What landlord fundamentals do you need to know to own/manage a residential rental property?
In an ideal word, rental properties would maintain themselves, and tenants would always be happy, grateful, pay on time, and stay forever. However, that’s not reality. Buying a rental property is a calculated risk that comes with the responsibilities of understanding which rental properties are the best fit for your individual situation. It also involves making choices about lifestyle, finances, maximizing cash flow, minimizing expenses, applying the landlord-tenant laws for your province, attracting, screening, and keeping quality tenants. WHEW! This article summarizes the fundamentals landlords need to build their rental foundation and is the first of two articles.
Landlord Fundamental # 1 – Do you want to be a landlord?
Before you jump into the real estate investment arena ask yourself what you want your real estate investment to achieve for you? Do you want a few houses that you own outright that will provide a retirement income? Do you want to build an empire so that you can become a full-time real estate mogul and leave your job? Do you want a legacy investment you can leave to your children or estate? Do you want short-term rentals that provide extra income for travel or luxuries? Begin with the end in mind and work forwards.
Things to consider
- How much management do you want to do?
- What type of tenant/s do you want to manage?
- Do you want to be the landlord or do you want to outsource to a property manager, or hire your own employee to manage?
Type of property
Since there are as many types of real estate investment options as your imagination can muster, ask yourself which property resonates with you.
- Do you want to rent out the basement suite of your house?
- Do you want to rent out rooms in your house?
- Do you want to own several single-family dwellings?
- Do you want to own a block of condos/townhouses?
- Do you want to own multifamily units? (Apartment buildings, 4 plexes, duplexes, 8 plexes)
- Do you want to own a rooming house or a student rental?
- Do you want to rent out vacation properties in different countries?
- Do you want to rent out Airbnb properties on a short-term basis?
There are pros and cons to each type of property. What are the pros and cons of each type of property you are considering? Interviewing property investors is a great way to get the scoop on the pros and cons. Real estate investor groups are also a good source of information.
Type of tenant
Finally, who do you like to deal with or what type of tenant do you like to manage? This may sound like a ridiculous question, but neighbourhoods and properties attract specific types of tenants, and most property investors prefer dealing with a specific type of tenant profile.
Your exit strategy
Built into your “why” should be your exit strategy. An exit strategy provides an understanding of how you intend to profit from each real estate transaction. Additionally, although we all like to believe we’ll live forever, never get sick, and nothing bad will happen to us, that’s just not realistic. Give careful thought to whether you want to sell, offer seller financing, sell to a tenant-buyer, flip, and sell, cash-out and refinance, or pass it onto family or the estate. Life circumstances can change, and your exit strategy may undergo a few iterations during the lifespan of your investment.
When it comes to real estate investing, one size does not fit all. There are as many types and ways to invest in real estate as there are people to invest. There is also an art and science to getting a decent return on your investment that involves education, research, luck, timing, maintenance, and learning the legalities of running a rental property business. Take the time to research your options to find the real estate investment that minimizes your risk and maximizes your profits.
After you’ve figured out your exit strategy, your management style, type of property and tenant, it’s time to crunch the numbers.
Landlord Fundamental #2 – How to Calculate if your property will cashflow?
If you want to own an investment tool that increases your prosperity, you need to know how to calculate the cash flow. To do that first calculate gross monthly income and effective monthly income and subtract expenses to calculate if the property will cashflow.
You already know businesses exist to make money and that real estate investing is a business. So you’ll understand then that it doesn’t matter how much you love the house, the neighbourhood, or the idea of owning a rental property. If the numbers tell you there is no cashflow, walk away. Your real estate investment should be supporting you, not draining your bank account. If it can’t do that, find another investment.
Things to consider
Gross monthly income is all the money your tenants will be paying you to rent your property including;
- Storage space
- Facilities such as conference rooms, gyms, lake access
- Tenants’ insurance (although this is usually a chargeback to the tenant for the monthly premiums)
- Pet fees
Effective Gross Income –subtract the bad debt and vacancy allowance from the gross annual income to come up with effective gross income
Know which expenses you can claim – there are basically two types; operational (day to day maintenance expenses) and capital (larger expenses that are not every day such as a new roof, new hot water tank, new furnace). The best source for this information is on the CRA website (rental expenses, capital expenses, and claiming capital cost allowance). Here is a link that includes a detailed breakdown of how to calculate if your property will cashflow.
Return on investment (ROI) is an indication of how productive an investment is. In the case of real estate, ROI will be the combination of income during the year and change in value of the asset during the year.
Cashflow- Ideally, when you purchase an investment property, you don’t want to fund the property from your own income. If you need to fund the property, you’re limited to the number of properties you can invest in because they are taking away from the money you need to live your life. Cash flow is calculated by including everything you will need to fund the property. This includes all the expenses that you’ve calculated so far and adds in the principal payment as well.
