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*Note on Terminology: Conservatives and liberals can’t even agree on terminology, with conservatives using the pejorative “illegal aliens” and liberals using the cuddly “undocumented immigrants.” We’ll split the difference here and use the term “illegal immigrants,” because it’s clear and unambiguous. And because we don’t mind needling both sides a little.

Ready to plunge into some salty, politically-hot waters? Check all political righteousness at the door, because we’re going to have a pragmatic look at the pros and cons of signing a lease contract with illegal immigrant tenants. No pulled punches, no political correctness, just an honest discussion.

Illegal immigrants are a reality in the housing industry. There are an estimated 11-11.5 million undocumented immigrants living in the United States, and they aren’t homeowners – it’s awfully tough to buy a home without a valid ID.

So they rent, which means landlords and property managers must make a decision about whether to lease to them.

What are the practical advantages, risks and pitfalls of signing a lease contract with illegal immigrant renters?

Is It Legal to Rent to Illegal Immigrants? Conflicting Laws

On the state and local levels, laws run the gamut from doggedly pro-immigrant to unabashedly anti-immigrant.

In some states and municipalities, it is a crime for landlords to knowingly sign a lease contract with illegal immigrants. For example, property managers and landlords in Oklahoma risk criminal penalties for signing a lease with illegal immigrant tenants.

Nor is Oklahoma an outlier. According to the American Apartment Owner’s Association, a Kentucky real estate investor, named William Hadden was arrested and charged with crimes ranging from harboring fugitives to conspiracy. All because his property manager rented to illegals. Thankfully Mr. Hadden was acquitted, but had he been charged, he could literally have spent the rest of his life behind bars.

At the opposite side of the political and legal spectrum, for example in California and New York, it’s illegal for landlords or manager to even ask a rental applicant’s immigration status!

Consider a case where a property management firm were threatened with a lawsuit for demanding an applicant’s social security number to run a tenant credit screening. Why you ask? Apparently that was enough to violate California’s rental laws prohibiting inquiry about a rental applicant’s immigration status as part of a landlord’s tenant screening.

Before you do anything you might live to regret, make sure you understand your state and local laws. You might think you’re following your conscience, but the law may have something entirely different to say on the matter.

Federal Fair Housing Laws

Dip your toe in the waters of leasing to undocumented immigrants?

Under the current Trump Administration, states are actively combating federal policy on how to handle illegal immigrant tenants. And leaving many landlords in a damned-if-you-do, damned-if-you-don’t position.

Still, the Department of Housing and Urban Development has not changed its position on Fair Housing laws and where illegal immigrant tenants fit into them. In fact, HUD has actively pursued more Fair Housing lawsuits in the last few years, including some pretty innocuous cases with no ill will towards any group.

Don’t be the next landlord to be made an example.

As a refresher, landlords and property managers cannot discriminate based on national origin, race or ethnicity (among others). That means you can’t ask for any additional information or documents from one applicant that you don’t ask from any others.

Imagine you get two applicants, one an obvious American yokel, and the other a non-English speaker of unclear nationality and legal status. You cannot ask for any extra documentation or information from the latter, or run any identity/background checks, that you did not also collect on the former.

If you don’t ask for a copy of every applicant’s driver’s license, you can’t ask for it from any applicant. Likewise with running tenant screening reports. Keep records of all screening information collected for a year after filling vacant units, so that you can prove that you treated everyone the same if you’re ever taken to court over Fair Housing laws.

Tenant Screening & Lease Contract Challenges with Illegal Immigrants

All of the above are reasons to run tenant screening reports with every single rental application. Run a full credit report, nationwide criminal background check, nationwide eviction history report and an identity verification.

Illegal immigrants will probably not be visible on any of these records. Does that mean they will be a bad tenant?

Not at all, but it makes it harder to know. It’s difficult to vet someone who doesn’t exist on paper, with no past, no records of prior performance.

And then there’s the language barrier. Immigrants in the U.S. illegally are much less likely than their legal counterparts to speak English, making communication a challenge from the very start.

In some states, landlords may face foreign-language lease contract requirements. For example, in California if the lease terms were negotiated in another language, the landlord or property manager must provide copies of the lease contract in that language, plus an English copy.

Anecdotally, there are widespread accounts of illegal immigrants squeezing extra residents into rental properties, beyond those listed on the lease contract. More occupants mean more wear and tear on the rental property. It also means non-screened, unapproved adults living in your rental, unbeknownst to you.

These accounts are impossible to substantiate with hard data – by their nature, these households are undocumented. But the advantages of leasing to illegal immigrants also hinges on anecdotal evidence; the knife cuts both ways.

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Eviction & Collection Challenges

What happens if an illegal immigrant doesn’t pay the rent?

“An illegal immigrant has a much greater chance of being ‘judgment proof,’” explains Maryland landlord-tenant attorney Brian Pendergraft. “My toolbox for collecting a judgment is neutered. There is no bank account for me to garnish, or legal job where I can garnish their pay checks, or miscellaneous assets I can levy.”

And what is a landlord to do if they leased to an illegal immigrant, in a state where it’s a criminal offense? They may well be afraid to file for eviction at all, and making it public that they leased to illegal immigrants.

Fortunately, in practice landlords usually have little to fear from rent court judges ordering prosecution for leasing to illegal immigrants. If you rented to illegal immigrants and they stopped paying the rent, I would urge you to serve an official eviction notice and start the eviction process immediately.

Advantages of Leasing to Illegal Immigrants

With all these risks associated with renting to illegal immigrants, what are the benefits?

It turns out the advantages are pretty persuasive, even if most are anecdotal.

Despite the risks outlined above, where’s the last place on earth illegal immigrants want to end up? Most will do everything in their power to avoid being taken to court, appearing on official dockets and potentially forced to show documents. That means they are much less likely to breach their lease agreement. If they do breach the lease, they typically move out rather than face eviction and court appearances.

Illegal immigrants are also less likely to sue their landlord, for the same reason.

Beyond paying their rent on time and avoiding court entanglements, illegal immigrants are less likely to contact the landlord to constantly complain or demand property updates. Living in the U.S. illegally mandates a certain amount of privacy; illegal renters tend not to want their landlord or anyone else coming through the property more often than absolutely necessary.

Because of the risks involved in applying to rent a new property, illegal immigrants tend to move less often than their legal counterparts. When they find a comfortable home with a landlord who doesn’t hassle them, they’re likely to stay for many years. Longer tenancies mean fewer turnovers, and we all know turnovers are profit-killers.

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So, Should You Rent to Illegal Immigrants? An Experience that Sums It Up

Early in my career, managing the personal real estate portfolios for the two owners of a nationwide mortgage lender, I had to fill a vacancy in a low-end neighborhood. Most residents were U.S. citizens, and an antagonistic pool of tenants.

I sat down with my boss to review the applications we’d received, and I mentioned a Hispanic applicant who was here legally but who had no credit history or credit references. My boss’s face lit up: “Awesome! Rent to them.” No further questions.

Surprised, I shrugged and did as he requested. I met the tenant at the property to sign the lease contract, and as soon as I had signed, he leaned out the back door and whistled. He honest-to-goodness whistled.

Six more adults filed into the property with their belongings. It was a two-bedroom rowhouse.

I gathered the lease agreement and left, deciding to ignore the blatant breach of the occupancy lease clause.

Sure enough, they paid like clockwork, the rent arriving a day or two early every month. The only time I ever heard from them about a repair request, the one documented tenant called me very apologetically. “Mr. Brian, I’m so sorry to bother you. We tried fixing it ourselves, but the roof leak is so bad, I think it needs a real roofer.”

When I showed up to meet a roofer there, I noticed they had actually made other small repairs and improvements around the property themselves, without calling me.

Pros and cons, risks and rewards. Still, there’s something to be said for a tenant who wants to avoid any trouble with their landlord, and who wants to remain living in your property as long as possible.♦

Blast away with your outrage! We’re ready for all the political indignation. “You’re taking advantage of a vulnerable population” or “You’re sheltering criminals” or some other such righteousness. Bring the controversy!

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People are clumsy, dirty, accident-prone Tasmanian devils. That goes double for children, and says nothing of pets.

Homeowners are no better, but they have so much money invested in their property that they take more care not to damage it. But renters? Fuhget about it. Tornado inbound, chance of damage: 100%.

So how to protect your rental property, that you’ve invested hundreds of thousands of dollars into?

Like everything else in rental management, an ounce of prevention is worth pounds upon pounds of cure. While screening tenants thoroughly (including an inspection of their current home) helps you weed out the dirtiest and least reliable tenants, you also need to armor your property to withstand the incoming horde.

From physical rental property improvements to protective lease clauses, here’s how to tenant-proof your property and prevent damage before it happens.

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Protecting Rental Property Walls

Face it: your walls are going to get screwed, hammered, dirty, and beaten up. Sounds like an R-rated movie, right?

Your tenants won’t be gentle, because as far as they’re concerned they’re just passing through. It’s on you to take precautions, both in the form of rental property improvements and protective lease clauses.

1. Go Glossy

Most people paint their walls with a flat finish paint. It’s a little cheaper, and it looks good… at first.

In six months, it shows every scuff of every shoe or hand or box that brushed by it.

Glossy paint, alternatively, can be wiped clean. Scuffs erase right off the wall. So yes, while the total material costs might add an extra $100 to your painting bill, you may well be able to get two extra tenancies out of that paintjob, rather than having to repaint between every single tenant.

You have to paint anyway, you might as well use longer-lasting paint.

2. Install Door Stoppers Behind Every Door

This is a no-brainer. Every single door needs a door stopper behind it. You can install them yourself, or if you’re not feeling handy-capable, grab a six-pack of beer and a pizza and invite your handy friend over to help you.

You know what happens otherwise: doorknob-shaped holes in the wall behind every door.

There’s a thin line between “damage” and “normal wear and tear,” when it comes time to deduct or refund the security deposit. But here’s the thing: you don’t want either. You can’t make your renters treat your property with kid gloves, but you can make your property harder to hurt.

Tenants are tough on properties, so it’s your job to make sure your properties are tougher than your tenants. And as rental property upgrades go, this one costs less than $50 and will save you countless hours of patching and repainting walls.

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3. Prohibit TV Mounting

Do you really want a bunch of holes drilled in your walls, just so your renters can mount their TV instead of using a TV stand?

Then there’s the more serious risk of them failing to screw the mounts properly into studs. What happens when their $2,500 TV falls off the wall, taking a huge chunk of wall with it?

Worse, what if a toddler is playing on the floor underneath it?

Nope. No TV mounting. Write a clause into your lease agreement and avoid a slew of drywall-related rental property repairs.  

4. Screw All Racks, Bars & Hooks into Studs

Similarly, you don’t want renters to yank a towel from the towel bar and have the bar pull right out of the wall. It gets even uglier when your tenants’ kids use the towel bar for pull-ups.

The same goes for coat racks and hooks, paper towel holders, and every other protrusions for hanging things on.

Invest $6.99 in a stud finder and use it before screwing any fixtures to the wall. For the cost of a few dollars and a half hour, you can dodge endless rental property repair calls at 10 PM.

Protecting Rental Property Floors

The other part of the house that takes a beating from your tenants are the floors.

Before continuing, it’s worth pointing out that replacement flooring counts as a rental property tax deduction. It takes the sting out paying for them… but not by much. Your goal as a landlord: preserve the flooring through as many tenancies as possible.

Here’s how you can achieve it.

5. Avoid Carpets and Hardwood Floors

Carpets are a disaster waiting to happen. When making flooring decisions, ask yourself “How will this flooring hold up to vomit and red wine?” That will jolt your train of thought in the right direction.

Faux wood, luxury vinyl tile (LVT), and bamboo flooring can all look spectacular, and in many cases look indistinguishable from hardwood floors. Speaking of which, hardwood is another disaster waiting to happen. Your renters will scratch it up every time, no exceptions.

The next time you need to replace the flooring, look to the three options above as tenant-proof rental property upgrades.

6. Require Felt Pads on All Furniture Feet

This might sound like splitting hairs, until you actually go out and spend the money to install the faux wood or bamboo floors.

Put a strongly-worded lease clause in your rental agreement, and have the renters initial it. The clause should include a line holding them responsible for any scratches to the floors, and the cost of replacement flooring sections will be deducted from their security deposit.

Lastly, spend $3.99 and give them a box or two of felt pads when you sign the lease agreement with them. Aww, what a thoughtful housewarming present!

7. If You Must Install Carpets, Spend More on Padding & Less on Carpeting

Carpets usually need to be replaced between nearly every tenancy. Padding does not.

But here’s the thing – thick, plush padding makes even lower-grade carpet feel rich and plush.

Don’t install carpets, but if you absolutely have to, invest more in the padding than the carpets themselves.

8. Put a Shoe Rack by the Front Door

People track in mud, dirt, gravel, pebbles, dog excrement and worse into your rental property. At least, they do if they leave their shoes on when they walk in the front door.

