Worry-Free Landlording

There are aspects about land lording that a lot of people just aren’t cut out for. There’s the real estate knowledge you need, the home rehab/repair skills (or at least the knowledge to know when a tradesman is doing good work or just ripping you off), and then the management aspect of working with tenants. As far as the landlord/tenant relationship, there are a few things I do to try to make everything easy.

Firstly, I charge a rent that’s somewhere around 10% below market rates. This does a number of things for me. It gives me my pick of tenants when I have a vacancy. So far, whenever I put up a craigslist ad advertising my rentals, within 24 hours I have about a dozen appointments setup to show the places to prospective tenants. Of those people I arrange to meet, about 1/3 just plain don’t show up, another 1/3 have hard luck stories or unreliable income or decide the place isn’t for them, and then there’s another 1/3 of highly-qualified, eager tenants hoping I’ll decide to rent the place to them. Compare that to those “for rent” signs you see that have been up so long they’re becoming sun-faded.

The lower rate also keeps tenants in place longer. When people feel they are getting a good deal they are less likely to shop around for another place, even if there are little things about my property that aren’t absolutely ideal for them, they’ll stay because of the cost savings. And transitioning between tenants is always an opportunity to lose money. – Whether it’s some cleaning/repair fees/time to get the place back into showroom condition, or some lost rent from people moving in and out in a less than perfectly synchronized fashion.

I’ve seen advice along the lines of “if you never have vacancies then you aren’t charging enough.” I could raise my rents by 10% and still have tenants, but if that causes me to wind up having a vacancy for even one month per year, all that extra profit is a wash-out anyway.

Anyone who is prone to worry should not consider being a landlord. If you find yourself checking your stock prices three times a day, or always glancing up to see what the DOW is doing when they tease you with it on the news, then you’ll probably find the idea of handing the keys to an asset that constitutes a sizable chunk of your portfolio over to someone you’ve talked to for maybe 90 minutes less than comforting.

I don’t find it too difficult though. Worst case, the property is insured in case of an absolute catastrophe. And considering the condition these properties were in when I bought them, a tenant would be hard-pressed to do any damage that would intimidate me and my repair skills. And I just assume, from the get go, that in between tenants I am going to have to spend up to a month’s rent in repairs when they move out, because that’s just the nature of owning property. And if it’s actually left in rentable condition then I’m just ahead of the game. Nothing irks me more than when an unscrupulous, penny-pinching landlord tries to pass off normal wear and tear as damage attributable to the tenant and uses it as an excuse to hold onto a security deposit.

When I hand over the keys to a tenant, that’s it, the property is their’s, and it’s out of my mind. I might drive by every few months to take a cursory look from behind my windshield. But I mostly try to leave the tenant with their privacy.

I think a lot of landlords want to have things both ways. They want rental income from their property, but they also want to retain control over it in the most nitpicky of ways, not allowing anyone to change a paint color or trying to keep a security deposit because a tenant hung some photos on the walls and left a nail hole. – Or demanding regular “inspections” to snoop around the house. I think when you hand over keys in exchange for rent you have to just accept that some things are going to happen in the house that you don’t like, that’s why you’re getting paid.

I also write my leases in a way that incorporates state-mandated tenants rights right into the terms of our agreement. If a judge ever gets to see one of my leases he’s going to think I’m a saint. A lot of landlords, knowingly or not, will have leases in violation of state law but most tenants never realize it because most leases don’t end up getting challenged in court. Massachusetts is a very tenant-friendly state, and I’m glad for it. I don’t want single mothers or disabled people being thrown out into the street in the middle of February anymore than anyone else. While I don’t think I have any obligation to provide charity to my tenants who can’t pay their rent. I do accept that the realities of making money off of providing people with housing means that I carry a risk of not being able to evict certain classes of people under certain conditions for limited periods of time. That’s just part of the cost of doing business. It’s a societal problem that government has decided is best dealt with by passing the risk to landlords and I knew that full well when I got into land lording so I budget for it and won’t complain (too loudly) if/when my turn to bear the burden ever comes.

Most of my life has been worry-free. I think the key is imagining the worst possible scenario, planning for it, and accepting it as a possibility knowing that I’ll be able to deal with it. When it comes to other people I plan for the worst and hope for the best. This way, whenever things go well I see a budget surplus rather than having a budget shortfall when things go wrong.

Maybe my laid-back attitude is a result of the high profit margins I’m running. If you’re a landlord leveraged to the hilt and less than a year of rent payments short of defaulting on your loans I could see it being much harder to sleep at night. But that’s the price for entering a capital-intensive business when you have to borrow nearly all of the capital. But that’s not a problem unique to land lording, any business conducted that way would be stressful.

 

 

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7 Comments

  1. Posted January 5, 2013 at 4:17 pm | Permalink

    I like your plan for getting a good tenant. And if you’re lucky, they’ll actually leave your property in better condition than when they arrived.

  2. lurker
    Posted January 6, 2013 at 12:00 pm | Permalink

    better condition than when they arrived???? wow you are an optimist. normal wear and tear seems the best to hope for IMHO.
    do like the proper landlord philosophy and it rings true…I think I would worry too much….

  3. alapolo
    Posted January 6, 2013 at 3:57 pm | Permalink

    I don’t think mike crosby is wrong – in my own experience as a tenant, the relationship to the landlord matters. The more down to earth and out of your life (apart from when rarely needed) they are, the more likely it is that I, the ideal tenant, will actually want to make an effort.

    On the contrary though, I, the ideal tenant, might be less ideal when all I get from the landlord is no attention when needed, and lots of it when not needed, especially concerning things like wear and tear.

    In the end it should be common sense, but oh my, it’s not for everyone to realize that goodwill and positivity beats the laden scrutiny of a pedantic owner.

    All in all it seems that your strategy couldn’t be much better, and in any case is quite admirable. Lucky tenants!

  4. Posted January 7, 2013 at 10:56 am | Permalink

    great approach and philosophy. If I’d had this guidance when I was landlording way back when maybe I’d still be at it…

    Nah. I worry too much. :)

  5. Posted January 7, 2013 at 10:36 pm | Permalink

    My ex-landlord used a property management company, so my first contact with him was the letter stating all of the things that were going to be taken out of our security deposit, half of which we had taken care of before we moved out. An otherwise content tenant became a sworn enemy, and after two ignored letters asking to be given our money back, I sued him on a technicality and won. Collecting on the judgement in the homestead-happy state of Texas is next to impossible, but luckily I’m a patient man.

  6. Posted January 9, 2013 at 5:31 pm | Permalink

    I’ve been a landlord for 5 years and have learned most of my mistakes from my first rental. Like you, I don’t worry about my properties as long as I follow my maintenance plans.
    At first I was apprehensive on having strangers living in my rental property. Now I’m apprehensive when there is a vacancy due to the insurance liability of having it empty.
    I treat my tenants with courtesy, follow the law and explain their rights and obligations. I love my tenant market where as many other landlords would run away from the tenants I have.

  7. Posted January 22, 2013 at 9:26 am | Permalink

    Been following your progress for well over a year from the ERE board. Good job, good landlording philosophy, and very inspiring story on your sweat equity real estate development plan.

    I used a hybrid of your methods. Combined leverage with sweat equity to give me 6 cash-flow positive properties which are in the payoff mode. See my brand new blog at http://payoffmyrentals.blogspot.com/

    This is an aggressive 3.5 year plan to pay the remaining 3 rental properties off to achieve FI. Not finished telling the story, but it’s started at least. I’m just not much of a writer.

    I like your style!