226: 5 Important Things You Need to Know Before You Become a Landlord

SHOW NOTES FOR EPISODE 226: 5 IMPORTANT THINGS YOU NEED TO KNOW BEFORE YOU BECOME A LANDLORD

Being an effective landlord is critical to real estate investing success.  Landlords are able to take advantage of a wealth of tax benefits while generating steady cash flow and their property appreciates in value.  In this podcast episode, Bill shares five important things every real estate investor needs to before becoming a landlord.

As an investor, there are a number of things you need to know to be successful.  My friends Jake & Gino explain it simply and precisely –you need to Buy Right, Manage Right and Finance Right.

Buying Right includes a host of things- Selecting the right market, selecting the right criteria, selecting the right property, proper due diligence and more. And there are tons of things related to each.

In Buying Right, I always look for “emerging markets” to invest in and try to buy in “Landlord Friendly” states.  In episode #034, Landlord Friendly States, I talk more about this and reference key landlord friendly states, such as:

1. Texas
2. Indiana
3. Colorado
4. Georgia
5. Kentucky
6. Mississippi
7. Arizona
8. Florida
9. Arkansas

These are states where the laws favor landlords and make it easier to be a successful investor.

Buying in the right place will help make it easier to do the second thing – Manage Right.  If you don’t Manage Right, your whole investment can fall apart. You need to know, before you invest, how to manage your investment property for maximum efficiency and profitability.

There are many aspects to Managing Right but perhaps the most critical is the landlording or property management aspect.  Whether you do it yourself, which I highly advise against, or you hire a property management firm, this is critical.  And, even if you do hire a property manager, don’t forget, YOU are still the landlord!

Being an excellent landlord can yield significant returns for those who want to invest in real estate. Landlords are able to take advantage of a wealth of tax benefits while their property appreciates in value and cash flow grows.

Still, landlords do face some unique challenges that newcomers to the real estate arena are often not adequately prepared for. Routine maintenance, repairs, and cleaning aren’t all that landlords are responsible for. The landlord-tenant relationship is an extremely complex one that is governed by an extensive and strict set of guidelines.

Here are a list of 5 key things you should know BEFORE buying a rental property.

#1 – Leases Protect Landlords, Not Tenants

Most people rent before they buy, and thus most people first experience leases as a renters.  As a renter, it may initially seem that a lease protects the renting party, but this could not be further from the truth.  The rental agreement is actually in place to protect you, the landlord.  All landlords need to understand this in order to avoid any potential legal issues down the road.  Tenants in all states are given certain rights immediately upon occupation of a property, even if they have not paid any rent or signed a lease.  The lease is actually intended to limit tenants’ rights, making it vital that a lease be drawn up and signed before any tenant is given access to a property.

#2 – Tenancy Has Several Meanings

Every state has something called the Landlord-Tenant code that prospective landlords should study, in addition to other state laws.  These laws can greatly affect your property, and is especially true when defining tenancy.  As a landlord, you should be aware that anyone allowed to stay on your property for a specific amount of time will automatically become a tenant and be offered the same rights as a tenant.  The amount of time varies by state, but it is entirely possible that you could kindly offer your couch for a week only to find out that you have to give your initial guest a 45-day eviction notice.  Something as simple as allowing a person to sleep in an apartment and use your common facilities, i.e. the kitchen, can be enough for a person to claim tenancy.

#3 – You Should Never Cheat On Your Taxes

Many landlords believe they can budget their rental numbers, especially if renters pay in cash. Not only is the IRS savvy to these devices, but it also is just never worth the risk.  Claiming losses on a rental property for more than a few years is enough to set a red flag on your account and potentially trigger an IRS audit. Ultimately, stating your rental income will be financially beneficial if you plan on investing in more rental properties in the future.  Otherwise, you may find yourself approaching lenders for an investment loan with a tax return showing only losses for five straight years.

I know this first hand!  I didn’t cheat but I did have significant losses due to high capital expenditures.  I was ecstatic when I found out I didn’t have to pay any taxes.  But when I sought to re-fi a property and had to submit my previous years taxes, it showed no income (or actually a negative income) which excluding me from the good loan rates.  I didn’t have to pay the taxes but I did have to pay a higher interest rate, which meant I had to pay somewhere else.

#4 – Procedures Are There For a Reason

Skipping an expensive credit and background check (which should include a criminal check)  may seem like an excellent way to save money at the time, but it will only cause heartache down the line. Tenancy applications and background checks exist for a reason.  While people may usually seem trustworthy enough, they can also be extremely irresponsible.  Instead of skipping standard protocol, you should consider transferring the cost of the application to the tenants.  In many real estate markets, tenants will not bat an eye at a reasonable application fee.  When looking at credit checks, make sure you look very carefully for any prior issues with landlords and/or evictions. Patterns form for a reason.

#5 -It Can Still Be Difficult to Evict Someone

Anyone who has faced the terrifying threat of eviction may feel as though it is an incredible power wielded by all landlords. While eviction may seem frightening at first, landlords actually have very limited control over the situation. Evictions need to be officially filed, even if the tenant has stopped paying rent. Once the eviction has been filed, the tenant will still have 30 to 45 days vacate, depending on the local laws (some may be less). This is a period of time that a non-paying tenant will have free run of your property and potentially damage it. Furthermore, even after the 30 to 45 days the landlord cannot take any physical action to evict the tenant.  Landlords cannot shut off utilities or change the locks. Instead, you need to consult the local police or sheriff’s department and petition to have the tenant removed. An actual eviction proceeding can go on for months, especially if the tenant chooses to contest it.

While becoming a landlord seems like an intimidating process, those that are willing to tackle the challenge will eventually find themselves raking in significant rewards.  Owning and renting out property gives you a steady source of income, independent from other employment or traditional investment vehicles, but this income does come at a cost.  You need to be educated and become extremely well versed on all of the laws and regulations regarding your state and you will need to be extraordinarily conscientious throughout the entire process.

Well that’s it for today…

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