Being a successful landlordmeans more than collecting rent from your tenants. Sure, rental income is your primary source of cash flow. But making a healthy profit as a landlord requires managing properties and tenants properly. Even the way you collect rent from tenants can affect how profitable your business is.
Of course, many startup landlords hope to start earning passive income. However, to get to that stage requires a lot of work and organization. The best way to know how to run a lucrative landlord business is to learn from those who do it well.
Profitable landlords are on top of everything, from maintenance to late payment fees. To make sure you become a profitable landlord, it’s worth avoiding typical rookie mistakes and pay close attention to the following list
Top 8 Secrets of Profitable Landlords
1. Profitable landlords know their numbers
It’s not enough to calculate a mortgage, add on the profit you want, and rent out a property for that amount. There are a ton of other numbers you must consider. Here are just a few:
Maintenance and repairs
Vacancy rate (approximately 8% of the rent)
You may also want to consider a property manager, particularly if you have to manage many rental units. However, for startups, the cost of a property manager usually makes it an unviable investment.
Profitable landlords are always realistic, even though they always consider the worst-case scenario to ensure they have the cash flow available.
2. Successful landlords know how to find the right rental properties
The best landlords keep their emotions out of business. It’s easy to find a property that you fall in love with. But a bargain price tag doesn’t always mean it’s a good deal. After all, it’s paying tenants that make a rental business successful, not a cheap property.
It is essential to have a good knowledge of real estate, especially in your local neighborhood. You need to know how much people are paying for rent in the area and for different properties. Consider what amenities are close by—for example, schools, public transport, shops, and physicians. Is the property in a safe neighborhood? The most profitable rental units are the ones that attract good tenants, who pay their rent on time.
3. Savvy landlords are aware of tax advantages
Don’t wait for the IRS to knock on your door and tell you how to reduce your tax bill. Profitable landlords will research tax information and determine exactly what expenses are deductible and what aren’t—saving a ton of money.
To be a profitable landlord, get professional real estate tax advice. States have different real estate tax laws, and you need to know what you can deduct. Generally, you can deduct mortgage interest and expenses from buying the property. If you are working from home, you may be able to deduct some household expenses.
It’s highly recommendable to hire an accountant to guide you through the tax process. They will save you money on your tax returns and make sure you aren’t making any expensive mistakes.
4. Landlords aren’t out to make friends
There is a balance between being a fair and reasonable landlord and trying to make friends. Successful landlords are kind, respectable, and reachable. However, you also don’t want to be dropping in for coffee every other week.
There’s a problem with being too close to tenants—they may feel that it’s OK to overstep boundaries. They might start by paying rent a little late. Or they could think that they can call you day and night for trivial matters.
There’s another problem—having a personal relationship with tenants makes it more challenging to increase rent. Even if the rent increase is in line with current rental rates, they may feel hard-done-by.
However, if you are looking at multiple properties, you don’t want the reputation of being the horrible, distant landlord. Being friendly and listening to your tenants’ needs will encourage them to speak well of you and attract more tenants.
5. Always screen tenants
The best landlords know the importance of thoroughly screening every tenant. Don’t be tempted to take on any tenant because your property has been vacant for a while. If you panic, you rush the process and cause yourself costly problems in the future, such as expensive evictions.
Most people’s applications will look perfect, but you can’t rely on everyone being completely honest. Your screening process should include checking with listed references, background checks, and credit reports. Despite being time-consuming, you will get a complete overview of your tenant. Profitable landlords will also check if tenants have renter’s insurance, just in case there are any issues.
6. The best landlords report tenants to credit bureaus
Profitable landlords understand the benefits of rewarding on-time rent payers and punishing those who are late—it’s the fair thing to do. Tenants who know you report to credit bureaus are less likely to fall behind on payments, which means fewer evictions to deal with.
On the plus side, reporting those tenants who pay on time is a massive benefit for them. You help build their credit score, and most tenants prefer when landlords report rent to credit bureaus. Having a healthy credit score will make it easier for them to apply for credit or a mortgage in the future.
7. They are exceptionally well-organized
Being organized from day one is an absolute must. It is good to get into an organized habit even if you’re starting with just one property. Ensure you have a well-organized system that you can scale up when you expand. You will need to keep a record of:
Rental payments (due dates and late fees)
The payment of property taxes and insurance
Copies of insurance policies
Certificates and necessary inspections
Paperwork is always a bit of a nightmare. But it is critical to be organized in this area and have a thorough paper trail in case of any legal or financial problems. It would help if you also made sure that there is a digital copy of everything in case hard copies are lost or damaged.
8. Profitable landlords invest in being organized
If you are starting with one or two properties, you might be able to keep on top of everything with paper copies. But suppose the number of properties starts to increase and you still have your day job. In that case, a property manager can be a worthwhile investment.
Property managers can take away many of the day-to-day tasks of a property rental business, like maintenance, repairs, rent collection, property marketing, and tenant acquisition.
Profitable landlords also invest in rent collection apps or property management software. These solutions offer ways for tenants to pay rent online and keep digital records of financial transactions. Some also include tenant screening, credit reporting, and built-in chat to communicate with tenants about any issues. Rental apps can save a great deal of time and make organization more streamlined.