For the past few years, I’ve been a landlord of a few rental properties from a high-rise condo unit to a low-rise pre-construction home to a fixer upper resale home. However, I’ve never owned a multi-residential building before – that’s a totally different beast (I’ll love to have enough money to own it some day). I’ve experienced the highs of doing very little to manage my rental properties and collecting the awesome monthly rent cheques. On the other hand, I’ve also gone through the lows of dealing with terrible tenant issues at very inconvenient times and fixing things that my tenants broke. In this post, I will share my beginner’s guide to owning rental properties through my experience of owning/managing multiple rental properties.
Cash Flow Projection
Different people have different goals when they invest in rental properties. Being a landlord, my goals are simple. I want to make money in the long run, own rental properties that can provide me with a stable income and do not require any additional funds after the initial investment. Before I purchase my rental properties, I do an estimate cash flow projection for the first year to ensure that my cash flow goal is met. Depending on your financial situation, being able to purchase rental properties that provide you with positive cash flows will give you a great deal of financial flexibility.
Purchasing The Right Rental Properties
When it comes to investing in rental properties, it’s important to purchase properties that fit your investment budget. Ideally, the rental properties should be within an hour drive from your own residence as it makes managing your properties easier. The properties should be located near public transit to maximize your target custom base when you rent it out and capital appreciation when you sell it. Check out my “how to buy an investment property: step-by-step” post for a walk through of the rental properties purchasing process.
Fix All Issues Before Renting Out your properties
Time is money. When you save time, you save money. In no other place is this saying truer than in rental properties. If you fix all the issues before renting out your rental properties, you’ll get fewer service calls. There will be a lower chance that you’ll have to fix any major issue that started out as a minor issue that you didn’t want to fix previously. With minimal issues, your tenants have no excuse not to pay you rent. You can also upsell your rental properties to potential tenants as higher quality and well-managed properties comparing to what’s available in your target market.
Know Your Local Landlord Tenant Act
To protect your investment, you need to arm yourself with knowledge of your local by-laws. You need to have general knowledge of the Landlord Tenant Act. Since I live in the province of Ontario, it’s called the Residential Tenancies Act. With general knowledge, I know what my rights and responsibilities are and what my tenants’ rights and responsibilities are. When it comes to dealing with problematic tenants, I will use this knowledge to ensure that I limit my legal liabilities. On the other hand, I can also use the legal framework to exert my legal authority as a landlord to protect my rental properties.
With the help of the Internet, looking for potential tenants is easy and very cost effective. Personally, I’ve never paid any service fees when I am searching for tenants. I personally use the real estate section of the Kijiji.ca website to advertise my rental properties for free. Facebook rental groups in your local area and Craiglist.ca can also be used for free too. If you really need to, you can hire a Realtor to assist you by listing your property for rent on Realtor.ca.
Tenant Screening Process
If you plan to own rental properties for the long run, you need to set up a tenant screening process. This process will help you mitigate the risk of renting to professional tenants that I mentioned in another post. The more checks you do, the harder it is for the professional tenants to take advantage of your rental properties. You can use either Equifax or TransUnion to obtain a credit report on the potential tenants. Ask for previous landlord reference letters, employment letters, a government issued identification and any documentations that you can legally request. The more due diligence you do on the potential tenants, the lower the chance that you’ll rent your property to professional tenants.
To ensure that I have a paper trail of all my communications with my tenants, I set up an email account specifically for that purpose and I let me tenants know that I check that email on a daily basis and will respond to any emails within 48 hours. If they need to contact me urgently, they can either call me or my partner. It’s also important to have the emails and contact info of all parties written in the lease. When it come disputes or conflicts, you’ve got evidence and written documentation to support your arguments.
Dummy Proof Your Property
The more you do to dummy proof your property, the fewer issues and service calls that you’ll get from tenants. It’s not that often that you rent to bad tenants, but you will get a bad tenant from time to time. When you do, it’s not that easy for you to get rid of them when the lease term hasn’t ended or they are still paying rent. The way around it is to dummy proof the property so that it’s less likely to suffer irreparable damage from bad tenants. A preventative measure is less costly than replacement renovation.
