To many Ventura County residents, the idea of owning rental properties is probably very intriguing. Who wouldn’t want to own multiple properties where someone else is paying down your mortgage while hopefully providing you with additional cash flow on top of that? While owning rental properties can definitely have rewarding financial benefits when done correctly, there is also the reality of being a landlord. You can always hire a property manager to handle most aspects of “land lording” for you, but of course this will be an additional expense. In Ventura County where it is becoming more and more difficult to find homes that you can break even with, not to mention make a profit, a property manager may not always be the best solution. The alternative is to handle the managing aspect yourself, but this opens up a whole different can of worms. We have all heard horror stories about phone calls at midnight for an overflowing toilet, tenants destroying your property or not paying rent, and the headaches of having to go through a long, drawn out eviction process. Since California is known as a tenant-friendly state, you want to avoid as many issues as possible by doing your due diligence BEFORE you rent out your first property. This will be the first in a series of posts of how to prepare yourself and your home for rent.
There are various reasons why you may want to put up your home for rent. As mentioned above, most people recognize that having a home for rent is an incredible opportunity to start building wealth. But there are also those who become “accidental landlords” out of necessity. Perhaps you are being temporarily relocated for work, but your plan is to return back to your house at the end of the relocation. In this case, a good option would be to rent out your home until you return. There are others who may be underwater on their home and realize that renting the home can help pay down the mortgage while they wait (and hope) that property values increase. Or maybe, like my wife, you are moving to a new area and selling your home would not be worth the closing costs. In this case, my wife found that she now had a home for rent, even though this was never her intention. Whatever your case may be, following the appropriate steps will help ensure that your home for rent will encounter as few headaches as possible.
Getting your home for rent “tenant ready”
One of the first things that you want to consider is what condition you want your home to be in. If your home is fairly new and up-to-date, this may not be an issue. However, if your home is older and/or has deferred maintenance, you will probably want to put some money into getting your home for rent into a nicer condition. At the very least, your home should be clean and not need any major repairs. On top of that, how far you want to go with improving/upgrading your home should be dependent on the area you live in and what other homes for rent look like. You never want to overdo it with the upgrades, as most renters will not pay much more than they can find other rentals in the area for. Not to mention, most renters will not take as good of care of the home as you would, so you do not want to spend an excessive amount of money on items that you may need to repair/replace in the future. A good idea would be to do some research and see what other similar homes for rent look like in the neighborhood. To get the most bang for your buck, you want to make sure that your home is in a similar condition to those homes.
Managing a home for rent
Another one of the first things that you are going to want to decide is how you are going to manage the home. Are you going to use a property manager or do it yourself? This will be one of the key factors in analyzing what your expenditures and expected return will be. Property managers do not come cheap, and while rates may vary, you can expect to pay a property manager about 10% of your monthly rent. Also, when a tenant moves out and the property manager must find a new tenant for your home for rent, expect to pay about 50% of the first month’s rent every time this happens. As we will get into in a future post, the ability to minimize tenant turnover will be crucial to reducing your losses due to vacancy as well as property manager fees. Some of the duties that you can expect a property manager to take care of are as follows:
– Marketing for and finding new tenants
– Doing the initial walkthrough and signing leases
– Collecting rent (and late fees)
– Answering phone calls from tenants
– Handling maintenance issues
– Handling evictions (not including lawyer fees)
If you are not going to use a property manager, of course you are going to have to do all of these items yourself. If you have only one home for rent and have the time and willingness to do this, this may not be an issue. As a word of caution, there are many instances where a landlord feels that they do not need a property manager and does not budget it into their expenses. But all it takes is a few late night phone calls or trouble tenants to make these enthusiastic owners loathe the day that they ever decided to rent out their home. Some experts suggest that you should always budget for a property manager, even if you do not plan on using one initially. That way, if you ever have to hire a property manager, for whatever reason, you have the money to do so. And if you never end up using one, that is just more money in your pocket.