If you put a shoe rack by the front door and take off your shoes when you show the unit, it sends a strong message: This property is so nice that we take shoes off before entering. You can even include a lease clause requiring them to take off their shoes when they enter the unit.

While you can’t really enforce the shoe clause easily, they’ll be much more likely to comply if there’s a beautiful shoe rack just begging to be used. And like the other rental property upgrades on this list, it’s cheap.

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What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

How to Protect Everything Else in Your Rental Property

Floors and walls take the biggest beating, but that doesn’t mean the rest of your rental property is impervious. Here’s how to protect your rental property in all other areas.

9. Switch Screen Doors & Storm Doors to Plexiglass

Your renters’ kids will put their hands right through the screen door. Or worse, the glass in a storm door.

Nowadays you can buy strong, scratch-resistant plexiglass nearly as clear as glass. Cops use it to lock up violent felons – you can count on it to prevent your tenants’ kids from breaking it.

It’s also one of the cheapest rental property improvements on this list. Win-win.

10. Simple Landscaping Means Less to Mess Up

Ornate landscaping looks great. It also requires work to upkeep. Do you think your tenants are going to break their backs keeping up extensive landscaping?

At best, your renters might water a few plants and mow the yard. And those are more responsible people than the average slacker whose weekend is filled with cheap drinks and reruns of bad sitcoms.

As a general rule of thumb, the less work your tenants have to do to maintain the outside of your property, the more likely it is they’ll do anything at all.

11. Replace Light & Fan Pull Cords with Switches

Pull cords to turn on lights and fans aren’t the “cool,” or “vintage” type of old-fashioned. They’re just annoying, outdated, and fragile.

Besides constantly getting in the way and hitting people in the forehead, your tenants will inevitably yank them too hard one day and pull it out of the socket. Then they’ll call you saying “I don’t know what happened, it just fell out on its own!”

Get ahead of the issue by replacing them with this newfangled technology called a light switch. Spend an extra $5 per switch and install dimmer switches for a more luxurious feel.

And for the fans, you can buy plus/minus button switches to control fan speed. They’re not outrageously expensive either – two simple and affordable rental property updates for a modern vibe and less to break.

12. Install Window Blinds Yourself

I’ve heard a lot of landlords over the years say “If my tenants want blinds, they can install them on their own.”

That’s the wrong attitude. First, you want your unit to show in its best possible light (pun intended). Second, blinds are cheap.

Finally – and most relevantly here – if you install the window blinds, you know it will be done right.

The last thing you want to do is leave rental property improvements in the hands of your tenants. If you do, you can expect four-inch carpenter nails or screws going right into your beautiful window framing.

Take this responsibility on yourself, and if you want to go higher-end, buy wooden slats or even plantation shutters for a classic-elegance feel. And make it clear that damage to them will come out of the tenant’s security deposit.

13. Require Tenants to Replace the Air Filters

One lease clause you should definitely include is a requirement that the tenants replace the air filter every three months. Include the appropriate size, and even the best store nearby to buy them, or a URL where they can order them online.

Most tenants forget to do this, and it leads to exponential greater strain on your air conditioning condenser and furnace. Which, in turn, leads to drastically shorter lifespans for each, plus higher energy bills for your tenants.

Not every rental property improvement is done by you. But even this one requires your attention, as part of your semi-annual property inspection.

Final Word: Inspect the Property Every 6 Months

Some tenants wreak havoc on their homes. Others are respectful and treat your property gently.

If you don’t inspect the property every six months, how can you know which type of tenant they are? That’s important information, which will help guide your decision about how much to raise the rent, whether to renew their lease agreement, or whether to start the eviction process immediately.

Checking on your properties regularly helps you verify that the tenants are complying with the lease agreement terms as well. Are they replacing the air filters? Keeping batteries in the smoke and CO detectors? Did a deadbeat boyfriend move in? Did they sneak in a pet?

It also sends a clear message to your tenants: I’m paying attention, and I care about this property. You should care about it too.

Have any horror stories about what tenants have done to your property? Or success stories of how you’ve protected your investments? Share them below! (And speaking of sharing, please pass this article along to other landlords who’d enjoy it!)

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About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

The post Tenant-Proof: 13 Rental Property Improvements to Fortify Against Damage appeared first on SparkRental.

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Heard tales of guaranteed rent payments, courtesy of Section 8? Deposited by the government, and paying higher-than-market rents?

If these stories perked up your ears, you’re not alone. Section 8 landlords can make good money, with a lower risk of rent defaults – at least on the government-paid portion.

But Section 8 tenants come with other risks as well. If you’re looking to learn how to become a Section 8 landlord, here’s a quick overview of what you need to know, and how to get started.

A Quick History Lesson

Back in the dark days of the Great Depression (I just got a déjà vu of my grandfather’s stories), the federal government launched two programs for low-income housing under the Housing Act of 1937. They were early predecessors of Section 8, and provided subsidized housing.

Yet it was not until the mid-‘70s that the modern incarnation of Section 8 was born.

It was initially intended as a project-based rental assistance system. Hence, the term “the projects,” which has a negative connotation among landlords and tenants alike. I bet you can think of some troubling movies and TV shows set in the projects (The Wire comes to mind, set in Brian’s hometown of Baltimore).

Although lawmakers’ intentions were good, by the 1980s backlash started mounting. Criticisms poured in that the project-based rental assistance program served only to clump together low-income families in high-poverty, high-crime locations.

So, Congress flung about for a fix. Instead, they just added another housing program to the books.

We still have a project-based voucher program in place, but now we also have a tenant-based voucher program, geared to the individual or family. Enter: Section 8.

The Basics: How To Rent a Home to Section 8 Tenants

Tenants apply with a local housing office  in order to get Section 8 approved vouchers. Those perspective Section 8 tenants will be either approved, denied, or wait-listed to join the program.

You – the landlord – decide if you will accept tenants who will be paying with Section 8 vouchers.

But wait one moment… does the good ol’ government pay for all of the tenant’s rent?

Not always! Increasingly, apartments and houses that take Section 8  are only receiving a portion of the entire rent amount.  Often this portion falls around 70% nowadays.

When you accept a tenant who has been accepted into the Section 8 housing assistance program, expect some red tape. Your property will undergo an inspection for approval, at the very least.

And that’s if everything goes smoothly. But more on that later.

Advantages to Section 8 Tenants

So should I become a section 8 landlord? What are the advantages to signing a lease agreement with Section 8 tenants?

Here are a few pros of accepting Section 8 tenants.

1. Reliable On-Time Payments

Well, for the government’s portion, anyway. But there’s no guarantee the tenants will pay their portion on time; not from the government, anyway.

Fortunately, you can buy a rent guarantee from private insurers. Check out Rent Rescue or Sure Insurance to buy rent default insurance, that kicks in and pays you the rent if your tenants stop paying.

And through good ol’ fashioned tenant screening, you can weed out unreliable renters with a poor credit history, showing a pattern of paying bills late (or not at all). It helps if you automate your rent collection to receive rent electronically, direct-deposited into your bank account.

2. High Allowable Rent Increases

Most cities allow landlords to raise the rent in the 5-8% range per annum. These are determined by the federal government’s findings of fair market rents; more on this below.

But since the government pays the lion’s share of the rent, Section 8 tenants tend not to complain as much about rent hikes.

3. Fill Vacancies Faster

When you accept Section 8 tenants, you can fill your vacancies faster. First, because many landlords don’t accept Section 8 vouchers, leaving tenants with fewer options.

But there are also extra websites and newsletters specifically for Section 8 rental listings. Check out  GoSection8 and WeTakeSection8 as two examples where Section 8 landlords can market their vacant rentals.

4. Lower Vacancy & Turnover Rates

Because Section 8 tenants often have a harder time finding landlords who accept vouchers, they tend to stay longer-term. That in turn means lower turnover rates and vacancy rates.

Both of which mean higher profits and better real estate cash flow.

5. Potential for Higher Rents

While it was more common in decades past, sometimes Section 8 tenants do pay higher rents than market tenants.

To research Section 8’s “fair market rates” (FMR) for your market, go to HUDuser.gov, select your state and then your county. There you will find a chart providing the FMR for efficiencies up through 4-bedroom rentals.

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Disadvantages to Becoming a Section 8 Landlord

Section 8 tenants can come with plenty of their own risks and drawbacks. Before you take the plunge and invest time and money into becoming a Section 8 landlord, consider some of these disadvantages.

1. Red Tape

The bureaucracy can cost time and money, and delay new Section 8 tenants moving in. Worse yet, local housing departments often require extra steps in the eviction process, delaying eviction of non-paying Section 8 tenants.

Which, in turn, means months of unpaid rent.

2. Delayed Initial Payments

Sometimes your first rent check can take up to two months. Oh, you will get it eventually, but count on covering your expenses out-of-pocket for the first few months.

Just imagine telling your mortgage company “I’ll get it to you eventually!”

3. Inspections, Inspections & More Inspections

Did I say inspections? We are talking about a white-gloved, look-everywhere inspection.

This is the top reason many landlords do not accept Section 8 vouchers. It’s also why Brian stopped accepting Section 8 tenants – every year, his entire cash flow for the year would be wiped out by repairs ordered on a whim by local inspectors trying to prove they visited each home on their schedule.

4. Tenant Quality

Sure, the government portion will come in every month, but what about the tenant’s portion?

The simple fact is that lower-income tenants often mean lower credit, lower reliability, and less stable income. Look out as well for “professional tenants” who know the system better than any landlord accepting Section 8 rent vouchers.

5. Property Damage

Higher-risk tenants aren’t just a risk for rent defaults. They also pose a higher risk to your property itself.

Tenants can put the proverbial beatdown on your rental unit and you, the landlord, are left with the bill. What, you thought the government will accept liability for  the Section 8 tenants’ actions? That you’d be reimbursed for any damage caused? Never.

Sure, you can take that Section 8 tenant to small claims court and sue for the damages, but don’t count on getting that moolah, even if you win a judgment.

Brian shared some of his horror stories with me, and pointed out that the less financially invested people are in, well, anything, the less attention they pay. His Section 8 tenants often treated his properties badly, because they had little or no financial investment in it.

Tips for Working with Section 8 Tenants

Still want to become a Section 8 landlord?

We’ve got you covered. Here are some tips for success, when starting out with Section 8 vouchers!

Screen Tenants Like $150,000 Depends on It

Or however much your property is worth. Because you are handing complete control and possession of your asset worth hundreds of thousands of dollars to these people.

Think of tenant screening as a mechanical process – remove any attachment and emotion from the equation. You need a written policy on your tenant screening criteria, that you follow like clockwork every time you collect rental applications. For a sample, the National Housing Law Project contains a great example under the heading “Screening Process and Eligibility Criteria.”

List out all your tenant screening criteria such as income, criminal history, employment as applicable, credit check and score, eviction history, landlord referrals, and condition of their current home. Feel free to start with a free tenant background check.

Following a set procedure also keeps you in compliance with landlord Fair Housing laws. Assuming, of course, that your policy adheres to FHA regulations.

Tenant-Proof Your Rental Property

Make your rental “strong like bull”! Start tenant-proofing your property by painting the walls with glossy, neutral-colored, inexpensive paint. It’s easier to rub scuffs away on glossier finishes rather than flat paint.

I personally steer clear of both carpets and real hardwood floors in rentals. However, sturdy lookalikes are perfect, from waterproof luxury vinyl tile (LVT) to faux wood to bamboo.

If you insist on installing carpets, use a thick, higher-grade padding, and lower-grade carpets with darker colors. You’ll have to replace the carpets often, but not the padding.

Use tamper-proof smoke and carbon monoxide testers. If you provide appliances, install second-hand ones with few bells and whistles. The more complex an appliance is, the more likely the tenant is to misuse and break it.

Likewise, remove other unnecessary features. No reason to include garbage disposals (they break easily), ceiling fans, window air conditioning units, or anything that is not a required addition. Bare minimum equals less inspection, less maintenance, and less damage to worry about.

Don’t provide screen doors. Tenants – particularly Section 8 tenants – end up breaking them, and if you include them when tenants move in, they’ll expect you to repair or replace them when they break them.

Many of the common repairs can even be done cheaply and by you, thus saving money but still maintaining the property in a good strong condition.

Inspect the Property Every 6 Months

Your goal is not to harass, but to look for needed repairs and ensure the tenant is complying with all lease agreement rules.

Schedule inspections and throw in a “I am doing a smoke detector check” surprise. Check for running toilets, leaking faucets and anything else that may be literally or figuratively flushing money down the drain. (Did you know that one toilet with a slow constant run costs about $75 per month?)

You will also be able to be sure that the tenant is complying with your lease agreement terms. Are there any unauthorized occupants? Dogs? Alligators in the bathtub?

File for Eviction Immediately if Tenants Break the Lease Agreement

If the tenant, the tenant’s visitors, or their kids are breaking rules, get right on top of it. Start the eviction process as soon as possible; it takes several months (or longer, for Section 8 tenants) from the initial eviction notice until the eventual lockout. So the tenants will have plenty of time to correct the violation and avoid the eviction.

