Investing in a rental property provides exciting opportunities, but it can leave you with a lot of questions. Do you become a self-managing landlord, or hire a property manager? Do you tend to maintenance issues yourself, or find preferred vendors to hire? The varying responsibilities of owning and managing an investment property can take its toll, but knowing why and how to outsource those responsibilities can give you a head start.
What You Need to Know About Becoming a New Landlord:
If you plan to self-manage, there is vital information that you need to know before you begin your journey as a new landlord. Having a solid understanding of laws and regulations regarding housing, a general knowledge of property maintenance and responsibilities, and a good grasp of the importance of tenant screening, as well as how to market and keep tenants, will all serve to help you to find success and protect your investment long term. Here are the key areas of importance when becoming a landlord:
- Understand the Fair Housing Act: The Fair Housing Act prohibits landlords from using any of the following criteria when evaluating prospective tenants: race, color, national heritage, religion, gender, disability, and familial status. You cannot deny a dwelling, set different criteria for the dwelling or provide different housing services or facilities based on those protected classes. While the Fair Housing Act is key to understand, you must also be aware of your state rental laws and local ordinances to fully protect yourself from a sticky legal situation. Every state has different limits on security deposits, late fees, etc.knowing the laws that apply in your state through a state-specific lease will keep you on the correct path since this knowledge can help you write a lease agreement in-line with state statutes.
- Develop an Understanding of Property Maintenance and Essential Costs: Property maintenance is crucial to maintaining your investment. Seasonal and annual maintenance tasks can prevent costly damage and unnecessary expenses. Consider what needs to be done, and whether you will tackle these tasks yourself or hire a professional. Remember, habitability is a key requirement for providing housing, and delaying on maintenance can be costly for you and unsafe for your tenants. Understanding how much you need to save for repairs, and keeping in mind that vacancies can happen (and will cut into your bottom line) will keep your investment afloat no matter what situation you find yourself in.
- Research Tenant Screening Best Practices: Landlords should use financial data, credit histories, and other background data to evaluate potential tenants. A landlord should always verify the rental applicant’s credit, employment/income, criminal background, and eviction history. Good tenant screening can check for any red flags and help you avoid tenants who have been fiscally or socially irresponsible. Written tenant screening policies can ensure that you are unbiased and aboveboard when reviewing applicants.
How to Know if You Should Hire a Property Manager for Your Rental:
While hiring a property manager is markedly more expensive than self-management, it also comes with less risk and a lot more time to invest in other important areas of your life. While there are key questions to answer when considering hiring a manager, there are absolutely some great benefits to taking that step. To fully understand the pros and cons of hiring one, you first need to understand what a property manager does.
- The basic tasks of a property manager: Property managers assist owners with the nitty-gritty details of maintaining a rental. They have a full understanding of market rates, marketing tactics, legal obligations, and maintenance requirements all pertaining to the rental industry. This means that you will not need to spend countless hours researching how to market your property, where to set your rent and when to raise rent as well as how to legally find great tenants and create and enforce lease restrictions.
The Pros of Hiring a Property Manager:
Hiring a property manager can allow you to collect passive income without tearing out your hair. Managing a rental property as a new landlord can be a chore, or even a full-time job, and passing the burden of those responsibilities onto a seasoned professional can give you peace of mind. It can also free up your time to allow you to grow your financial success elsewhere, leading to potentially more investments down the road.
Perhaps more importantly, hiring a property manager allows you to pass along those legal responsibilities. A part-time or new landlord may not have the knowledge or time to invest in researching ever-changing real estate legislation, however, a lack of understanding won’t protect you from legal action. Many states require property managers to acquire proper licenses in order to legally manage rental properties which include education on landlord-tenant laws.
Hiring a real estate professional who will keep abreast of new laws, and will provide you with their expertise is extremely useful. Along with this legal knowledge exists an in-depth understanding of your local real estate market and property inspection and maintenance tasks. Here are some specific examples of tasks your property manager will take on in your stead:
- Navigate the eviction process: Although many of us don’t want to think about the worse case scenarios, it is important to become familiar with the eviction process and be ready to start the process when a tenant violates the lease. All states involve the same general eviction process. The landlord must serve the defaulting tenant with a notice, wait a specified period of time, file in court, attend a court hearing, schedule a date for the actual eviction, etc. In the event that an eviction becomes necessary, the right property manager will know the correct steps to take to make sure everything is handled appropriately. If the proper legal steps leading up to an eviction are not followed, the lawsuit could be dismissed in court, resulting in wasted time and money. Not to mention, you still have a lease-breaking tenant in your rental property.
- Handle all tenant turnover tasks: Tenant turnover involves a lot of additional work. Managers handle walkthroughs, marketing, tenant screening, and ensure that new tenants understand lease requirements. They also take care of inspections to verify the condition of the unit upon move-in and move-out.
- Rent Collection: Property managers assist with setting a rental price and their know-how allows them to hit the sweet spot of rent pricing that allows owners to capitalize on their investment while maintaining a regular tenancy. They create a policy for collecting rent from tenants that can include personal checks, online payments, certified funds, or cash. A property manager will also deal with late payments, unpaid rent, and the process of evicting a tenant due to non-payment of rent. Furthermore, they will advise on rent increases when the time is right.
With all of these benefits, however, it is important to note that although a lot of legal issues will be deferred to the management company, the owner will not avoid all legal responsibilities and should review the risks with their property manager and attorney.
The Cons of Hiring a Property Manager:
Realistically, the cons of hiring a property manager boil down to your finical responsibility. Property managers are paid by the owner of the rental each month, typically 7-10% of the monthly rental income. In some cases, a property manager will charge a “leasing fee”, about one month’s rent, to an owner for finding a new tenant if the property is ever vacant.
If you are just starting out it can be tough to add another expense, and if you are a DIY guru with time on your hands, you may find that being a landlord and self-managing your rental property is a challenge you are happy to take on. As your portfolio grows, you may even find that you would like to build your own management team, become a property manager yourself, and start managing properties for other investors.
Becoming a new landlord or property investor opens up a lot of doors and exciting opportunities. Finding the best path for your needs requires a basic overview of the responsibilities of a landlord and property manager respectively, and an in-depth understanding of your current time and financial investment abilities, alongside your current skillsets. What you need to know as a new landlord or investor goes beyond simply rental knowledge. A property manager or landlord must wear many hats, and it is important to your success to decide what route will fit your lifestyle and overarching goals in the best manner.