Acquiring A Rental Property For Passive Income
By Paul Esajian on August 11, 2014
Acquiring a rental property for passive income is one of the best ways to generate long term wealth. From the outside, it may appear that all you have to do is find some tenants and wait for checks to roll in. But being a landlord is much more difficult than that. It is often a shock to many new landlords just how much work is involved in keeping up a successful property. From handling money, finding good contractors, and keeping the unit occupied, there are many areas that need your constant attention. If you are a new landlord, there are some basic areas that will warrant your attention if you are going to have a successful rental property.
The most important aspect of any rental property is in dealing with the bottom line. Before you take ownership, you should do your due diligence on all of the numbers involved to know exactly what you are getting into. Even if you have seen previous bills and have an idea of what to expect, you should have an accounting and budgeting system in place from day one. Every dollar that goes in and out of the house should be accounted for. Often times it is the little things with new investors that are overlooked and end up lowering the bottom line. Having an accountant for your first property is probably not realistic, but you need to have some accounting system in place that can track all of your expenses. If you don’t know where your money is going, there is no way to tell if you have a profitable property.
It is also a good idea to keep your personal and real estate accounts separate. Even if you only have one or two properties, it is easy to commingle your funds and get confused. This is especially the case if you are holding security deposits and need to put the money in an interest bearing account for at least a few months. This amount will be minimal at best, but any interest is due to your tenants when it is time to move out. If you put this money in a savings account or need to withdrawal money to do any work you are setting yourself up for trouble down the road if you continue to take without promptly replacing it.
Aside from budgeting and financial responsibilities the next area that causes the most issues with new landlords is in dealing with and finding reliable contractors. Instead of scrambling around in short notice looking for someone it is much easier to have people at the ready you can call. Between plumbers, locksmiths and general contractors the odds are you will need one of their services over the course of your lease. Even the best properties and best tenants are not immune to a clogged toilet or minor furnace repair. Getting a call in the middle of the night saying that there is no heat is certainly not a good feeling and may lead you to overpay to get the job done quickly. The alternative is to try to develop and cultivate relationships before you need them. Not only can you quickly call these people in a pinch but you will feel confident that they will do the job right and at the best price.
Most new landlords fail to place enough emphasis on finding the best tenants for their property. They spend days finding a plumber who will do a job for $50 less but will rent their property to the first live body that shows interest. It can be slightly nerve wracking if you are getting towards to end of an existing lease but this doesn’t mean you shouldn’t spend time screening new applicants. Aside from an injury to your tenants or damage to your property an eviction is the most damaging thing that can happen to your property. Because of this it stands to reason that you should spend ample time in finding the most qualified tenants. This starts with giving each tenant an application, going through it and contacting any references. It is a sad reality but there are many tenants who go from house to house looking for weak landlords. Even if you are closing in at the end of your lease you have to take the time and screen all prospective tenants.
Finally it is important to remember that owning a rental property should be treated like running a business. This means that while you can be nice and fair with your tenants you also need to exhort your authority if they are late with their rent or not taking care of the property. If you let the first payment slide a few days you are setting yourself up for this to continue for the remainder of the lease. You should be the one in charge and if rules are broken you have to have consequences for your tenant. This doesn’t mean you can’t be sympathetic if something short term comes up but you need to run your property as a business even if this means issuing a late fee if the rent is not received on time.
Owning a rental property and taking care of everything yourself can be very overwhelming if you are not prepared to handle it. If you focus on finances, having people to call if problems arise and finding good tenants you will have a good foundation for everything else. Being a landlord is not easy but it doesn’t need to be any harder than it has to be either.