Often tenants who break their lease agreements will be bounced from the Section 8 program; they have much to lose by not following the rules.

Final Word

Above all, know your neighborhood. If you have a great rental in a desirable neighborhood, you may want to rethink becoming a Section 8 landlord. Chances are that the FMR will be lower than what you can fetch on your own.

Now that you are armed with the info, the good, the bad and the truth, go forth and choose well! The Section 8 Housing Voucher program has its place and can be a viable option for many landlords. But before jumping in, make sure you know exactly what it is you’re getting into.

What to Do Now:

1. Comment below: Have you ever worked with Section 8 renters? How did it go? Will you consider working with Section 8 renters in the future?

2. If you’re new to the rental investing game, download our free Recipe for Rental Income: 5 Steps for Your First $500/Month in Passive Income.

3. Enjoy this article? Did it raise some questions and ideas that got you thinking? If so, your friends, colleagues, and family members will probably also get something out of it. Share it with them on Facebook or Twitter. You can also follow us on Facebook and or Twitter for awesome daily doses of, well, real estate awesomeness ?

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If you own or manage rentals long enough, you’ll eventually have to go through the eviction process.

Evictions are expensive, time-consuming, and fraught with pitfalls. No really; they can take anywhere from two to twelve (12!) months. Many landlords make matters worse by hesitating to evict bad tenants, and then blundering through the long eviction process ill-prepared.

Most bad tenants – and therefore most evictions – can be avoided through tenant screening tactics, but nothing’s foolproof. “Be Prepared” is not just a motto of the Boy Scouts. You need to know how to evict defaulting, dirty, or property-damaging renters before the need arises, or when the time comes you’ll freeze and slow the lockout process even further.

It Starts with a Paper Trail

You might think it’s easier to pick up the phone and ask Tom Tenant where the rent is. Or to give verbal warning after warning to the inconsiderate noisy renter, or to Sneaky Pete who slipped his pet python into the property (say that five times fast).

Repeat after me: “Telephone calls leave no trail.”

Phone calls can be a polite addition to written notices, but by themselves they just create a case of he-said she-said. No judge wants to referee between two spatting parties without hard evidence to lean on.

So, how do you keep good records going into the eviction process?

1. Put everything in writing! If you are emailing, send it with a read receipt. If you text, screen shot it. Keep copies of all letters!

2. In addition to your ledger, keep copies of all payments. If paid by cash, provide a receipt and get a signature; hold on to all paid check copies; money orders and account automatic deposits.

3. If police or other authorities are called by neighbors, get a copy of the report. Make sure you write down the date, time and the officer’s name. Create your own incident report.

4. Keep hard copies in a file, along with digital copies on your computer. When you’re sent a digital file, print it. When you’re given printed paper, scan it. You never know when you’ll lose either your hard copies or your digital files.

5. Take pictures! Trash strewn all over the rental unit’s lawn? Take photos. Tenant left the apartment damaged? Take photos. Turn your date- and timestamp on before taking the photos, and consider taking a video of the damage. Most critically, take photos along with your Move-In/Move-Out Condition Statement, which should be signed by the renters at both move-in and move-out, and provide photos to the renter of each condition.

Ignorance Is Not Bliss; Know the Laws!

Benjamin Franklin said it best: “An investment in knowledge pays the best interest.”

Let’s face it, that property that you are renting out to others cost a pretty penny. Becoming knowledgeable of state, local and Federal regulations are a big part of your owner’s manual.

First, know that “self-help evictions” are a big no-no. A “self-help eviction” is when the landlord/owner takes measures into their own hands to remove a tenant who has not paid or violated the lease or law. It’s illegal in every state.

What are some “self-help eviction” measures to avoid?

  1. Do not change the locks before the eviction lockout date.
  2. Do not touch or remove any of the tenant’s possessions.
  3. Do not shut-off utilities (even if the tenant has not paid).
  4. Do not stop making repairs. Tenants routinely use this in court as a defense.
  5. Do not harass, curse at, or threaten a tenant, occupant or guest. Be careful using social media and posting anything derogatory about them, no matter how much of a deadbeat they’ve been.
Overview of the Eviction Process: Infographic

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Eviction Process Step 1: Written Notice

Every state has written notice requirements – specific written legal notices that must be sent to renters, usually by certified mail.

While a few states are looser, others are extremely precise and specific. Not sending the right notice at the right time only adds time and aggravation to this already stressful process.

Here are a few examples:

North Carolina: When a North Carolina tenant is behind on the rent, the landlord must give them a written notice demanding payment within ten days. If the tenant fails to pay, the landlord must then go to the local courthouse and file a Complaint in Summary Ejectment (more on that in Step 2: Filing).

Illinois: Illinois requires a five-day notice when the tenant fails to pay rent. Other wrong-doings and lease breaches require a different form, a ten-day notice. Then there are the major cities! Chicago imposes its own set of processes for eviction. Be sure that you always check your local notice requirements as well!

Proper notices in each state contain specific language. For instance, some are simple demands. An example is: “This is a formal demand that you owe me $XXXX.XX in back rent. You must pay this amount in full on or before XX/XX/XXXX or legal proceedings will be initiated.”

Some states permit language that tells the tenant to pay, or leave. This is often referred to as a “Notice to Pay or Quit” or a “Notice to Terminate”. It is these tiny little details that can often make or break an eviction case. Most district judges will hold you accountable to the letter of these minutiae.

How Do You Serve the Eviction Notice?

Again, without sounding like a broken record, different states (and some municipalities) have different protocols. Below find the various ways to deliver that notice to the offending tenant.

  1. First-class and/or certified mail. Some states allow regular mail, while others require certified mail. I always send one certified, return receipt required, even when not required. Having that little green signed card in court can go a long way.
  2. Post. This is when you tape the notice to an obvious place such as the front door. Tip: Mail it as well!
  3. Hand-deliver. Each state has their own ways to do this. With some, you can just hand it to whomever answers the door and run! And other states require a signature (tip: it’s always better to get it signed). There are rules as to who may receive the notice and their minimum age; delivering it to a toddler is never allowed.
  4. Process server. Few states require this, but it has its advantages. First, it’s hard proof that the eviction notice was delivered. It’s also less confrontational and dangerous than hand delivery by you, as irate tenants can be unpredictable. Still, it’s expensive, and an extra step to have to take.

Bear in mind that some states require a combination of these service options before filing in court for eviction.

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Eviction Step 2: Filing

How many days did your state require in the eviction warning notice?

That’s how long you must wait before filing in court.

For instance, in Iowa, once your notice period expires, you go to your county court and file an Iowa Forcible Entry and Detainer or F.E.D. Alabama landlords also file the form in the County courthouse; it’s referred to as the Statement of Claim Eviction, Unlawful Detainer. In Michigan and Pennsylvania, these forms are filed at the district court level and termed Summons and Complaint for Eviction.

As each of them has different names, they also have distinctive information required as well as the methods to file them. Some municipalities have joined this millennium and allow online filing for the eviction process. Others remain stubbornly low tech, and require an in-person visit to the courthouse with paperwork and paper check in hand.

The nuances do not end there. Each court has a decree on what constitutes “proper waiting time”. That five-day grace period in your proper notice may mean “any” five days in a row in one state, and five business days in another state and a whole different counting interval somewhere else.

Rule of thumb: Contact the clerk of court where your property is located. Do this before you ever need it. Find out what constitutes a day in a notice period? How can a form be filed; in person or online?  What is the service of notice requirement?

Eviction Step 3: The Hearing

The document is filed, your tenant receives notice from the court that they must appear for a hearing. Most states will assign a court date for all parties to appear and duke it out, presenting evidence and making a case before a judge.

However, some states such as Nevada require the tenant to contest the complaint first (usually via mail). If they do so within the time window, a court date is scheduled for all parties to appear. However, if the tenant fails to answer in the time allotted, the eviction order is automatically granted. There are a few states that have similar procedures.

“What do I bring to the eviction hearing?”

The lease agreement, if you have one is very important to bring along. Any notices, copies of checks, pictures, unpaid utility bills and your rental ledger should be in your case file. If you have made any phone calls, make sure you have the specific dates and times.

TIP: Always bring an extra copy of the lease agreement with you. Often the Judge does not have it. Make notes as to which section of the lease was violated. The more organized and the easier it is for the Judge to find the necessary information, the better it is for you.

“Do I need an attorney?”

You can’t expect us to answer that! While we would never tell anyone not to hire an attorney, our experience has been that landlords don’t need one for the eviction process. But if there is confusion, complications, worries, snags or you have never been in a court before; perhaps it is worth the money to hire an attorney. However, a cut-and-dry non-payment case is usually straightforward. And often the tenant doesn’t bother to show up.

Step 4: Eviction Lockout

Each state has their own procedure for formal eviction lockouts as well, surprise!

Many courts offer a period of appeal. (See how long this process is getting?) In Pennsylvania, the appeal time after a judge renders his decision is ten days. This means that either party may file an appeal to a higher court at any time within the ten-day period.

And remember, each court counts days differently!

Once the judge approves the eviction, and any appeal period has been exhausted, the procedure for a constable or sheriff perform a lock-out may begin. Important note: YOU may be the one required to schedule the eviction with the sheriff’s office! Be sure to ask the court.

Almost there….

Some states such as Colorado have a process for Writ of Restitution. This is a form that the landlord/owner will get from the courts, and then take to the sheriff’s office.

Once the sheriff assigns an eviction date, the landlord has to post or serve it on the tenant. Basically, it tells the tenant to get out or be locked out. That means everyone on the household must vacate and all personal items must be removed.

Eviction Step 5: Are We Done Yet?

Just when you think it’s safe to go back in the water (or prepare your property for the next renter), there are potential pitfalls.

  1. What if your tenant appeals? In some courts, in order for the tenant to do this, a specific portion or allotment of the rent “allegedly” owed must be paid into the court along with paperwork to initiate the appeal. In other courts, the tenant must simply pay rent, current. The appeal process can be lengthy and complicated. Therefore, at this point unless you have been there, done that; time to call your lawyer.
  2. Unfortunately, there exist professional tenants that can literally drown a landlord in litigation for months, or worse, years. Tenants in the midst of bankruptcy could hold you stagnant as well. Without sounding repetitive, get good, professional, legal counsel if this happens!
  3. Tenant is locked out, but all their stuff remains! In some absurd states, the landlord is required to store the property. For instance, in Nevada, the landlord not only must store the junk for 30 days but also even after the 30 days are up, must make sure and take all “reasonable” efforts to locate the owner of this abandoned stuff! And in Oregon, not only must you store the renter’s belongings, but you must also ensure that no damage is done to it.

What?!

Then you have a state like good ol’ Arkansas where if the deadbeat leaves personal effects behind, it is considered abandoned and well, you can just throw it away or do whatever you want with it.

 

Are There Any Alternatives to The Eviction Lockout Process?

Originally invented by banks, lenders came up with the idea to pay owners in foreclosure to leave. It made sense (cents?) as the foreclosure process could take upwards of a year to complete. In this time, the property is most likely not being repaired, may even be getting neglected and abused.

It inevitable that some landlords would follow suit. It might stick in your craw, but sometimes it’s the cheapest and fastest way to get your hard-earned property back. (It makes one wonder though, at a legal system so cumbersome that we have to reward people for breaking their contract just to get our own property back….)

Consider a simple non-pay eviction case in my suburb. I can generally go from notice to lock-out (provided there are no glitches) in about a month to forty-five days. But in larger cities, such as Philadelphia or Chicago? Triple that, just to get a court hearing! Much less an actual lockout date.

So, here you are with a tenant not paying rent. In my smaller town, it will cost you two months of no rent (plus court fees) to evict. Then money to clean out the abandoned trash, repair the property, and yes, even replace appliances, carpeting and the like. Perhaps some extra costs to store junk left behind. Then, to market you go. Hopefully, you find a good tenant quickly. All in all, you’re facing thousands of dollars in expenses.

Instead you try:

“I would like to propose that you move out in two weeks and I will pay you $500. I’ll meet you here to inspect the property, and if all looks good, I’ll give you the cash and we are done.”

Be sure and read your tenant and the situation before jumping to this solution. Many times, when a tenant gets a notice, they get scared and leave quietly on their own in the middle of the night or pay up. Other times, they’ll string you along and say they’ll leave voluntarily, and then… won’t.

Oz. of Prevention > Lb. of Cure

As much as we try and avoid the eviction hell, occasionally we all end up there. But through tenacious tenant screenings, including background, criminal, credit and eviction reports, you greatly reduce the probabilities.

Go further and check the Facebook and social media pages. Contact employers, prior landlords. Walk through their current home.

If you have any doubts about a prospective renter, require their rent be deducted from their paycheck! (Psst – we can help with that)

What have your eviction experiences been? Any tips to pass along to other landlords?

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Why work when you can automate?

