Avoiding Disaster in the Rental House/Landlord Business is where Real Estate Investor Girl can give you some advise from the "been there, done that" arena.  Yes, I heard warnings and advise about what to be aware of when dealing with tenants, but I guess I thought it would not really apply to my situation.  I was wrong.  Tenants often have a different mindset than the rest of the population.  They must be aliens ,from outer space, ordinary people, but like ordinary people that we all are, some have a different set of ethics.  Before I have people screaming at me, I want to emphasis that not all tenants are in that category.  I was a tenant at one time in my early 20's.  My in-laws are tenants at this time.  For me, and my in- laws, just like most of you, we were tenants who paid our rent on time, and added value to the rental, rather than damaging.

• The first thing to be aware of when buying a house to be a rental, is the neighborhood.  The type of neighborhood, and condition of the neighborhood, is the type of tenant you will attract.  You might think that will be solved by buying in an expensive neighborhood.  But there is more to it than that.

• Just like any other real estate investment, you must be able to buy the property at a discount.  10-20% less than the going market price, is recommended, depending on the amount of repairs needed.

• The general rule of thumb is to charge 1% of the purchase price as rent.  However, in many areas it will be hard to get more than $1,500 for monthly rent.  This rent, high threshold differs for other areas.  But just because 1% of the purchase price is $2,500, it will be hard to rent the property at that rental amount, if the top neighborhood rent is $1,500.  So, you have to choose wisely. 
  

• Your interest rate on your mortgage will be higher than for an owner occupied home.

• In order to not have to pay out of pocket for rental home expenses, you must have a monthly cash flow. Often the figures of $250 is used as minimum monthly cash flow.  However, to avoid the rental to not be a liability against your income when applying for credit, the figure of 25% above the mortgage PITI (principal, interest, taxes, insurance) amount is required.  In other words, a mortgage payment of $800 would have to have rent coming in of $1,000 in order for the mortgage payment to be considered break even.

• In some areas, monthly cash flow is very difficult to achieve with a single family home.  It will improve in the future with payments staying the same, and rents rising.  But, be aware you could become a millionaire on paper, but be house rich, cash poor.  And, remember, pulling cash out as a refinance still has payments connected with it.  Many new real estate investors who start out in investing in rentals, find themselves in a difficult situation because they are paying out more than they are earning in income.  Read about Casey  Serin who is a young "would-be" real estate investor who bought 8 properties, and wound up in financial disaster, and foreclosed upon.  Unfortunately, when going to expensive real estate investment seminars, with a lot of hype, sometimes the entire story is not told, and a lot of people get themselves into that type of situation, but usually on a smaller scale.

• A duplex, triplex, or quad unit is more probable to produce cash flow.  In some areas these are hard to find.  Make sure that when the unit is converted to multiple rental units, codes are followed for the apartments to be legal. (like separate utilities)  Also be very aware of sound transfer issues.  If you have multiple units in a home, but are constantly complained to about sound issues, you  won't keep renters.

• For each rental unit, it is crucial to keep at least $5,000 in reserve.  This is for unexpected repairs, and the inevitable vacancy period.  Adjust this figure, according to the mortgage payment, and the life expectancy of systems, and appliances in the unit.
  

• Use an application for tenant applicants, a fee charged is okay, and screen the applicants in four areas.  Previous landlords, employment, credit, and criminal background.  Be sure your application gets signed permission of the applicant to check in these areas.  Watch for the prospective tenant that has people set up to falsely respond to the landlord, and employment areas.  Verify in more than one way.  Also, to see first hand how a prospective tenant takes care of a home, some landlords have some of the forms filled out at the tenants residence.  Others will try to determine this by the condition of the car.
  

• Have a strong lease.  Be sure to know the landlord/tenant laws in your state, and form the lease from that.  Just like any legal documents, you may need help understanding the interpretation of the laws in your state.  If you are aspiring to be a landlord, or already are one, a site I would not be without is www.Mr.Landlord.com by clicking on this link you will be able to receive a free lease example, and a free rental owner newsletter.

• As a landlord, you set yourself up for a tenant thinking you are very rich, and their attitude can be that you can afford anything, and what they do, is justified, to so call " level the playing field."  You are also the property manager... refer to yourself as the property manager, not the landlord, or property owner.  This will give you a more equal  footing with the tenant, and problems, or complaints will always be referred to the owner.  Even if that means it will give you time to think about it.  And if the answer is negative to the tenant, they will not take it out on you.  This can also be done with a partner.  You have to run everything by the partner.

• Do not get emotionally involved with the tenant and their problems.  This is not just limited to females, but girls, this is where we are most vulnerable.  We tend to want to help others, and can get sucked into a tenant's lies, or outright scams.  When you want to do the right thing, it is not always the wise thing.  Set up parameters ahead.  If the tenant is late 3 days, 5 days, or whatever time frame you have, send out the first late notice letter, then have it predetermined when you send out the demand letter.  Have it as automatic as you can.  If it helps, have someone who will do this for you.  Do not put off the eviction process. (Be sure to follow the laws.)  In other words run the rental business as "business like" as you can.  I am not saying that if you have had someone for a tenant for awhile, and they face a new problem with their income, and they have been good tenants, to not work something out, but some people are "professional scam tenants".

• Do NOT rent to relatives, or friends.  They sometimes expect you to be that "good friend" that doesn't care if you get paid.  Or, another common thing is either they demand more, or you over improve the residence for them.

     Are you frightened off yet from being a rental owner?  Rental homes are one of the best real estate investments if you follow business sense for managing them.  I just want you to be armed with the information that makes you wiser than the average person who casually decides to get into rentals "to make a lot of money." Always continue to educate yourself in real estate investing.  But seek out as much information as possible.  Absorb the information on www.Mrlandord.com and get the free offers.  Check out the book by John C. Schaub, "Building Wealth One House At A Time".  He offers a common sense approach to building wealth through rental houses. 

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