Residential Rentals

[Todd Sachs]

How many improvements should you make? Do you need a property manager? How do you find good tenants?

So you have decided to invest in residential rentals! Whether you’re keeping your day job and want passive income or you’ve decided to make this a full-time career, each investment property you own demands time, attention and a lot of practical know how to remain profitable.

I have been a successful landlord for over a decade, but it took me several years and quite a few mistakes to learn how to make money with my residential rentals. Hopefully, I can help save you time, money and aggravation by sharing some basic tips.

How many improvements should you make to your rental?

There is really no end or limit to what you could do to your rental prior to renting. So when do you stop? In considering how much to renovate and upgrade, I always analyze how much the unit will rent for and what the competition is offering. Then, I always do what is necessary to ensure the residence is clean, safe and functional:

• Make sure it is extremely clean and free of odors.
• Give it a fresh coat of paint. Flat paint on the walls and ceiling is less expensive than eggshell and it’s easier to paint over again. I typically have to paint each time I switch tenants. Semi-Gloss on the doors and trim.
• If I have carpet, I make certain it’s in fairly good shape and free of major stains. If the carpet is in bad shape, I replace it with a mid-grade contractor carpet and the least expensive padding. I usually pick a color that hides most dirt like light brown.
• Make sure everything is safe and up to code (electrical, smoke and carbon dioxide detectors, etc.).
• Make sure everything works and repair or replace as necessary (garbage disposal, dish washer and microwaves are typically the first to need repair).
• Consider the pros and cons of supplying a clothes washer and dryer. This is a tough call. I have seen the provision of a washer and dryer abused. I once had a tenant that decided to wash all of her husband’s coworker’s laundry for a fee. They racked up water bills in the thousands, never paid and moved out. Take into account whether your tenant is paying the water bill. Also, repairing washers and dryers can be very costly, sometimes as much as a new appliance.
• Think about what repairs and renovations can prevent future hassle and aggravation. For example, if the roof is questionable – install a new roof.
• Finally, when determining improvements, remember that some renters have more modest expectations then others, so certain upgrades may not be necessary.

Should you hire a property manager?

This is important to consider when going into the rental business. Property managers typically charge 8-10% of gross rents and charge up to 100% of the first month’s rent (placement fee).

I manage my own rentals, and quite frankly, having a great handy man on call is the key to doing this (unless you have home improvement skills and time). Here are some of the tasks required when managing rentals:

• Managing improvements (painting when tenants turn over, new carpet installation, appliance replacements, etc.)
• Screening tenants
• Collecting rent
• Taking all calls from tenants (my toilet keeps running, the garbage disposal doesn’t work, the neighbor upstairs is making too much noise, etc.)
• Inspections and violation notices (section 8 annual inspections, fines for tenants not putting lids on trash cans, etc.)
• Collections and evictions

How do you find the best tenants?

Screening potential tenants is the single most important part of being a successful landlord. This will make or break you! A bad tenant will cost you money, cause stress and make you wonder why you ever decided to become a landlord. Here are some important guidelines for finding good tenants:

• Income: I always make certain the total rent is less than 35% of their gross income.
• Credit: Although I do allow some slow pay on a prospective tenant’s credit report, I always look for judgements and evictions. I consider a credit report as a major factor to the credibility and character of the tenant. People go through tough times and bad credit doesn’t always mean bad people. I ask them questions about bad credit and then make my call based on their response.
• Criminal Background Check: Would you rent to tenants convicted for sex offenses, felony theft or violent crimes? You might look at all convictions case by case and ask questions to determine their eligibility (each state may or may not have laws regarding criminal discrimination).
• Pets: NO DOGS (unless they are service dogs) PERIOD! I will allow up to two cats, but the tenant must pay an additional security deposit of $100 each.
• Proof of Income: I require paycheck stubs for the last month (at least two recent stubs). If they receive cash (bartenders, hair dressers, etc.), then I ask for last year’s tax returns.
• References: Ask for references other than family (call at least three references). Ask for a recent landlord’s number and information. This will be a true testament to their rental history.
• Occupancy: Most state laws mandate a maximum occupancy of two persons per bedroom. Also, I make sure that anyone over the age of 18 is on the lease no matter if they’re children of the tenant or not. This binds all adults to the terms of the lease.
• Smoking: I want to know if they are smokers. I do not allow smoking in any of my rentals.

Overall, owning rentals has been a great experience. You get to depreciate the house structure and deduct any and all improvements as well as interest loan payments on your tax returns. You will eventually own the property outright (if you have a mortgage) which will provide a great income source now and in the future.

Making the right decisions can make owning rentals both a rewarding and a profitable experience. Want more information? Let’s set up a meeting to get you started making money, one rental at a time! 

Thanks for reading!  I appreciate hearing feedback; landlords, do you agree with me?  

Todd Sachs - Realtor in Maryland