The whole point of investing in rental properties is passive income. If you’re spending your nights and weekends manually collecting rental applications, writing lease agreements or collecting rent payments, you’re doing it wrong. The best property management software allows you to do all these things with the click of a button.

Rental property manager software allows landlords, real estate and property management companies to oversee their properties in one place. It automates actions like:

  • Advertising properties
  • Collecting rent payments
  • Screening applicants
  • Requesting maintenance work
  • Tracking profits and expenses

In short, rental property manager software allows landlords to stay organized and on top of their properties, saving both time and money.

But it’s difficult to know what’s the best landlord app for your business. There’s a vast number of options out there, and many don’t disclose their pricing and fee structure. And with extra costs and hidden fees, it’s not easy to compare like for like.  

Here’s our take on the best property management software for each type of landlord and property manager. And we’ve included the best free property management software too!

What Features Should You Look for In Rental Property Manager Software?

Picking the best rental property management software for your business boils down to several factors. This includes the number of properties you manage, how mobile you are, your budget and the amount of people you have on staff.

But whatever rental property manager software you go for, there are some standard features you need for the right level of automation and overview.

On the Cloud

Traditionally, all rental property manager software was managed from one application on your desktop. But increasingly the best landlord apps for the mobile property manager are cloud-based, ensuring your information is accessible from multiple devices.

Handy when you’re at a loose end and want to do some admin while on the go. And, for that matter, when your computer suddenly sparks and fizzles and displays the “blue screen of death”!

Collecting Rent and Managing Expenses

When you’re juggling multiple properties, don’t let your precious time be sucked up by collecting and chasing rent payments. Even free property management software allows you to collect rent online and keep track of late payments.

But to have a complete overview of your passive income, you need to track your expenses too. That’s why the best rental property manager software integrates your rent ledger and tracks your expenses. This allows you to automate as much as your accounting work as possible and generate essential reports with ease.

Ideal landlord apps let you generate income and expense reports with one click, along with Schedule E tax statements. Who said landlord accounting had to be hard?

Maintenance Management

The best rental property management software don’t just allow you to record work orders for your properties. They also allow you to request and track maintenance work orders. Even some free software for rental property management allows you to store information securely and easily, like photos and documents.

Good landlord software also helps you track communications with tenants, with a system for recorded maintenance messaging.

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Advertising Vacant Units

Rental property manager software that automates advertising your rental properties is a must, because it’s such a time-consuming process. Even free property management software allows you to advertise a property at the push of a button, syndicating it to top real estate sites like Trulia or Zillow.

The best property management software will also automate the rental application process. You can automatically generate and send a rental application to your applicants, which they can fill out online, e-sign and send back to you.

Screening Tenants

Nothing ruins your bottom line faster than a bad tenant who never saw a bill they wanted to pay on time. But tenant screening can also eat up your time and bog you down with paperwork.

The best property management software automates this process as much as possible, allowing you to run tenant screening reports instantly, including full credit reports, criminal reports, eviction reports, and housing history reports. Ideally, you can also select who pays the fees: the applicant or you.

Some landlord apps even let you generate a free background check for applicants!

Protecting Your Investment

Elite property managers use an ironclad lease agreement to protect your property from the very beginning. If a rule isn’t written into the lease, it’s not enforceable.

So the best property management software programs generate custom lease agreements for you at the click of a button. The should also let you generate late rent notices instantly.

Which rental property manager software is the best for you? That depends on the amount of properties you’re dealing with, and your requirements. Here’s our recommendations for the best property management software for each type of landlord.

Best Free Property Management Software for Smaller Managers & Landlords: SparkRental

What, you thought we wouldn’t include our own app on this list?

We get it: you’re building your property empire one property at a time and you want to avoid any unnecessary expenses. But managing everything by yourself is time consuming and costly, which eats into your passive income. So, you can’t afford not to automate either. What to do?

SparkRental’s free property management software has all the features a landlord or smaller property manager needs to automate their property management. Landlords can save time and money operating their rental business without costly fees and monthly charges.

Spark Rental’s minimum monthly cost is free for the standard plan. But as your needs change, you can upgrade to our premium plan ($19) or ultimate plan ($39).

Pros:
  • Send your rental listing out to Trulia, Zillow and HotPads, reaching 120 million Americans
  • Collect free, instant rental applications that your applicants fill out and sign online
  • Run complete tenant screening reports (either instant or charged to applicants)
  • Create free lease agreement with protective clauses of your choosing
  • Collect rent online, direct deposited into your account
  • Track your rent and expenses in one place for quick and easy accounting
  • Store your documents, property condition photos and records in a secure property management hub
  • Generate and send late rent and other tenant notices with the click of a button
Cons:
  • The free plan does not include maintenance and communication logging, landlord website builder or priority customer support
  • For properties of 75 or more units, you’ll probably require more customizable property management software

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What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Best Property Management Software for Large Managers: Buildium

If you’re managing 75 or more units, those little expenses that you could just absorb before will start to affect your bottom line. And you’ll need features like customer service and better oversight. It’s time to kick it up a notch and automate more steps, and that means spending more.

Our pick for the best property management software for large landlords and property managers is Buildium. It’s one of the best-known names in the property management industry, and for a good reason. Its software is flexible and easy to use.

But with Buildium’s minimum monthly cost starting at $47 for 1-20 units, it may not make good financial sense for the smaller landlord.

Pros:
  • Easy-to-use tools with an excellent digital tour for the novice
  • Robust online security and Stevie Award winning, 24/7 customer service
  • Set custom credit score requirements to quickly screen applicants on the Pro plan
  • Prorate common charges among tenants
  • Set up regular inspections automatically with their partner Happy Inspector
  • Convert maintenance work orders into bills, which can be paid online
  • Enables tenants to authorize their bank accounts, set up automatic payment schedules and submit maintenance requests
Cons:
  • There’s a mobile app but only for essentials, and its site isn’t very mobile friendly
  • High monthly cost from the get-go
  • Not as customizable as other rental property management software
Best Rental Property Management Software for Mobile Functionality: Appfolio

So, Buildium is a good option for the larger landlord or property manager. But it’s not particularly mobile-friendly. So, if you want to manage your properties on the go, our vote goes to Appfolio. Every single one of its functions is available on mobile devices.

Appfolio’s minimum monthly pricing starts at $1.25 per unit per month. But with a $250 minimum monthly payment and a $400 onboarding fee, it’s more expensive than Buildium.

Pros:
  • Offers similar features to Buildium, but its platform is fully mobile-responsive
  • Easy-to-manage software that’s intuitive and quick to master
  • Upload pictures taken with your phone and record verbal notes with the inspection feature
  • Responsive customer service
  • Offers a wide range of plans to suit your property portfolio: residential, commercial, student housing and community associations
Cons:
  • Appfolio does not offer free trials to prospective customers, but a free demo is available
  • Minimum monthly pricing is more expensive than Buildium
Most Customizable Property Management Software: Rent Manager

If you want a property management app that can be tailored to any portfolio of any size, the best property management software for you is something very customizable. In this case our vote goes to Rent Manager. Its pick-and-choose features and unique pricing structure suits all different kinds of landlords that manage all kinds of properties.

Rent Manager charges a flat monthly rate of $75 per month per user, not rental unit. So, if you have a lot of properties and few employees, this pricing structure could suit you.

Pros:
  • Tailor the application to your needs and requirements, including the drop-down menu choices on your dashboard
  • VoIP technology automatically identifies and opens the caller’s records, speeding up conversations
  • Fully integrated with multiple partners with full read and write data functionality, including AmRent and Safeguard
  • Eliminate the need to print and send documents through the mail with Virtual Post Office
Cons:
  • Rent Manager’s software is hosted on a remote desktop rather than cloud-based, so it can be laggy
  • Interface design isn’t as intuitive as other property management software and is harder to learn
  • If you’re handling a smaller number of units, the flat rate of $75 might not make sense economically
Over to You

Regardless of the size of your business, the best property management software will save you precious time and money by automating your day-to-day operations. You’ll have an overview of your rent payments and expenses and can send and receive tenant applications with the click of a button.

If you’re managing a large number of properties, the best property management software will cost you. Just make sure that the software suits your requirements as well as price range, like mobile integration and property type.

But if you’re a small landlord or property manager, you can’t go wrong with SparkRental’s free landlord app. It automates those jobs that eat up so much of your time with the click of a button. And it gives you peace of mind with automated screening reports and tenant notices.

Have any tips about what property management software to choose? How do you prefer to automate your landlord tasks? Let us know in the comments! More Landlording Reads:
About the Author

Yvonne Reilly is a landlord, property investor and solopreneur, passionate about helping people become financially independent and realizing their FIRE dreams. As a freelance writer, editor and digital marketer, she also helps small businesses connect with their audience and build traction. You can find out more about Yvonne on her website.

The post What’s the Best Property Management Software for Your Business? appeared first on SparkRental.

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To the uninitiated, investing in rental properties can look like a no-brainer route to financial independence and a steady passive income. After all, your tenants are covering your mortgage and other rental expenses, with little effort on your part!

But if you don’t do your homework before you take the plunge, your rental cash flow will falter at the first bump in the road. Rental investment rookies often learn this the hard way — as I almost did with my first rental property venture.

My husband’s and my first foray into investing in rental property, was actually repurposing our first home. Having lived there for a couple of years already, we were cocky. The area was a rental goldmine and we knew our expenses backward and forward.

But there were a few things we’d forgotten to factor in…

Rental Property Investing Newbies: Don’t Forget Non-Mortgage Expenses

As we were green at investing in rental property, we forecast our passive income by deducting the mortgage from the rent we planned to charge. That left us with a nice chunk of money every month even after paying our mortgage, we (naively) thought.

We were all set to advertise until a mortgage broker sent us tumbling back to earth. Apparently, our particular loan mandated a higher interest rate, as we were no longer owner-occupiers. We’d have to switch our homeowner’s insurance to a landlord’s policy.

Over the next 18 months, we saw our maintenance expenses, repair costs, property taxes, and vacancies all play a major role in our rental cash flow. It was a bitter dose of reality, reflecting the true cost of investing in rental properties.

We were lucky to get some good advice just before we set our rental price. So, let me pay it forward. Here’s a guide to investing in rental properties for beginners. Or: what every aspiring investor should know before they get started in rental real estate investing.

What to Do Before Investing in Rental Properties

If you’re new to investing in rental property, the golden rule is to always research as much as possible beforehand. This is true whether you’re buying a property or changing your status from owner-occupier to landlord.

Don’t gamble your well-earned money on an impulse buy. Instead, gather as much data as possible to ensure your property will actually cash-flow for you!

Converting Your Home into a Rental

If you’ve been living in the property before you lease it out, keep in mind you could lose any primary residence exemptions. That could mean a painful hike in property taxes and other local fees.

You may also have to switch your mortgage from a traditional loan to a rental property loan. This can mean stricter terms and higher interest rates. So, shop around before investing in rental properties and seek advice from local mortgage brokers.

Getting a Mortgage on a Rental Property

Getting a mortgage for a rental investment property often requires a higher down-payment than owner-occupied properties. So be prepared to shop around for a mortgage that will keep your rental cash flow reliable.

Seek advice from a trusted mortgage broker or financial institution on what terms are best for you and your rental property. It could mean choosing between a short or longer-term loan, or a fixed or variable rate.

Location Research to Ensure a Better ROI

If you’re investing in rental properties the same way you’d shop for a home for you and your family, you’re doing it wrong. If you want to make sure your rental yields a good income, you need to evaluate the location like a landlord. An investor, focused on ROI.

  • Consider areas that are up and coming or being gentrified to get a better return on your investment.
  • Research the property taxes in the area to get a better idea of your costs.
  • Find out if the location is attractive to renters. What are the schools, crime rates and amenities like?
  • Talk to other landlords or real estate agents to get an idea of the neighborhood’s vacancy rates.
  • Ask the neighbors about the location and whether they’ve had any problems.
  • If the rental property is far from your home or if you are managing multiple properties, look into management agencies in the area.

Try Propstream and Mashvisor as quick rental market analysis tools.

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How to Calculate Your Rental Cash Flow

One thing that never dawned on me when I started out in rental property investing was the hidden expenses. As I’d been living in the apartment for a few years, I thought I had a good handle on the costs of living there.

Turns out I made the classic rookie mistake of not taking rental expenses into account. I’d thought that investing in rental properties would yield a straightforward passive income. But my cash flow would be at risk without factoring in costs like landlord insurance, capital expenditure and maintenance.

Luckily, we had people around us who knew better and set us right, and I’m eternally grateful. We set a rental price that would cover the expenses we could foresee. We also ring-fenced an emergency expense fund for any nasty surprises.

Since then we’ve had our share of sump pumps replaced and new furnaces installed. And that’s the rule, not the exception. But setting the right rent and having an emergency expense fund from the very beginning spared us many sleepless nights.

We calculated our rental property’s cash flow by hand, but you’re in luck. It’s now easier than ever to forecast future returns by using a rental property calculator (psst: ours is free!).

