Residential Landlords?

I've got an opportunity to buy a house in town that's about to go back to the bank for pennies. The payment would be such that I could afford to swing it every month even if I didn't rent it out. Based on what stuff is renting for in town, I could put 20% down and charge double the mortgage payment in rent. I just found out about it today, so I've got a ton of homework to do.

But my first big questions are:

Do you guys screen the tenants yourselves or hire someone for that?

Is there a need to set up a corporation?

Do you hire a property management company or handle everything yourself?

Thanks.

poopshovel wrote: But my first big questions are: Do you guys screen the tenants yourselves or hire someone for that? Is there a need to set up a corporation? Do you hire a property management company or handle everything yourself? Thanks.

The first time I rented mine, I hired a realtor who pre screened and got credit reports. Cost me 1/2 months rent. The second tenant was a friend of a friend. By then I already had all the lease paperwork that the realtor gave me. I asked for three months and did no credit checks, it worked out fine.

I did not set up a corporation. I would look into buying the home through an LLC, if possible.

I purchased a home warranty for $400 and they take care of most of the stuff. If its something very simple, or its not covered, I do it.

J

I have one rental house. I joined TECO (Tenant Evaluation Company) to save any potential headaches from scammers. Yes. there are many out there and they have lots of tricks. You will especially want to know if they have an eviction. A restraining orders will signal bad choice of boyfriends which could result in damage to your property.

Definitely have a background check done. The potential tenant has to pay for the report so you are not out of that cost. If they have issues, they will not pay for the report. That alone weeds many.

https://www.smart-landlord.net/

I just file using 1040 Schedule E. You do not need to incorporate,

I do the work or contract out what I do not want to do, or cannot do.

I am a commercial landlord but will try to chip in a little advice if you don't mind. Charging double the mortgage payment in rent is good, that's about where you want to be to have a good investment. Don't be surprised if in the medium term you do not net much or any money - maintenance and taxes and other costs can eat up to half of a market rate rent.

I would not bother incorporating, that adds a lot of paperwork and another tax return (or three with federal+state+city) with minimal return on that time or cost involvement. Instead I would up your liability insurance coverage with an umbrella liability policy for at least a million dollars. Shouldn't cost more than $150/year. Getting it from the same insurance company as your homeowners and auto insurance might make it a good bit less than that.

Property management company would be around a 10% fee and there basically aren't any really good ones. If they were really good they would be managing their own properties. They also won't pay for any of the work, they just schedule a contractor and send you the bill.

What service do you use for background checks - just TECO?

dculberson wrote: I am a commercial landlord but will try to chip in a little advice if you don't mind. Charging double the mortgage payment in rent is good, that's about where you want to be to have a good investment. Don't be surprised if in the medium term you do not net much or any money - maintenance and taxes and other costs can eat up to half of a market rate rent. I would not bother incorporating, that adds a lot of paperwork and another tax return (or three with federal+state+city) with minimal return on that time or cost involvement. Instead I would up your liability insurance coverage with an umbrella liability policy for at least a million dollars. Shouldn't cost more than $150/year. Getting it from the same insurance company as your homeowners and auto insurance might make it a good bit less than that. Property management company would be around a 10% fee and there basically aren't any really good ones. If they were really good they would be managing their own properties. They also won't pay for any of the work, they just schedule a contractor and send you the bill.

Thanks very much guys. Yeah, I'm not expecting to get rich off it...at least not off the first one. But just have that income flowing in every month. The house is not going to get any cheaper, and comes with empty lots on either side. Can't see the value going anywhere but up over the next 20 years or so.

House is very small, and has no central heat or air, but does have gas heaters and window units. The seller is a good friend of ours and his elderly mother lived there for years with no complaints. I see the lack of HVAC as a big plus. "A/C quit working." "Okay, I'll be there in 20 minutes with another $100 window unit."

I've figured $10k - $15k in renovation to get it looking cozy and inviting.

Two other big bonuses: I can see the back of the house from the shop. AND I may already have a solid tenant lined up.

History on the house is that Mom died, left it to our friend (her son.) He tried renting it. Didn't do a credit check. Ended up with deadbeat tenant. He then tried owner financing. No credit check. SURPRISE! Another deadbeat. Round three: Young couple, both with jobs. He decided against the owner financing thing. They got a loan from the bank - but not for the full amount, so he did partial owner finance ($20k?) Checks started coming in late, and now they've moved into a trailer park down the road. This is the only scary part to me, as the power has been cut off for at least a couple months now, and they haven't been inside the place.

According to the seller, the chick living in there says she's fine with opening it up for me to take a look but wants to get some of her stuff out first. We'll see how that plays out.

Our friend is just sick of the headache. He's retired and doesn't need the income, and is basically taking a big hit on the owner-finance end just to get out of it and walk away with a little bit of cash in his pocket.

Again, I've still got a lot of homework to do, but I think it's a sound investment. Like I said, I can swing the payments no problem either way.

