11. Collect Rents & Enforce Your Lease
New landlords inevitably fail to enforce their lease terms properly. They’ve been a renter for much of their lives, they’ve fallen for all those cultural stereotypes about mean landlords, so they buckle at the first sob story they hear from a tenant late on their rent.
Hear me well: people push boundaries. It’s human nature. Tenants will try and push your boundaries to see what you’ll let them get away with. If they can pay their rent two weeks late with no consequences, but their phone service stops working if they fail to pay on time, which bill do you think they’ll prioritize?
On the first of the month, send an automated email reminder. On the day before the rent officially becomes late, send a text or manual email reminding them that they’ll get hit with a late rent fee if you don’t receive the rent today.
When the rent officially becomes late, send an official eviction warning notice required by your state’s laws. Don’t freak out about it: they’ll still have ample time to bring the rent current. The eviction notice doesn’t say “get out” — it says “cure the violation or else I’ll file in rent court in X days.” You need to do this as soon as the courtesy period ends.
Don’t feel comfortable doing that like clockwork, every time? Don’t become a landlord. Invest in passive real estate syndications instead, or at the very least, hire a property manager.
12. Decide Whether to Hire a Property Manager
If you’re like most people, you’re busy. Do you really want to listen to tenant sob stories or field phone calls at 2 am when your renter clogs the toilet?
Consider delegating the day-to-day management to a property manager. Just beware that you’ll then have to manage the manager.
You’ll need to double check their tenant screening and selection, confirm how often they inspect the property, and make sure they’re serving eviction notices the day the rent officially becomes late.
A good property management company is worth their weight in gold. Unfortunately, the industry is rife with shoddy, unprofessional property managers.
Whether to hire a property manager isn’t always an easy decision. I’ve known real estate investors who actually hire the property manager first, before deciding to invest in a certain real estate market. Because without good property management, your returns will suffer, and an otherwise good property might lose money.
Pros & Cons of Becoming a Landlord
You now know how to become a landlord. But should you become a landlord?
Weigh the following pros and cons of becoming a landlord before committing your time and money.
Pros of Being a Landlord
I spent many years as a landlord, and it has a lot going for it. Consider the following upsides to owning rental property:
- Ongoing and expanding passive income: Once you buy a property, it continues paying passive income forever. In fact, that income grows over time, as rents rise even as your mortgage payments remain fixed.
- Appreciation: Even as you collect cash flow, your property also rises in value, at least in most cases.
- Leverage: You can buy real estate assets with other people’s money. A lender covers most of the cost, and your renters pay down your mortgage balance. Plus, your cash flow grows disproportionately faster than rents, since your mortgage payment stays the same even as rents go up.
- Tax benefits: Landlords enjoy dozens of rental property tax deductions. You don’t have to itemize your deductions, either — these come off your taxable rental income, so you can still take the standard deduction. Plus, you can deduct for depreciation and show a loss on your tax return even as you collect money in real life.
- Predictable cash flow: As outlined above, you can accurately forecast a property’s cash flow before buying. Once you master this, you can avoid bad investments moving forward.
Cons of Being a Landlord
Rental properties aren’t all fun and games. There’s a reason I sold off my rental properties, after all.
Beware of the following drawbacks before you become a landlord.
- High skill required: It takes knowledge to reliably make money on rental investments. And that knowledge requires dozens or more likely hundreds of hours to acquire.
- Not truly passive: Rental investing requires labor. Sure, we talk about “passive income,” but rental income isn’t actually passive. It requires work to find good deals on rental properties, work to line up financing and close on them, work to renovate them and rent them out and to manage them.
- Risk: Like all investments, rental properties come with risk. Risk that the tenant stops paying rent or destroys your property. Neighbors could also damage your property, or local “knuckleheads” (a euphemism if I’ve ever heard one) could vandalize it. There’s even a risk that the government will make lease agreements only one-way enforceable again, putting another eviction moratorium in place.
- Legal liability: Your tenants or neighbors or contractors can sue you. I’ve been sued twice as a landlord, and it sucks. Even when you win, you still lose, because it costs you money, time, and stress to defend yourself.
- Loan liability: When you borrow a rental property loan, you sign a personal guarantee. Fail to pay it back, and the lender can come after your personal assets such as your home, car, and baseball card collection.
FAQs About Becoming a Landlord
Still have a few questions about how to become a landlord?
Hopefully these will get you squared away.
Is becoming a landlord worth it?
It depends. If you have a passion for real estate and want to start a real estate side hustle as an investor and landlord, then absolutely. But if you just want to diversify your investment portfolio, there are much easier ways to do so. You can earn just as much (or more) passive income and appreciation from real estate syndications, or even real estate crowdfunding platforms, without the headaches.
Can you buy a rental property with no money down?
You can get creative with coming up with a down payment for a rental property. Theoretically you can buy a property with no money down. But that doesn’t mean it’s a good idea, as you might overleverage yourself and end up with negative cash flow.
Should I become a Section 8 landlord?
That’s a business decision you’ll have to make for yourself. On the plus side, Section 8 pays their portion of the rent on time every month. But the tenant doesn’t necessarily pay their portion on time (or at all). Worse, the annual inspection inevitably leaves you with thousands of dollars in repairs, which often aren’t necessary but writing up repairs is how Section 8 inspectors show their supervisors that they hit every property on their rounds.
Should I invest in local or long-distance rental properties?
It depends on whether your home city is a good market for rental investing. Many aren’t, in which case you have no choice but to look elsewhere if you want to invest in rental real estate.
Should I use the BRRRR method or buy turnkey rental properties?
If you invest long-distance, only buy turnkey properties. If you invest locally, you can consider buying fixer-uppers to follow the BRRRR strategy, but start small with cosmetic repairs. You add a whole new level of complications when you renovate properties.
Final Thoughts on Becoming a Landlord
First-time landlords tend to make the same handful of mistakes.
They underestimate operating expenses and overestimate rental cash flow. They lean too heavily on credit checks in the screening process, and don’t spend enough time checking on rental history with previous landlords or reliability with employers. And they don’t enforce their rental contracts when renters break the rules of the lease.
To be a successful landlord, you need to do better than other novices in the rental industry. Learn how to accurately budget for maintenance costs and major repairs, for vacancies and property damage. Aggressively stay on top of potential evictions — not because you enjoy it, but because you need to defend the boundaries of your lease to force good tenant behavior. Skip these expensive mistakes if you want to reliably earn positive cash flow.
Or skip them by investing passively in real estate instead.♦
What do you still want to know about how to become a landlord? What’s holding you back from becoming a landlord?