Maintenance and CapEx

The income on your investment property might be passive, but that doesn’t mean you should be laid-back about your investment. Rental properties need regular maintenance to keep them in good shape and to keep your tenants happy. When a bathroom tap starts to gush water or the dishwasher suddenly gives up the ghost, you cash on hand to quickly fix or replace.

Along with your garden variety repairs, there’s also capital expenditures or CapEx. These are the costly fixes like a new roof or a replacement furnace. Read more about CapEx here.

Vacancies & Turnovers

When calculating your cash flow margins, don’t forget to factor in turnover costs. Every time a tenant leaves, you need to clean and paint the property, advertise and pay the mortgage and bills. Tenants who don’t pay on time, cause damage or skip out on their lease will eat into your passive income.

Do your due diligence and you’ll get yourself a great tenant that will stick around for years to come.

Even if you have a cash-cow rental property in a hot location you’ll still have tenants come and go. In between tenants, you’ll need to freshen up the unit with new paint, cleaning, sometimes new carpets or flooring before showing. You must also factor in the time spent advertising the property and showing it to prospective renters.

The average vacancy rate is around 8% which works out to a month a year, but if your investment property is in a cooler market you should use a higher number.

Property Management Fees

If you only have one property and you’re a dab hand at home improvement, you might be happy maintaining it yourself. But what if you’re living in another city and the washing machine suddenly springs a leak?

A good property management agency is worth their weight in gold, especially when you have multiple properties. Believe me, you’ll need them if you’re a long-distance real estate investor.

Even if you use an automated landlord app like ours, still shop around for a reputable property management agency to keep in reserve if you need help.

Utilities

In a perfect world, your renter will pay the utilities themselves. But you might still get landed with the bills when the unit is vacant. So, make sure to include some money for utilities in your rental cash flow calculations before investing in a rental property.

Miscellaneous

Miscellaneous costs can include bookkeeping, accounting, lease agreements, automated landlord apps, and mileage. If you’re small fry you can absorb these costs, but if you have a suite of properties these costs will start to add up.

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Risks to Expect (and Mitigate) in Rental Property Investing

When I first started investing in rental property, I was already aware of the damage that a bad tenant can wreak on your investment. That’s because a good friend had converted their home into a rental, only to see it ruined by reckless tenants.

Our friend had leased his home to a family who skipped out on their rent after six months. Not only were the rooms filthy and all the furniture broken, but the carpets were scorched, and the kitchen walls blackened.

It cost thousands of dollars of his own money to fix these issues. As a result, he was scared off rental property investing for life.

I’m glad to say that this has never happened to us. And it’s because we’ve always taken steps to protect our income and investment. We make sure that reputable people are in our properties and we keep an eye on our investments.

A quality tenant means fewer repairs, less time spent dealing with issues and less wear and tear. And a long-standing tenant means you’ll save money on turnover and vacancy costs.

Tenant Screening

Before you even consider handing over your keys to anyone, you need to carefully screen your prospective tenants. That means running a thorough rental application process. This includes eviction, credit and criminal record checks, alongside landlord and employment references. (We offer a free rental application!)

And to save yourself some time down the road, consider doing a pre-screening interview so that you’re only showing the property to qualified applicants.

When you run rental applications, you can select to include tenant screening reports as well: tenant credit reports, criminal background checks, and eviction reports.

Security Deposit

Always make sure to get a security deposit before your tenants cross the threshold. This will help protect yourself from late payments and minor damage done to your rental investment property. Plus, your tenants are more likely to take care of your property to ensure they get their deposit back when they move out.

A security deposit is not a failsafe against all damage though. My doomed friend’s security deposit only partially covered repairs to his wrecked house. Watch out for these security deposit mistakes to better protect your property from damage and defaults.

So, make sure to do proper tenant screening and protect yourself with an aggressive lease agreement.

Have an Ironclad Lease Agreement

It’s essential that you have an airtight lease to protect yourself legally when investing in rental properties. Each state imposes its own legal requirements for leases. But to truly protect yourself you should include state-specific lease clauses including:

  • Due dates for payments
  • Lease termination fees
  • Late payment fees
  • Occupancy and guest rules
  • Property inspection frequency

Luckily for you, our state-specific lease agreement includes protective lease addenda and disclosures.

Defend Your Boundaries

You can include every lease clause under the sun, but it won’t matter unless you’re willing to enforce these rules. New landlords are often too timid to crack down on renters who consistently pay rents late and push boundaries.

To protect your rental property investment and rental income, set clear ground rules from the very beginning. If any bad behavior or habits rear their ugly head, remind your tenants of these lease clauses and issue any relevant fines. That way you’ll nip any issues in the bud and show them you’re serious about protecting your property.

Inspect Your Rental Investment Property Regularly and Often

As my friend learned the hard way, repairing your property after a bad tenancy can wipe out your precious passive income. So, keep on top of your investment by making routine inspections on a regular basis, at least every three to six months. These checks allow you to keep on top of any maintenance requirements and give your tenants a chance to fix any issues before they get worse.

Over to You

We’ve all learned lessons the hard way, and investing in rental property is no exception. Luckily, we had people around us who weren’t shy about sharing their advice and horror stories! And we’re very grateful they did, to help us learn real estate investing.

And even when you do everything right on paper you’ll still have bumps on the road when investing in rental properties. In my case, it was two couples moving out in two years because they broke up. My husband and I started thinking that unit was cursed.

Fortunately, we had made sure that our lease termination clause covered any turnover costs. And third time was a charm when we finally found the perfect tenant, who stuck around for years and took great care of our property.

There are always risks involved when investing in rental properties, but luckily you can mitigate these risks by researching taxes, vacancies, expenses, and potential tenants beforehand. And with an ironclad lease agreement and regular inspections, you’ll be on the road to financial independence in no time.

Have you any questions about investing in rental properties? Do you have anything to add about mitigating your risks as a rental property investor? Let us know in the comments! 

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About the Author

Yvonne Reilly is a landlord, property investor and solopreneur, passionate about helping people become financially independent and realizing their FIRE dreams. As a freelance writer, editor and digital marketer, she also helps small businesses connect with their audience and build traction. You can find out more about Yvonne on her website.

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Real estate investments are expensive, even if you finance them. That means mistakes are expensive.

I already shared some of the real estate investing lessons I wish I’d known when I was just starting out. So I figured I’d open it up to other professional real estate investors, and ask them their most valuable lessons that would have helped when they were first learning real estate investing.

I’ve segmented the lessons into four sections: buying investment properties, financing them, managing rental properties, and selling properties.

Without further ado, here’s how to skip the heartache as you learn real estate investing!

Buying Investment Properties

Among the most common questions I hear from new real estate investors surround how to find and evaluate deals. Try on these tips, as you go about scouring your target market for good deals.

New Investors Always Underestimate Expenses

Nichole Stohler of Gateway Private Equity Group puts it succinctly: “Your numbers are probably wrong.

“You rarely make the money you think you are going to make in the beginning. Despite reviewing actual property numbers, thoroughly analyzing them and having an inspection prior to purchase, there are still events that are difficult to predict.”

When new investors first learn about real estate investing, they almost always underestimate rental property expenses. Many fail to budget for vacancy rates, repairs, maintenance, property management costs, accounting and travel costs, and other expenses associated with owning and managing rental properties.

Use our free rental property calculator to help you forecast rental cash flow, and be conservative in your analysis!

Nichole’s parting advice: “Besides using actual property numbers in your analysis, plan for 30% more expenses in your first year.”

Don’t Count on Appreciation

Robert Taylor, AKA The Real Estate Solutions Guy, lost $90,000 on his first rental property.

“Cash flow is king. My first rental property had negative cash flow between the mortgage, expenses, and the rental income.  I had to write a personal check every month for the difference between rent and the mortgage. I told myself it didn’t matter, that in time the property would appreciate. It helped that I also had a six-figure income to cover the negative cash flow.

“Unfortunately, the Great Recession hit and my income dropped significantly. Of course, the value of my rental property took a dive too, from $300,000 to $125,000. With no more extra income and a rental I couldn’t afford, I couldn’t afford to keep it any longer. This mistake ultimately cost me over $90,000 in hard, cold cash.”

Real estate doesn’t just go up in value – it can go down too. But rents are far more stable than home values, and almost never decline; see this graph of rents even during the Great Recession (blue is median, green is mean rents):

The bottom line: invest for cash flow, and hope for appreciation, but don’t count on it.

Your Profits Depend on Your Due Diligence When You Buy

A common adage when you learn real estate investing is “You make your money when you buy, not when you sell.” The concept is simple enough: your profits, as either a flipper or a rental investor, will be determined by how much you pay for a property, compared to what it’s worth. In other words, the discount you can score.

Jerryll Noorden, founder of We Buy Houses In Connecticut, explains that the lesson is far more nuanced than he originally thought. ”I thought I knew what that meant way back then. It means more than offering the right price. It means going that extra step, to check in that spiderweb-infested crawlspace to make sure the oil tank is not leaking. To make sure there are no termites, those ‘small’ things you know you should do, but for an unknown reason you just don’t.

“It was a thorough and expensive lesson to check everything!”

In other words, price is only half the issue. The other half is accurately assessing the property’s underlying value. It doesn’t matter if you pay less than the other properties in the neighborhood, if your property has a $20,000 termite problem!

Don’t Assume Existing Tenants Will Go Quietly

Vivian Young with Website Greenlight learned firsthand that not all existing tenants leave when or how they say they will. She recommends: “Let the seller deliver tenant-free before opening escrow!

“We were about to open a short escrow on a small house when our broker called and asked if we could grant the tenant another two weeks to move out. I didn’t feel comfortable about this. The house was on the market for six months and the tenant, on a month-to-month lease, looked like she wasn’t going anywhere. No moving boxes, no signs of packing up her belongings.

“As we dug further, the tenant was asking the seller for a move-out fee but they wanted to pass the burden of paying the financial ‘incentive’ to the buyers. We passed. The only thing we wanted to see in our new home was four blank walls, not inherit a tenant!”

It goes to show that not all expensive lessons need to be learned the hard way, as you learn real estate investing.

Finding Good Deals Take Both Patience and Work

“A problem that I see with so many starting out real estate investors is the lack of patience,” explains Don Wede, President of Heartland Funding Inc.

“They imagine that there is the magical deal tree and they can just go up to it and pluck a good deal right off. They need to learn that finding good deals is hard work and one must be persistent and patient that the deals will come.”

Buying rental properties is not like buying stocks or ETFs or REITs. You can’t simply click a button on your brokerage account and buy it. If you want to make money in real estate, you need to invest time and effort in finding deals – and for that matter, in learning real estate investing.

Wede continues: “To piggyback on this problem is the lack of dedication to education, in this field of real estate investing. You are jumping into a whole new industry, and education is paramount if you are going to succeed.”

Try these tactics to help you find good deals on investment properties, even in a hot market.

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Generate More Leads Through a Website

One of the more unique tips I heard from investors about learning real estate investing centered around using a website to generate leads and score deals.

Earl White, founder of House Heroes, explains his journey to learn about real estate investing and finding deals: “I chased MLS listings my first two years investing. Even with auto-updates, follow-up, and hundreds of offers, deals were few and far between. I moved financial resources into direct-mail with moderate success, but direct-mail is an uphill battle with prospects overwhelmed with postcards and letters.

“Online lead generation changed the ball game. I opened my website in 2016. With a mixture of search engine optimization and pay-per-click, off-market motivated sellers were finding me – not the other way around. Even for direct-mail leads, prospects visit my website, see video testimonials, and call-in already comfortable with my company. Websites are also a great networking tool to display your work for lenders and partners.

“Websites are not expensive. A professional website costs less per month than going out to a restaurant. I threw hundreds of hours at MLS properties and thousands of dollars at direct-mail. My lean years would have ended much quicker had I invested in my online presence. Ranking in search engine results takes months in competitive markets, so delay can be costly.”

Financing Investment Properties

Another broad category of questions I hear all the time from new investors surrounds financing.

“How can I fund my deals? Who should I borrow from? How much of the purchase price will lenders fund?”

We answer a lot of those questions on our comparison charts for investment property loans that we’ve vetted. But here are some more tips from pro investors, as you learn real estate investing.

Leverage Cuts Both Ways

Leveraging other people’s money to build your own portfolio of assets can accelerate your gains exponentially – but it can also accelerate losses when you make mistakes.

And that’s the thing about learning real estate investing: in the beginning, you do make mistakes.

Mark Moss, founder and market analyst at Market Disruptors, explained how he initially earned excellent cash flow from single-family and small multifamily rentals – then he cashed out to invest everything in larger properties. “At the time, finding properties I could make $1,000 per month net was pretty easy and I knew if I got just ten, I would be set for life.

“But as the real estate market heated up, I moved into developing multi-million dollar properties, condo complexes and even mixed use. In order to do this level of properties, I need much more capital than I had worked with in the past.

“So I sold or refinanced all of my rental properties to get the capital I needed to do these larger projects. And in 2008, when the financial markets crashed, I was wiped out. I found myself millions of dollars in debt and unable to carry the properties because they would not cash flow and I didn’t have the income to sustain them.