Communicate Your Expectations
Before signing the lease with a tenant, I clearly communicate my responsibilities and the tenants’ responsibilities to ensure that we are on the same page regarding my policy on rent, maintenance and service calls. It’s also important to set the expectations for my tenants that their responsibilities are to pay rent on time and to use the utilities and appliances in a responsible manner. I will conduct my business by the books to protect my investment such as providing them with written notice if they don’t pay rent on time. By communicating your expectation at the beginning it minimizes any potential future conflicts and misunderstandings.
Never Provide The Keys Before Receiving A Deposit
If you have not been familiarized with the term professional tenants yet, I’d recommend all current and future landlord gets familiarized with this term. Professional tenants know the loopholes of the law and use it to take advantage of unsuspecting landlords. I recently read a story about this well-coiffed, professional tenant who was able to con his landlord to provide him with the keys to the property and had not paid his landlord a single dime of rent. Hence, I will never provide the keys to my castle before the tenant provides the cash.
Property Maintenance Responsibilities
It’s important to clearly document certain responsibilities such as mowing the lawn, shoveling the snow and disposing of trash around the property. My property got fined by the city for putting the trash bins a bit too far beyond the curb and it was about $500. That was a costly and unnecessary expense. In addition, if you don’t mow the lawn, the city can also fine you. To ensure that you don’t incur any unnecessary expense, make sure that your document the property maintenance responsibilities clearly in the lease.
Whether To Hire A Property Management Company
Depending on if you are a hands on or hands off landlord, sometimes hiring a property management company to assist you may make sense. To ensure that I have control of screening the tenants and to keep more of my rental revenue, I decided to be a hands-on landlord. However, if you just want to invest and do not want to deal with tenants, outsourcing to a property management will lighten your workload. The service fees that you paid will be used to offset your rental revenue and pay less income tax.
Invest With A Partner
As I’ve covered in “the benefit of investing with a partner” post, having a partner to work with you to manage your rental property is crucial. You’ll have more resources to do the administrative work and handling service calls. The complimentary skills of the partners allow you to divide work based on expertise. Most important of all, having a partner means more financial power and flexibility. It also lowers the financial and cash flow risk for both partners.
Depending on if you are paying the bills or your tenants are paying the bills. If the tenants are paying the bills, make sure that you have the bills transferred to the tenants’ names. If they missed paying a bill or not paying a bill at all, it’s their credit that they are affecting, not yours. On the other hand, if you are paying the bills, make sure that you keep the receipts so that you can claim those as expenses to lower your annual rental income taxes.
Rental Income Tax
When it comes to taxation, rental incomes doesn’t get any tax incentives. All rental incomes will be treated as regular income and taxed at your highest tax bracket. To ensure that I minimize my income tax bill, I borrow both the down-payment and mortgage (I can discuss this in another post) so the interest that I paid will be used to offset my rental revenue. In addition, I offer to include furniture and appliances to tenants. I also get to write off a percentage of the furniture and appliances cost as depreciation. Lastly, the spouse with lower income owns a higher percentage of the property so that more of the rental income will be taxed at a lower rate.
Keep All Your Receipts
Any expenditure related to the rental property such as hiring a contractor to fix plumbing issues or utility bills or property tax bills can be used to lower your rental income. To ensure that you keep more of your money, keep all receipt for income tax reporting and documentation purposes. If you ever get audited, with supporting documents, you can comfortably justify your expenses easily.
Provide Depreciable Equipment and Furniture
As I’ve mentioned in another section earlier, providing furniture to tenants can provide more benefits in addition to just lowering your rental revenue. You can charge a higher rental rate if furniture is provided. You may have a competitive advantage over your competitors when it comes to tenants that don’t want to spend money to purchase furniture. Depending on how you structure your lease, you can ask for an additional deposit for the furniture.
Service Contractor List
I cannot stress enough about the importance of having a list of servicing contractors’ contact handy. I had the furnace of my rental property broke down in the dead of mid-winter. Some Tenants broke a pipe in the kitchen during a long weekend. Another tenant broke a toilet and called me at midnight. So having contacts to service companies not only save your money, it can also save your rental property from ruin if an urgent issue is not being dealt with in a timely manner.