Landlord Fundamentals #3 – Attracting the best tenants for your property
It’s easy to get caught up in the excitement of buying a rental investment, I sure did. But buying an investment property at a reasonable price in a desirable neighborhood is only half the equation. The other half is the tenants. Without tenants, you don’t have a rental business. Let me clarify, not just tenants, quality tenants. Quality tenants pay the rent on time every month and take good care of your property.
It’s impossible to make any profit with bad tenants. Vacancies, non-payment or late payment, repairs, and renovations drain your bank account. Bad tenants make bad neighbors which make the community go downhill. They also wear your nerves down to a pulp.
To attract quality tenants – tenants need to find your advertisement. If they like your pictures and description, it’s in the area they want, and it fits their budget, they’ll text or call to set up a showing.
Things to consider
- Where to advertise – there are different online platforms landlords use with success – they are usually specific to the areas. Popular platforms landlords in Alberta use to advertise their properties include Facebook Marketplace, Facebook regional rental groups, Rentboard, Rentfaster, and Kijiji, among others.
- Writing an ad from the tenant’s perspective requires a catchy, descriptive short headline, a body of the ad that describes the features and benefits of the property, and a call to action (call, text, book an appointment, etc).
- Since housing falls under the Human Rights Act, be careful your ad is written without excluding anyone.
- The Human Rights Act protects rights to equality without discrimination. Housing falls under the protected grounds of disability, age (18 or more), religion or religious creed, family status, marital status, sex, sexual orientation, race or perceived race, nationality, place of origin, ancestry, colour, receipt of public assistance, and gender identity, race, religion, and sexual orientation. Whew!
Landlord Fundamentals #4 – Rent
The rental price can be a fun thing to play with – to start, take a look through a few online platforms for comparable properties in your area and surrounding areas. Then price your property similarly and see if people start calling to book appointments for showings. For example – if you have a 3-bedroom, 3.5-bathroom unfurnished house for rent in the SW area of your city – check out other SW 3-bedroom, 3.5-bathroom houses and see how your property compares – is it in better shape? Older Newer? Bigger? Smaller? Double or single garage? Be honest with yourself and set your price realistically.
Things to consider
- Remember to specify on the lease when rent is due. Indicate the date and time on your lease.
- Late charges -you can charge late fees for late rent; however, the RTA stipulates that the fees charged must be “reasonable”.
- Raising the rent – although there are no laws in Alberta restricting rental increases–how and when you raise the rent to follow strict guidelines. In Alberta, the Residential Tenancies Act provides the landlord/tenant rules for raising the rent.
- Non-payment of rent – the RTA also specifies what you are allowed to do if the tenant does not pay rent.
Landlord Fundamentals #5 – Pre-Screening Tenants
When you’ve posted your ad, interested tenants will start calling, texting, or emailing to get in touch with you. Before you agree to set up a showing of your property, have a quick pre-screening telephone call first to make sure that they meet your minimum tenant requirements. Questions can include; number of pets, number of occupants, move-in date, length of tenancy, reason for moving, willingness to complete an application with work/landlord references, and a credit check.
Landlord Fundamentals #6 – The residential tenant application form
Too many new and inexperienced landlords believe they can form a solid impression of a potential tenant from their gut reaction, only to discover that once the tenant moves in, they’ve been scammed.
The rental application allows you to collect valuable information that provides evidence of the potential tenant’s identity, license plate and vehicle make/model, current and former addresses, landlord and work references, and permission to run a credit check.
Things to consider
Whichever residential tenant application you choose, your form should request information in six key areas.
- Personal information
- Landlord references
- Previous addresses
- Employment history and references
- Authorization to run a credit check and if needed, a criminal record check
- Documentation to support the application such as government-issued identification, a recent pay stub, or proof of income from a financial institution or accredited authority such as an accountant or lawyer
Before you invest, take the time to do your due diligence and learn your Landlord Fundamentals 101, so that you are aware of the risks and are in control of the process. Taking the time to learn the ropes of real estate investing and property management put you on the path to achieving your goals of profitability.
Now is the time to start building your real estate foundation in a way that ensures your success.
What have you done to build your landlord fundamentals 101 knowledge? I’d love to hear about it at [email protected]
If you know how to advertise for tenants but don’t know how to screen tenants – sign up for my 5-step tenant screening process now to increase your profits and decrease your headaches.
To take advantage of helpful tips, tools, and educational resources for Do It Yourself landlords, sign up for a membership for Landlord Fundamentals 101. To save even more time and money, combine Landlord Fundamentals 101 with one-on-one coaching to qualify for the Canada Alberta Job Grant. Contact me today to find out how [email protected]