“The properties I lost were sold for 40% of what I had built them for, and the new buyers made millions riding the real estate wave back up to where it is today.”

There are a few lessons in that story as you learn about real estate investing. First, don’t bet the farm. Mark says “I didn’t need to sell and refi all my properties, I could have kept half of them as rental income.”

Second, scale gradually, and use leverage as a tool for measured growth, not explosive growth.

Private Lenders Invest in You, Not Your Deal

Before explaining further, it’s worth defining the term “private lender” (often confused with “hard money lender”). A private lender is an individual who lends you money, such as a friend or family member. A hard money lender is in the business of lending to real estate investors.

Robert Taylor goes on to break down private lending like this: “Money follows trust. If people find you trustworthy, money will be readily available.

“I used to talk to people about my deals to see if they were interested. It was always a hard sell. After a while though, I built up a track record of successful deals and treating my lenders fairly. When this happened, people I had never done business with would tell me ‘If you ever need money for a deal, let me know.’

“My lenders now don’t even look at the properties they lend on anymore. They are investing in me because they trust me, not the deals. Focus on being a person people want to invest in.”

Managing Rental Properties Profitably

A recurring theme on our landlord blog is that better property management leads to better returns, while requiring less work from you.

“More money with less work? Why wouldn’t everyone follow property management best practices then?”

Because it’s preventative. It requires investing a little work up front to avoid more work three steps down the road. And how often does the average person puts in an hour’s work today to save a week’s work next month?

But you can do better than the average landlord. Here’s how.

The Quality of Your Tenants Determines Your Returns

Deni and I drive home this point all the time.

Benjamin Mizes, the CEO of Clever Real Estate, puts it like this: “The quality of your tenants is so important. If your properties are located in rougher areas with high cash flow, 1-bedrooms have higher turnover, but 2- and 3-bedrooms generally are better quality tenants who stay longer.”

There’s a lot to unpack in that brief quote. First, that tenant turnovers are deadly to your returns. Why? Because they’re where most of the work and costs of rental management hit you. Doing move-out inspections, cleaning up the property, repainting, maintenance and painting, advertising the unit, carrying the mortgage, showing the unit, collecting rental applications, running tenant screening reports, signing a lease agreement, doing a move-in inspection… whew.

That’s a far cry from sitting back and watching the rent direct deposited in your bank account every month.

Also, if the quality of your tenants determine your returns, then tenant screening is the most important landlording activity you undertake. Don’t rush through it. It’s the meat of what it means to be a landlord, not an annoying distraction.

Finally, be wary of low-end neighborhoods and Section 8 tenants, despite how the numbers sometimes look on paper or on a rental income calculator. Often they come with hidden headaches and costs not seen with mid-range and higher-end rentals.

Small Gestures of Appreciation Go a Long Way with Your Tenants

Here’s a quick story from Dominick Tiziano of AccidentalRental to illustrate this point: “It’s amazing how far an unexpected gift will go to create goodwill with a tenant.

“I had a tankless water heater go out on a Friday night and couldn’t get a technician to look at it until Monday.  The tenant was able to shower at the gym and get by but was anxious about getting it fixed ASAP.

“After the water heater was fixed, I followed up with the tenant thanking them for their patience and sending them an Amazon gift card for their troubles.  They were surprised and delighted because they weren’t expecting anything.

“I never had any other complaints or issues with that tenant.

“The lesson I learned was that it pays to be fair and show your tenants that you understand when they have been inconvenienced.”

Part of learning real estate investing and landlording is learning when to be generous with tenants. When it comes to enforcing your lease agreement’s rules, be uncompromising. But when they’ve been inconvenienced, even when it’s “not your fault,” find ways of showing that you appreciate their understanding – and appreciate them as clients, which they are.

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Batch Your Showings of Vacant Rental Units

Showing vacant units takes time and effort. All too often, prospective tenants blow you off, after you’ve taken time out of your day to drive to the property to meet them there.

So? Don’t show it to specific individuals. Chris Siamof, Broker Associate with Keller Williams in Wisconsin’s Fox Cities, learned “the importance of setting up a ‘group time’ on my schedule to show prospective tenants. In the past I had set up individual showings and too often I would be stood up.”

She goes on to reiterate tenant screening as the most important part of being a landlord. “In screening tenants I learned how valuable conducting a background search is. It is better to lose a month or two of rent than to inherit a poor tenant. A tenant sneaking in animals or falsifying work history can cost you thousands.”

Renovations & Selling

Tenants and sellers aren’t the only people that real estate investors need to work with. Part of learning real estate investing involves learning how to work with contractors, and knowing when to sell and when to hold.

Learn to Fire Contractors Quickly

Contractors are either reliable or they’re not. They either show up every day and do good work, staying on-schedule and in-budget, or they burble..

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Want a better return on your rental investments?

Landlords need to understand how to tactfully and effectively raise rents, without losing their tenants. Turnovers can be costlier than a Kardashian’s wardrobe, so if you want to maximize ROI you need to minimize turnovers while keeping rents on the rise.

Here’s what landlords need to know about rent increase letters, legal limitations, and how to raise the rent without losing tenants.

First Step: Know the Market Rent

It doesn’t matter if you do everything else on this list right. If you try to raise the rent above local market rental rates, your tenants will balk.

And then they won’t renew your lease agreement, leaving you with a vacant rental unit and a costly turnover. Which will leave your net profits for the year lower, not higher, and defeat the purpose of raising the rent.

So, do your homework before raising the rent. Start with free resources like Zillow, to check nearby rental comps.

Another resource you can access is PropStream. While Propstream is primarily designed as a real estate investing tool to find under-valued properties, it comes with powerful market analytics.

One final tool worth mentioning is Mashvisor. Among other functions, Mashvisor helps you analyze the local rental market, and includes comparisons for Airbnb rentals versus long-term rental returns.

You can also check rental listings on oldie-but-goodie Craigslist, which remains popular and well-used by both landlords and tenants to this day.

How Much to Raise the Rent?

Feel confident in a number for your rental unit’s market rent?

Before you go raising the rent to that exact number, pause to consider how much of a rent increase you’re talking about. Calculate the percentage rent increase, over your current rent.

A good rule of thumb: don’t raise the rent by more than 5% per year. Any more, and the sharp rent increase often jolts the tenant into moving – even if you’re raising the rent no higher than nearby market rates.

Say you’re currently renting the property for $1,000, and after analyzing local comps, you decide the market rent is $1,100. Instead of raising the rent by $100 all at once, consider raising it by $50 this year, and another $50 next year.

And never, ever raise the rent by more than 10%, if you want to keep your tenants. No matter how much your tenants like the rental unit and get along with you, they will balk if you raise the rent by more than 10%.

Most people’s budgets can’t handle their rent going up by hundreds of dollars a month. If your rent is dramatically below market value, raise it gradually, in manageable increments over the course of several years.

You should send a raise-the-rent letter every year, so don’t put yourself and your renters in a situation where the rent is so far below market pricing that you consider a huge hike. But we’re getting ahead of ourselves, more on that shortly.

Serve the Rent Increase Letter Before the Deadline

Many lease agreements include a specified notice period, for notifying the other party about changes in the lease renewal. As a landlord, you must send a written rent increase letter before that period.

But the lease agreement isn’t the only factor. Most states impose minimum notice requirements as well.

Common notice periods are 30 or 60 days before the current lease agreement ends, although they can be as long as 90 or even 120 days. If the lease ends on April 30, and the lease and local laws require a 30-day notice period for any changes to the leasing agreement, the landlord must serve the rent increase notice on the tenant by March 31 at the latest.

With that said, landlords should serve the notice with time to spare. The tenants needs time to decide, and time to respond to your rent increase notice. If they opt to non-renew, you’ll need time to advertise the rental unit and screen tenants, ideally before the outgoing tenant leaves, to minimize your vacancy.  

It’s worth mentioning that the same notice period applies to non-renewal of the lease, if you want your tenant to move out at the end of the current lease term.

Check your state landlord-tenant laws before setting a notice period for raising the rent, and follow it to the letter when you serve a raise-the-rent notice!

(article continues below)

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How to Serve a Raise-the-Rent Letter

Each state has different legal options for serving rent increase letters. The most common service options include:

  • Certified mail
  • Hand delivery
  • Posting the raise-the-rent letter on the front door
  • Regular mail

When in doubt, serve the rental increase letter by certified mail, because it leaves you with a receipt to prove delivery.

Remember to mail it several days in advance – snail mail takes time!

Rent Increase Letter Sample

Where can landlords find a rent increase letter sample?

Glad you asked. We offer a free raise-the-rent letter through our landlord app, accessible by all account levels (including the Free account).

Here’s a video showing how you can create and print a rent increase letter in under 60 seconds using our landlord app:

Increase in Rent Notice Demo - Create Letter in 1 Minute - YouTube

You can create a free account here and generate your rent increase letter less than a minute later.

Watch Out for Rent Control & Section 8

In many markets, rent control is a reality for landlords.

The market rent doesn’t matter in those cases; you can’t charge market rents. All you can charge is what’s allowed by local rent control laws.

If your rental is in a rent-controlled area, make sure you check the local laws for maximum rent increase rates, and don’t surpass them. Exceed the maximum rent increase rate and you risk fines, plus angry tenants.

Keep in mind that Section 8 sometimes restricts rent increases as well. If you rent to Section 8 tenants, check with your local Section 8 office about annual limits before you raise the rent.

5 Tricks to Raise the Rent Without Losing Any Tenants

Want higher tenant retention rates?

You should. The average tenant turnover costs thousands of dollars in vacancies, repairs, maintenance such as repainting and new carpets, and new tenant leasing costs (whether to a property manager or in your own lost hours of labor).

But no one wants to hear that their rent is increasing. So how can you deliver this bad news without alienating your best tenants?

1. Raise the Rent Every Year, Even If Only Slightly

Every year, like clockwork, you should send a raise-the-rent notice. Even if it’s only by $10-20.

Why? Isn’t that just spiteful with no real income bump?

No, it actually has nothing to do with the money. The point is to set expectations – you are reinforcing the notion that the rent goes up every year, no exceptions. Don’t worry, none of your renters will go through the hassle of moving over $15/month.

Maybe neighborhood demand is stable this year, so you’re only raising the rent to keep pace with inflation. Or maybe demand in the area has skyrocketed, and you need to boost the rent significantly to keep pace with the market. Regardless, you’re sending a message: grass is green, gravity falls downward, and rent goes up every year.

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

2. Pave the Way with Good Relations.

Long before you ever need to raise the rent, you’ll be signing the initial lease agreement with the tenants and probably contacting them by phone a few times over the course of the first year. You’ll already know their children’s names from the rental application, and you’ve probably met their children at least once.

A simple way to warm parents to you is to ask about their children by name. You don’t need to actually remember their names; just pull out the rental application before you call them and ask how Little Bobby is doing. If they moved from another school district, you can always ask how the kids are doing in the new school.

If the tenants don’t have kids, you can always ask about their job, or a quirky hobby of theirs.

Keep a few notes each time you talk to your tenants, so you can reference them the next time you call them. It will take you thirty seconds to keep and reference these notes, but even this basic level of human contact will warm your relationship from “This landlord just wants a rent check” to “She’s a nice woman.”

3. Deliver the News by Phone (But Still Send an Increase in Rent Notice)

By law, you need to send written increase of rent letter, usually 30-60 days in advance (as outlined above). In some states, it’s as high as 90 or even 120 days’ written notice.

By the laws of common courtesy, you should deliver bad news gently, by phone. No one likes to open a piece of mail that says “Surprise! You owe me an extra $100/month starting next month.”

Be polite, firm, professional, and add the slightest hint of remorse (don’t overdo this last). Explain that you know it’s bad news, but rent for the new lease period will be higher than the last. If they ask why, simply tell them the rent rises every year alongside neighborhood rents and inflation.

Tell them that you would like to keep them as tenants, and that you hope they continue to rent with you. You’re now positioned to offer them an alternative.

4. Offer a Reduced Raise in Rent If They Sign a Long-Term Lease Renewal

“Pay more” or “leave” don’t have to be the only two options. What if you could offer a third option that allays their worries and keeps your rental unit occupied for years to come?

One option you can give them is to sign a multi-year lease agreement, and have the rent only rise by $X instead of $Y.

Or you don’t have to offer any discount on the rent hike this year, but you can offer to let them avoid next year’s rent hike by locking in this rent for two years (or even three!).

Long-term tenants are where landlords make high returns. Turnovers are expensive, between lost rent, new paint, new carpets, advertising, screening tenants, and possibly paying a leasing agent or property manager.

5. Ask Tenants About Desired Upgrades, and Consider Them

Talking to tenants about upgrades is a little tricky, because you don’t want the tenant to tie the idea of upgrades to the idea of rent hikes. Over the course of the year, ask the tenant what property upgrades would make the most difference to them, if they could wave a magic wand. If you manage a large building, consider a formal survey; if it’s just a few tenants, ask around verbally.