Learn from the previous owners experiences. This is a business and you have to treat it as such. Remember that no good deed goes unpunished. Get references and check them out. Use a good written lease(I saw one recently that didnt provide for an eviction process) Realtors and lawyers are good sources for leases; the internet is NOT.
You need to be able to spot the frequent flyers who have been evicted from every complex in town or nearby towns because they also know their "rights" and will use your inexperience, friendly attitude and ignorance to their advantage. Be very careful about young single mothers because there is usually a boyfriend lurking and waiting to move in when you turn your head. The best leases identify the authorized tenants and allow you to terminate the lease if anyone else moves in. YMMV

An LLC is not needed until you get 5-6 rental properties.

Never rent without a background and credit check, but know what to look for and what is not as big a deal. In a nutshell, people can have bad credit and be good renters, but people with a history of walking away from debt are to be avoided. Ditto for evictions and criminal records involving theft, damage and identify fraud.

Never rent without a security deposit and an iron-clad lease. Make sure that your neighbors have your number, they are often your early warning of trouble.

trucke wrote:

nderwater wrote: What service do you use for background checks - just TECO?

Yes, I use only TECO. They offer credit and criminal checks. They also helped me out a few years ago when I declined a tenant because they actually had a court eviction and they stated in writing that they did not. The prospect was threatening to sue me. TECO handled the whole thing. The lawsuit never materialized, but if it did, it helps TECO's marketing immensely. There are other companies out there. Just be sure to have the background check performed.

10-4. Thanks guys. Will DEFINITELY have a lawyer write up an iron-clad lease. Will DEFINITELY also do extensive credit/background check, and will be sure to have all authorized tenants laid out in the lease.

Is 3 months rent still kind of the standard for move-in?

poopshovel wrote: Is 3 months rent still kind of the standard for move-in?

Yep. Security deposit, first and last month rent.

poopshovel wrote: 10-4. Thanks guys. Will DEFINITELY have a lawyer write up an iron-clad lease. Will DEFINITELY also do extensive credit/background check, and will be sure to have all authorized tenants laid out in the lease. Is 3 months rent still kind of the standard for move-in?

My experience is a little different as I am in a college town, but typically around here it is one of the following:

• A security deposit worth 1-2 months rent plus the first months rent. So for $100 a month on an 12 month lease, you'd pay $200-$300 for move in, plus 11 more payments of $100, then after move out they get $100-$200 back.
• First and last months rent

If I were a landlord, I would go for the security deposit route every time.

We do background checks on our properties. At first we used e-Renter.com and found out later that they were not doing the job. One tenant had a clean check through them but during the eviction we looked at his record on the local clerk of courts website... 2 evictions, 2 domestic violence cases, B&E and some other stuff. Most people don't ever move more than a few miles so you can do your own criminal checks (usually for free). We just pay to get an abstract of the credit report now.

DO a background and credit check.

DO be suspicious of "Baby Mommas". They usually attract "Baby Daddies" AND drama (normally with police calls) and Baby Daddy is going to think it's a great place to sell drugs AND, if so, you are at risk of losing YOUR property if he is caught.

DO background checks on references for tenants with no history (i.e. 18 year old w/no credit or rental history, sometimes comes from a "home" with 20+ evictions in the family).

DO have a good relationship with an attorney or two, if you have questions ask them (not us) and follow their advice.

DO have them check over your lease. We use a generic lease for the state of Ohio, free from the internet, but I had Joel check it over.

About LLC's: the best part of them is they insulate your personal assets from your busiess assets. As in, if your rental belongs to the LLC and your tenant breaks a leg they have to sue the LLC. They might get its assets but they can't come after your other business properties like your shop or after your house/car/etc. That's what LLC stands for: Limited Liability Corporation and it's why my brothers and I put our dad's assets in one, if something happens a tenant can't sue us personally.

Here in SC an LLC costs ~$500 to set up.

Curmudgeon wrote: About LLC's: the best part of them is they insulate your personal assets from your busiess assets. As in, if your rental belongs to the LLC and your tenant breaks a leg they have to sue the LLC. They might get its assets but they can't come after your other business properties like your shop or after your house/car/etc. That's what LLC stands for: Limited Liability Corporation and it's why my brothers and I put our dad's assets in one, if something happens a tenant can't sue us personally. Here in SC an LLC costs ~$500 to set up.

That was my line of thinking.

That's what insurance is for.

Especially with just one property an LLC is a lot of work for little reward. There's liability protection but only if your paperwork is in order (ie, annual minutes kept) and you haven't done anything to tie your personal actions to the property. They're not infallible and not a trivial amount of work to maintain. Especially if you have someone do the required tax returns for you it costs more than just insuring against a suit.

But really you should check with your lawyer on that - which is also not free. Nothing in life is, sadly!

Our LLC carries its own insurance as part of the agreement we have with the management company and we are having an accountant do the taxes this year due to all kinds of strangeness left over from my dad's estate. No they are not infallible (nothing is) but it beats hell out of having to defend yourself from a lawsuit where someone is going after your personal assets.

