws in your area. Potential and current landlords should educate themselves thoroughly on their rights and responsibilities, Cain said, exercising particularly
caution when it comes to rental agreements. A poorly worded or outdated form, for example, can make getting rid of a problem tenant expensive, if not impossible. “Professional bad tenants know the law...and landlords can be so stupid,” Cain railed. “They won’t spend 50 cents for a new form but they’ll spend $2,000 for an eviction.

Local landlord associations can provide up-to-date forms, education and legal help.

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