Consider which desired upgrades would have the biggest impact on your long-term asking rents. If you could spend $1,500 and be able to charge another $75 in rent, then in under two years that upgrade will have paid for itself. Property upgrades also incentivize tenants to renew their lease and stay long-term.

If possible, make the upgrades after raising the rent, instead of just before. You can offer it as an inducement to renew long-term: “By the way, I took to heart your suggestion of installing new countertops. I’ve put down a deposit and the workers will be coming next week.”

It’s a delicate dance, raising the rent. It takes tact, professionalism, friendliness and firmness, but if handled right, your tenants will all renew their lease agreements. Higher rents and longer-term lease contracts? A recipe for higher ROI.♦

Have any tips for raising the rent? Any bad experiences? Tenants ever chase you out with a pitchfork? We love stories… share in the Comments section below!

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The post How to Increase Rents Without Losing Tenants (PLUS: Free Raise the Rent Letter) appeared first on SparkRental.

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I cringe every time I hear a new rental investor say “Well the mortgage payment is only $1,000, and the rent is $1,300, so that’s a $300/month cash flow!”

Sound the air raid siren, because that investor’s dreams are going to end in flames.

How to calculate rental property cash flow goes far beyond the PITI of the mortgage payment. PITI stands for principal, interest, taxes and hazard insurance, and even those may not make up the entire mortgage payment.

If you borrowed more than 80% of the purchase price, you’ll likely have mortgage insurance. If your property is in a flood plain, you’ll have flood insurance.

And that’s just scraping along the surface. Rental properties come with a lot of expenses, and you need to understand and account for them all.

That’s the bad news. What’s the good news? Luckily for you, this is what makes real estate such a great investment: you can accurately forecast future returns.

In under five seconds, you can make a shorthand calculation to determine if a deal is in the ballpark (I’ll show you how shortly). In under five minutes, you can make a detailed cash flow calculation to determine a property’s return on investment.

Here are the expenses to account for, whether you’re using a rental property calculator (psst: ours is free!) or manually calculating a rental property’s cash flow by hand.

 

Repairs, Maintenance, New Appliances & CapEx

Real estate is, well, real. It’s physical, and like everything physical, it falls apart if it’s not maintained properly.

Brand new homes need very little maintenance or repairs in their early years. Older homes need much more.

You’ll also incur costs every time you have a turnover, in the form of cleanout, new paint, perhaps new carpet, etc. What, you thought every tenant would leave the place in sparkling condition just like they found it? Think again.

Then there’s capital expenditures, or CapEx. CapEx is the long-term average of costs associated with big-ticket repairs: new roof, new furnace, new AC condenser, and so on. You can read more on how to calculate CapEx here.

Let’s say our friend Heidi is considering a duplex. Each unit rents for $800/month (or $1,600/month gross revenue, for the mathematically challenged). After running some numbers, Heidi determines that CapEx will cost her about 5%. She estimates another 8% for maintenance, repairs and replacing appliances periodically. That means:

  • CapEx: $80/month
  • Maintenance, repairs & appliances: $128/month

But she has a long way to go from there.

 

Vacancies

Rental properties don’t have perfect, 100% occupancy rates. After a renter moves out, typically it takes some time to repaint, replace the carpet, clean the unit, advertise it for rent, show it to prospective renters, sign a new lease agreement, etc.

That’s time you’re not earning rental income, and you need to account for it when you calculate rental property cash flow.

In blazing hot markets, turnovers may take place as quickly as a day or two. In slower markets, rental properties can sit vacant for six, nine, even twelve months at a time. (I’ve had properties sit vacant a year. Seriously. It’s like a slow-motion root canal for your wallet.)

A common baseline vacancy rate is 8%, which is about one month/year. But for slower markets, ratchet that up. Talk to other local landlords, property managers and real estate agents to get a good sense of the vacancy rate for the neighborhood in question.

After asking around, Heidi feels comfortable with an 8% vacancy rate. Her expense numbers now read:

  • CapEx: $80/month
  • Maintenance, Repairs & Appliances: $128/month
  • Vacancy Rate: $128/month

 

Property Management Fees

Another common line from newbie real estate investors: “I don’t need to include property management fees, I’ll be managing it myself!”

Property management is a labor expense. Whether you’re doing the labor or someone else is, it’s still an expense.

You could take your money and go buy stocks or bonds, and have no labor. No weekends spent hassling with rental properties. No 3 AM phone calls from tenants whining that they need a light bulb changed. And for that matter, no trying to figure out how to calculate real estate ROI, either.

(article continues below)

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The point is, you need to account for this labor expense. And besides, the time will likely come when you have no interest in managing these properties yourself anymore.

Include property management expenses in your real estate ROI calculation.

Typical rates in the industry fall in the 8-10% range, although it can be as low as 7%, or as high as 15%. Property managers often charge a fee to place a new renter as well, ranging between half and a full month’s rent. Set aside at least 10% for the property management fee, and perhaps as much as 18%, to account for both ongoing rental management and new tenant placement fees.

Heidi decides to set aside 12% for property management fees as she calculates her rental property ROI and cash flow:

  • CapEx: $80/month (5%)
  • Maintenance, Repairs & Appliances: $128/month (8%)
  • Vacancy Rate: $128/month (8%)
  • Property Management: $192/month (12%)
Utilities

Are you paying the utilities, or are the renters?

Even if the renters are paying utilities, expect to get stuck with utility bills occasionally. Your tenants might move out and leave a hefty bill, and of course you’ll have to pay for utilities during vacancies.

Heidi’s renters will be paying for their own utilities, but she knows she’ll occasionally have to pay utility bills herself. She sets aside $10/month per unit.

  • CapEx: $80/month (5%)
  • Maintenance, Repairs & Appliances: $128/month (8%)
  • Vacancy Rate: $128/month (8%)
  • Property Management: $192/month (12%)
  • Utilities: $20
Accounting, Bookkeeping, Administrative

For a single rental property, your auxiliary expenses may be negligible. Something you can round away.

But what if you own five rental properties? Ten? Twenty?

Will you still do your own taxes? Maybe, if you use landlord software like ours that automatically generates Schedule E returns for you. Or maybe not, depending on how complicated the rest of your return is.

What about bookkeeping and administrative help? Will you keep proper books with rent ledgers, expenses, depreciation, and so on?

Our landlord software keeps your books for you as well, but you may decide you still want a virtual assistant or bookkeeper to help out, in addition to your accountant.

These costs can vary, but count on at least 2-3% for them.

Heidi’s costs:

  • CapEx: $80/month (5%)
  • Maintenance, Repairs & Appliances: $128/month (8%)
  • Vacancy Rate: $128/month (8%)
  • Property Management: $192/month (12%)
  • Utilities: $20
  • Accounting, Bookkeeping, Administrative: $32 (2%)
Software, Office Supplies, Gas & Mileage, and All the Rest

Do you use online landlord software such as ours to help you manage your rentals? While we have a free account option, there are also premium options, which you would need to budget for if you use a paid account.

What about physical trips to the property? Semi-annual inspections (which you’re doing… right?) take time, gas, and mileage on your car. When a property is vacant and you have to turn it over, expect many trips to and from the vacant unit.

How often do you have to print and mail physical tenant notices? Again, these are expenses you only incur because you’re investing in real estate rather than stocks or bonds or private notes. They may be small, but you still need to include them when you calculate real estate ROI.

It all adds up. Consider a “miscellaneous” category for these types of expenses, at around 5%.

Heidi’s new expense list:

  • CapEx: $80/month (5%)
  • Maintenance, Repairs & Appliances: $128/month (8%)
  • Vacancy Rate: $128/month (8%)
  • Property Management: $192/month (12%)
  • Utilities: $20
  • Accounting, Bookkeeping, Administrative: $32 (2%)
  • Miscellaneous: $80 (5%)

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Real Estate Investing Tools to Help with Calculating Cash Flow

If you have a deal in mind, you can always run the numbers for free using our rental income calculator. It includes cash-on-cash returns, monthly cash flow, cap rates, and also has a built-in mortgage calculator.

Beyond calculators, some real estate investing tools help you find good deals on investment properties. In some cases, they include the exact returns and multi-year forecasts for you!

One such tool is Roofstock, a platform to help investors buy turnkey rental properties long-distance. They have excellent financial data, analytics, and forecasts. Here’s a super quick overview of how their platform works:

How Roofstock Works (in Under 2 Minutes) - YouTube

Another real estate investing tool to check out is Propstream. Where Propstream excels is helping investors find motivated sellers with high equity. Propstream lets you zoom into a neighborhood and find pre-foreclosures, post-foreclosures, properties with tax liens, divorcing owners, and properties that are or appear vacant.

They also break down the equity in these properties, displaying mortgages and other liens. But most relevantly here, Propstream displays estimated returns on potential properties.

How Propstream Works (in 90 Seconds) - YouTube

If you’re interested in learning more, check out our full, unbiased Propstream review here.

One last tool to consider is Mashvisor. Working at both the neighborhood and the property level, Mashvisor provides estimated returns, both for long-term rentals and Airbnb or short-term rentals. In fact, they even you analyze which rental strategy would net the most profits for any given property. (Use the link above for a 25% discount on Mashvisor’s services.)

Example: Heidi’s Numbers

Heidi is looking at paying $150,000 for the duplex. She’s putting 20% down ($30,000), and borrowing the remaining $120,000 as a rental property loan at 7% interest for 30 years, for a principal and payment of $399.18. Let’s round that to $400 for easier numbers, shall we?

So Heidi avoids mortgage insurance, and her property is not in a flood plain. The property taxes are $1,500/year, and the insurance is $900/year. That comes to $2,400/year, or $200/month. So, Heidi’s PITI mortgage payment is $600.

Here’s a final breakdown for calculating her rental property cash flow:

  • Mortgage (PITI): $600
  • CapEx: $80  (5%)
  • Maintenance, Repairs & Appliances: $128  (8%)
  • Vacancy Rate: $128  (8%)
  • Property Management: $192  (12%)
  • Utilities: $20
  • Accounting, Bookkeeping, Administrative: $32  (2%)
  • Miscellaneous: $80  (5%)

Total Expenses: $1,260

Her gross monthly revenue is $1,600, so her monthly cash flow is $340.

What about her cash-on-cash return on investment? Heidi put $30,000 down, plus we’ll say $5,000 in closing costs. We’ll assume the property needed $10,000 in repairs when she bought it.

So Heidi invested $45,000 in cash. Her annual revenue is $4,080. That means she’s earning about a 9% return on her investment: $4,080 / $45,000 = 9.07% ROI.

Here’s a quick visualization of how rental cash flow typically looks (in a fun Sankey diagram):

Shorthand Calculation: The 50% Rule

“Hang on Brian, you promised a quick calculation that would take five seconds!”

So I did, so I did.

Enter: The 50% Rule. Quite simply, you can estimate a property’s expenses at 50% of the rent, plus the P&I mortgage payment (just principal and interest – the property taxes and insurance are included in the 50% estimate).

So in Heidi’s case, 50% of the gross rents is $800, plus the P&I payment of $400, for a total monthly expense of $1,200. This method puts her monthly cash flow at $400.

It’s a rougher estimate, far less accurate. In this example it was off by $60/month, and in the wrong direction. That comes to $720/year in unexpected expenses, on average. Perhaps not so devastating, but what if she’d been looking at a property for $750,000, not $150,000? The error would have been compounded fivefold.

Use the 50% Rule as a shorthand way to evaluate whether a deal is worth looking into further. If it looks like it could potentially work, you can invest more time to look at the property more closely, and use a proper rental income calculator. If the deal clearly doesn’t work, well, you only lost 30 seconds of your life!

Final Word

Is Heidi’s cash flow good? Bad? That’s your judgment call, not mine, but personally I would find that ROI acceptable.

Why? Because it’s predictable. Sure, the stock market may surge 15% this year… or it might drop 15%. I have no control over my stock investments. I don’t know what I’ll earn from them.

But Heidi knows how to calculate real estate ROI and rental cash flow. Perhaps best of all, these numbers don’t even include appreciation, or take into account the gradual decline in her mortgage’s principal balance. In 30 years she’ll own the property free and clear, and then she’ll really have strong cash flow!

If you don’t calculate cash flow properly, prepare for a miserable experience as a rental investor. Year after year of saying “Well, this year we had that $2,500 furnace problem and lost money, but next year will be different!” Except it won’t be. Next year it will be electrical wiring that needs replacing, and so forth.

When you calculate cash flow properly, you don’t have to wonder when your “luck” will turn around. Instead you say “Another year of passive income! Our expense budget easily covered the $2,500 furnace repair. I’m going to put my feet up and have another cup of tea.”

Get rental property cash flow projections right, and you’ll never buy a bad deal in your life.

Ever ran into trouble over cash flow calculations? What happened? What have you learned since? Don’t be shy, we’re in the Trust Tree here! 