If someone is dumb enough to go to the trouble to start an LLC then allow their personal actions to be tied to the property they pretty much deserve what they get.

If you start an LLC now, you can add properties to it as you acquire them.

Get as much information as possible about expenses before making an offer.

Property taxes are a big one. Call the tax assessors office and find EXACTLY what YOUR taxes on the property are going to be and when they are due. What the current owner pays may have nothing to do with what you will owe.

Good point. 'Round these parts, reassesment hapens every 10 years, meaning the market price and the taxes are adjusted at that time. Some municipalities drop taxes way down for retired folks but when the house is sold to a non-retiree it gets reassesed. You'd also (at least around here) lose the lower rate on an owner-occupied house and that can easily triple the property taxes.

I sold my rental property a couple of months ago, and it was a happy, happy day. Some people do ok, but it's a tough road. I tried the professional route, but that really sucked everything out of it money-wise. After that, I did it all myself. Not very difficult really in the day to day activities of running checks on potential renters or taking rent checks.

The big problem is finding someone that won't tear the place up. That's a lot more difficult than it sounds. My last tenants did about $10k worth of damage and it took me over 6 months of my time to fix everything, and that's using every spare moment I wasn't at work. My parents have about 10 rental properties, and everyone is commitment in time and money, even the ones that are paid off. This is not something you want to do casually, it's a definite commitment.

That brings me to things that can and will go wrong, such as the HVAC system, the roof, fencing if it has it, appliances, plumbing, etc., etc. It only takes one major item to set you back a few years in rent profit.

And make sure you have it insured not only for loss such as fire and flood, but also liability should someone get injured. One of my parent's renters burned their place down and then sued because they would pay for their belongings. Before you laugh and say that won't happen, they still had to pay an attorney and go to court. Even though they won, it was a significant cost in addition to the headache of rebuilding at the same time. Then they had the gall to want to rent there again, and threatened another lawsuit when my parents refused.

He had a sterling credit report by the way. That's not always a good indicator. Their best renter was a stripper by the way.

Other things to keep in mind. At least around here property values are staying even. One of the big pluses of rentals has always been their rising values. Not to say they won't in the future, but for now, no. You also will need to pay income tax on the earnings. A plus is that at least for now, you can deduct all improvements and mortgage interest. They keep rumbling about cutting these back, but for now you can.

Not trying to talk you out of it, but it can be a lot more work than many think.

Datsun1500 brings up a good point. Use a title insurance company to handle the closing and they will make sure - and guarantee - that the title is clear on the house. That includes the foreclosure question.

thought of one more item. check your states landlord rights. in alabama, it can take 6 to 9 months to get someone evicted, with them living rent free and inflicting as much damage as possible. every state varies and chances are you will need this at some point.

Another red flag is if they offer you cash for security deposit, rent, etc to rent today in order to bypass the background check. You may never see any more money from them.

As racerdave600 mentioned, it can be hard to get them out because of state laws.

Example: They don't pay rent, so you start the eviction process. Simple enough. Then they break the hot water heater or something else and state that you did not provide acceptable housing. Now it's your fault. This can drag on for months. That gets expensive quickly.

Just do your due diligence up front and the Landlord career should go pretty well. We are not trying to dissuade you from being a Landlord, just suggesting that you learn what you need to know and not make an expensive mistake.

racerdave600 wrote: That brings me to things that can and will go wrong, such as the HVAC system, the roof, fencing if it has it, appliances, plumbing, etc., etc. It only takes one major item to set you back a few years in rent profit.

That's one of the reasons why I tell people that you can't make money with single family houses. Most are run at a break even or only a few dollars profit so when the furnace goes out you're cooked for a long time. After having a couple houses that we were supposed to profit in the long run (i.e. owning a property that somebody else paid for) I have a 15 unit building that profits over $3K/month with very little work, it was a battle to get there but now, unless I have a unit for rent, I only get a handful of calls each month.

I won;t even accept a deposit until I run the background check. I tell them I don't want to have to return it if something goes wrong... however, cash is king... at the right time.

FWIW, in Cincinnati from the time you post the 3 day notice to the time a tenant is evicted runs right around a month. Oh, the only downside to an LLC is you cannot represent the company in evictions or any other legal matter, you must have a lawyer.

trucke wrote: Another red flag is if they offer you cash for security deposit, rent, etc to rent today in order to bypass the background check. You may never see any more money from them. As racerdave600 mentioned, it can be hard to get them out because of state laws. Example: They don't pay rent, so you start the eviction process. Simple enough. Then they break the hot water heater or something else and state that you did not provide acceptable housing. Now it's your fault. This can drag on for months. That gets expensive quickly. Just do your due diligence up front and the Landlord career should go pretty well. We are not trying to dissuade you from being a Landlord, just suggesting that you learn what you need to know and not make an expensive mistake.