Do Regular Maintenance Checks
Before I sign the lease, I often communicate to my tenants that I will be conducting maintenance checks on my property once every quarter of the year. I will give them the proper notice of at least a minimum of 24 hours before conducting my regular maintenance checks. By conducting the regular maintenance check, I accomplish a few goals. First, I am ensuring that all the major appliances are working accordingly. Secondly, I can fix any issues to prevent them from getting worst. Third, I am able to assess the quality of the current tenant. Last, but not least, I am communicating to my tenants that I am a responsible landlord and will keep my rental property in tip top shape.
When it comes to making a profit in my rental property, I am content when I reach a certain amount of positive cash flow. I tend to provide incentives to good tenants to encourage them to extend their leases so I spend less time finding new tenants. One option is to implement a rent freeze for returning tenants. I may also invest in better appliances and not charge my current tenants extra.
Upgrade To High Efficiency Appliances
Depending on if you are paying the utility bill or not, you may way want to upgrade your property with high-efficiency appliances and fixtures. Since I rent my properties out inclusive of everything, I upgrade all my light fixtures and appliances to high efficiency so I’ll get fewer service calls due to the high quality of the appliances. I also save money on my utility bills and it’s better for the environment.
Do Not Become Emotionally Attached To Your Property
I am a perfectionist and I want all my properties to show well and attract potential tenants easily. So when I prepare my property for rent, I put a lot of detail and effort to make it presentable. However, once the tenants move it, they don’t value your property the way you do. They will scratch the walls, leave unconsumed food out for days or even weeks. I was quite emotionally attached to the properties and was bothered by some tenants’ irresponsible usage of the property and it creates a bit of unnecessary stress for me. For my own health and happiness, I decided to become emotionally detached from the rental properties and just treat it as a business.
It doesn’t matter how great your current tenants are or how great their reference was, sometimes, dream tenants can become a nightmare tenants when a tenant and landlord relationship breakdown (I’ve experienced it before and it’s not fun at all). The breakdown of the relationship can be for a variety of reasons, but your goal is to minimize the financial impact of this relationship breakdown. In another word, cut your losses. Hence, it’s critical for any landlord to have a thorough knowledge of the tenant eviction process. Arm yourself with this knowledge and check out LegalLine.ca‘s how to evict a tenant article.
Create A Rental Policy
When I first started my rental business, I didn’t have any policy in place and I had to learn a few lessons the hard way. After that, I decided that I will operate my business by the books, meaning I will provide written notice if tenants are late with rent. This will protect my investment against professional tenants and minimize the risk of non-rent payments for a prolonged period of time. I will also maintain my distance from my tenants as I have experienced tenants taking advantage of my easy going nature.
Build A Reserve Fund
I personally don’t believe in keeping reserve funds. I believed in having access to funds. However, this is a rental property and I am at the mercy of tenants that I have no control over their actions. In this case, the risk manager in me forces me to build a reserve fund to minimize the negative impact of my rental properties on my personal finance. Having a reserve fund will allow me to pay for emergency renovations or a sudden breakdown of appliances or keep my rental property operation even if I am facing unplanned financial costs. Depending on your comfort level, my reserve fund ranges from $5,000 to $10,000.
Re-evaluate Your Property
From time to time, you may want to re-evaluate your rental property. You may need to decide if the property is still a good investment or if the amount of time that you spent on maintaining/managing the rental property is still inlined with your lifestyle. The assessment will also allow you to analyze the profitability and the actual cash flow of the property comparing to your original projection before you purchase the rental property. I’ve sold a couple of rental properties that did not meet my cash flow needs and re-invested the proceeds in more suitable properties.
My Two Cents
Being a landlord is not easy and it requires a lot of hard work. This type of investment is not for everyone, especially if you don’t like dealing with people. If you have a partner to share the workload and financial risk, things will be a bit less challenging. On the other hand, owning rental properties is a great way to accumulate wealth and build income generating assets. If you put in the hard work, you’ll be rewarded eventually.
Is owning a rental property in your wealth building plan? If you own a rental property, what other tips will be useful for the aspiring landlords? What type of landlord are you, hands on or hands off?