More Fundamentals of Rental Investing:
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The billionaires of the world are not doctors or lawyers, they’re entrepreneurs. Specifically, they are people who started their own businesses, whether those businesses are online, brick and mortar, or real estate empires.

Starting and owning a business provides a long list of tax advantages, and real estate investments provide all the usual tax advantages plus some extras unique to real property. Every expense associated with rental properties – plus some just-on-paper expenses – are tax deductible.

However, tax laws change fast and that means it is imperative for all those who invest in real estate must educate themselves. So, before you jump into the rental property deductions checklist, make sure you’re up to speed on how the new tax law affects landlords’  tax returns.

The changes in the Tax Cuts and Jobs Act of 2017 (TCJA) impacted homeowners, real estate investors and landlords alike. Here’s an outline of what you need to know as a real estate owner, and when in doubt, hire a professional who knows accounting with a real estate investing focus. Ideally one who invests in real estate themselves.

 

Changes to the Home Mortgage Deduction in 2017

Home mortgage interest remains deductible up to $1,000,000, for loans that settled before December 15, 2017.

Home mortgage debt incurred after December 15, 2017 is only deductible up to $750,000. Mortgage interest on rental property loans is unaffected by the TCJA.

Another change worth mentioning is the tax deduction is no longer available on HELOC’s (Home Equity Line Of Credit) in 2018.

 

Lower Income Tax Rates

From 2018 through 2025, rental property investors will benefit from generally lower income tax rates and other favorable changes to the tax brackets. The TCJA retains seven tax rate brackets, although six of the brackets’ rates are lower than before. Here are the updated regular income rates:

Taxable Income – SingleTax RateTaxable Income - MarriedTax Rate
$0 – $9,52510% of taxable income$0 – $19,05010% of taxable income
$9,526 – $38,700$952.50  plus  12% of the amount over $9,525$19,051 – $77,400$1,905  plus  12% of the amount over $19,050
$38,701 – $82,500$4,453.50  plus  22% of the amount over $38,700$77,401 – $165,000$8,907  plus  22% of the amount over $77,400
$82,501 – $157,500$14,089.50  plus  24% of the amount over $82,500$165,001 – $315,000$28,179  plus  24% of the amount over $165,000
$157,501 – $200,000$32,089.50  plus  32% of the amount over $157,500$315,001 – $400,000$64,179  plus  32% of the amount over $315,000
$200,001 – $500,000$45,689.50  plus  35% of the amount over $200,000$400,001 – $600,000$91,379  plus  35% of the amount over $400,000
$500,001 or more$150,689.50  plus  37% of the amount over $500,000$600,001 or more$161,379  plus  37% of the amount over $600,000

In addition, the new tax law retains the existing tax rates for long-term capital gains.

 

No Self-Employment Taxes for Landlords

In many ways, landlords get the best of both worlds: the tax benefits of owning a business, without the downside of self-employment taxes.

Real estate flippers can sometimes fall under the “dealer” category, and find themselves subject to double FICA taxes. FICA taxes fund Social Security and Medicare, and cost both employees and employers 7.65% of all income paid. Self-employed people end up having to pay both sides of FICA taxes, at 15.3% of total income.

But the Tax Cuts and Jobs Act of 2017 ended up leaving landlords and their rental income free from any FICA taxes.

 

New Passive Income Loss Rule

If you have losses from “passive activities” such as owning rental properties, typically you can only deduct those losses to offset other passive income sources, such as other rental properties. For example, if you earn $10,000 from one rental property and have an $8,000 loss on another, you can offset your $10,000 income with the $8,000 loss, for a net taxable rental income of $2,000.

But if you have a net loss, that can’t be used as a deduction against your active income from your 9-5 job. You can carry it forward however, to offset future passive income earnings and rents.

Here’s how the TCJA changes matters: there’s a new $250,000 cap for single filers, $500,000 cap for married filers, for passive losses. Any passive losses that you’re allowed, in excess of those caps, must be carried forward to the next tax year.

It won’t affect most landlords, but it’s something to be aware of.

(article continues below)

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20 Tax Deductions for Landlords

Here are 20 rental property expenses you can deduct on your tax return, to keep more of your money in your pocket where it belongs. It’s not 100% exhaustive, as there are a few obscure tax deductions that only apply to a few landlords, but think of this as a rental property deductions checklist for the average landlord.

IMPORTANT: These rental property tax deductions are “above the line” deductions, meaning they come directly off your taxable income for rental properties. That means you can deduct these expenses, and still take the standard deduction.

1. Losses from Theft or Casualty

The TCJA suspended the itemized deduction for personal casualty and theft losses for 2018 through 2025. Before 2018 deductions of this kind were permitted when they exceeded $100.

But landlords can still deduct losses from theft or damage to their rental properties, as business expenses.

2. Property Depreciation:

This is a handy “paper expense.” Much of the cost of buying your property can be written off as a tax deduction, although it must be spread over 27.5 years (don’t ask me where that number came from). Buildings lose value as they age (at least theoretically), so the IRS lets you deduct 1/27.5th of the property’s cost each year.

Major property upgrades and “capital improvements” must be depreciated as well, rather than deducted in the year you make them. For example, a new roof is a capital improvement that must be depreciated, rather than deducted all at once.

But the patching of a roof leak? That’s a repair.

3. Repairs & Maintenance

Basic repairs and maintenance such as new paint and new carpets are deductible for your rental properties. That’s not the case for your primary residence, in which repairs are not deductible.

Remember, if it’s a large improvement or replacement (like the roof example), it may count as a “capital improvement,” in which case you’ll have to spread the deduction over multiple years, in the form of depreciation.

The line isn’t always crystal clear however, like the roof example above. Here’s an example of how it gets blurry: if you replace all your windows to modernize and improve your energy efficiency, it’s a capital improvement. If a baseball goes through one window, which you replace, it’s a repair. But what if you replaced a few windows last year, but not all?

Talk to an accountant, and build a defensible argument for any repairs you deduct.

4. Segmented Depreciation

Some improvements, such as landscaping and “personal property” inside the rental/investment property (e.g. refrigerators) can be depreciated faster than the building itself. It’s more paperwork, to segment the depreciation of certain improvements as separate from the building’s depreciation, but it means a lower tax bill right now, not in the far distant, unknowable future.

5. Utilities

Do you pay for gas, heating, trash removal, sewer or any other utility for your rental? They are tax deductible.

Take heed however, these if your tenant reimburses you for a utility, that would be considered income. So you have to declare both the income and the expense, even though they offset each other.

6. Home Office

This is a popular deduction, but it’s also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. And 2018 may see this deduction scrutinized even more.

One new downer: no more home office deduction for those who work for others in the comfort of their home. But as a real estate investor, you’re a business owner, so you can still claim it if you sue the space exclusively for “business.”

Make sure and talk to an accountant about this, and keep the percentage realistic.

7. Real Estate-Related Travel

Another popular-but-dangerous deduction, you can deduct travel expenses if your travel was for your real estate investing business… and you can prove it. Many people get cute with this one, and when they go on vacation they’ll go see one or two “potential investment” properties and then write the entire trip off as a business expense.

Whenever you plan on deducting travel expenses, put together as much documentation as you possibly can so that you can make a strong case that it was an actual business trip. For example, meet with a real estate agent in the area, and keep all of your email correspondence with them. Keep all listing information and investment calculations for any properties you visit. Track your mileage for all driving done to and from rental properties.

C-Y-A!

8. Closing Costs

Many closing costs are tax deductible, and others can be depreciated over time as part of your acquisition cost. Use an accountant with a deep knowledge of real estate investments, and send them the HUD-1 (settlement statement) for each property you bought last year.

9. Mortgage Insurance (PMI/MIP)

No one likes mortgage insurance (other than banks). At least you can deduct the cost from your taxable rental property income.

10. Property Management Fees

Paid a property manager to handle the headaches for you and field those dreaded 3 AM phone calls from tenants? You can write off their management fees, including both monthly fees and tenant placement fees.

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

11. Rental Property Insurance/Landlord Insurance

Like homeowner’s insurance for your primary residence, your landlord insurance premium for each property is also tax deductible.

12. Mortgage Interest

All interest you pay to your mortgage lender on rental property loans remains tax deductible. As mentioned above, it’s an “above the line” deduction that simply comes off of your taxable rental property income.

But for your primary residence, 2018 limits the deductibility of mortgage interest only up to $750,000 of home mortgage debt.

13. Accounting, Legal & Other Professional Fees

All professional fees associated with your rental properties are tax deductible. Bookkeeping, accounting, attorney, real estate agent and any other fees you pay out for professional services can be deducted from your taxable income. Don’t forget the cost of any bookkeeping or landlord software (ahem!) you use.

One wrinkle introduced by the TCJA however is that personal tax preparation expenses are no longer deductible from 2018 onward. But business accounting – such as for your real estate LLC or S-corp – is still deductible as a rental business expense for landlords. Talk to your accountant about shifting as many of your tax preparation expenses as possible to the “business” side of the books!

14. Tenant Screening

If you paid for tenant credit reports, criminal background checks, identity verifications, eviction history reports, employment and income verification or housing history verification, those fees are deductible.

Even better, have the applicant pay directly for tenant screening report costs. Which, I might add, our landlord software allows you to do!

15. Legal Forms

Bought a state-specific lease agreement this year? Eviction notices? Property management contracts? The cost of legal forms is also deductible.

16. Property Taxes

Under the Tax Cuts and Jobs Act of 2017, landlords can still deduct rental property taxes as an expense.

But it’s a little more complicated for homeowners, and even though this is a list of landlord tax deductions, let’s take a moment to review the changes for homeowners, shall we?

in 2018, you can no longer deduct for state and local taxes in excess of $10,000. These state taxes include things like: state and local income tax, sales taxes, personal property tax, and… property taxes.

What does this mean for high-tax states like New York, New Jersey or Connecticut? Well, it could mean that more people may relocate to lower-tax states like Florida, and may even spark lower property values in states such as New Jersey. Only time will tell.

17. Phones, Tablets, Computers, Phone Service, Internet

Bought a new phone this year? Maybe a new laptop or tablet? If you use it for work, you can probably persuade your accountant (and the IRS) that the costs should be deducted from your taxable income. Likewise, for internet bills, phone service charges and the like, with the caveat that you need to be able to document that it was for business purposes. Printer toner, computer paper, pens, and the like; keep those receipts.

18. Licensing Fees

Licensing and registration fees are sometimes a local requirement for rental properties. For instance, in the city of Philadelphia, a rental license fee is required along with an inspection of the property.

So, if you’ve had to purchase or renew a landlord or rental license for the property, that cost is deductible.

Furthermore, some localities will require a vacation rental license for short term rentals such as seasonal, AirBnB and the like. These licensing costs are deductible as well.

19. Occupancy Tax

There are states that assess an occupancy tax on collected rental amounts, comparable to paying sales tax. This is more of a common practice in states where short-term rentals are common. Florida, Arizona and New Jersey are examples of states that charge an occupancy or tourist tax.

If you own rental property in an area that charges an occupancy-like tax, then the amount is tax deductible. Remember, however, that the tax will not only differ from state to state but also from local jurisdictions like cities and counties.

20. Business Entity Pass-Through Deduction

There are significant changes in 2018 tax regulations on how legal entities (e.g. LLCs) and pass-throughs and the like are going to be treated. Sole Proprietorship, Partnership, and Corporate Entities are now entitled to a “pass-through” deduction as long as the rental activities meet the requirements for business tax purposes.

The short version is that landlords can deduct 20% of their rental business income from their taxable business income amount. For example, if you own a rental property that netted you $10,000 last year, the pass-through deduction reduces your taxable rental business income from $10,000 to $8,000. Pretty sweet, eh?

There are restrictions, of course. The deduction phases out for single tax payers with adjusted gross incomes over $157,500, and married taxpayers earning over $315,000. Although under some conditions, higher-earning landlords can still take advantage of the pass-through deduction – definitely discuss with your accountant.

One more reason, beyond asset protection, to own rental properties under a legal entity!

Final Word

It’s hard to get ahead if 50% of your income is going to taxes (which it probably is, if you add up everything you pay in sales tax, property tax, federal income tax, state income tax, local income tax and FICA taxes). But by being savvier with your documentation and deductions, landlords and real estate investors can pay less in taxes than other people, and truly realize the advantages of entrepreneurship.

Remember to always document every expense you plan to deduct. That means keeping receipts, invoices and bills throughout the year as expenses pop up; to help with this, keep a separate checking account for your real estate expenses if you don’t already. Never swipe that debit card or write a check from that account without first getting documentation!

We will continue updating and expanding this article content as the upcoming tax changes continue. (If you want to be notified of future webinars by email, sign up for our mailing list – you even get access to our free mini-course on buying 2-4 multifamily rentals!)

Feel free to pass this rental property deductions checklist on to other landlords, to make sure they’re taking advantage of all tax deductions available for landlords!

How aggressive do you get with your travel deductions and home office deduction? Do you leave your mortgages in place just for the interest deduction? Spill the beans!

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