Owning rental property is not as simple as handing over the keys to a tenant and sitting back as the money flows in. Successful landlords need financial savvy, good people skills, a willingness to take late-night phone calls and much more.
“This keeps me going, seven days a week,” said Reid Kuzel, a Tempe resident who with his wife, Pamela owns more than 20 rental homes in Arizona, mostly in the Valley.
Rental properties can be a good way to generate long-term profits.
A recent UCLA study pegged historic average returns on single-family rental homes at about 9 percent a year, with roughly half coming from rental income and the rest from home price appreciation.
Not only can you take advantage of the long-term tendency for real estate prices to rise, but you have someone else — a tenant — paying the mortgage by writing rent checks.
The number of renters has swelled in recent years, as the nation’s homeownership rate has declined. And as a business, most of the costs of renting out a home are deductible from a tax standpoint.
But it’s not carefree work, and you need to view this as a long-term business endeavor. Not everyone has the personality or financial capacity to become a landlord. Here are some tips to consider:
1. Assess your landlord personality
Landlords who manage their own rentals need to deal with people, from tenants to handymen to cleaning crews. It helps to be firm and disciplined, on the one hand, but somewhat flexible and patient, too.
“I tell tenants that I want this to work,” said Kuzel. “I want to work with them … treat them as people, with respect.”
Other favorable personal qualities include an ability to exercise discretion, act lawfully and have enough time and flexibility to deal with unexpected repairs or surprises.
You could hire a professional property manager if you don’t want to deal directly with many people, have trouble saying no, lack the time to oversee properties and so on. But managers typically will take a cut of 10 percent or so, and might not show the same enthusiasm for managing your property as you would.
2. Evaluate your financial flexibility
Rental properties don’t always pay for themselves, especially initially, and that might necessitate propping them up with personal funds on occasion.
“The maintenance/repairs really punched me in the nose last year,” said Jeremy Kisner, a Phoenix certified financial planner who owns two rental homes in Las Vegas with his wife, Angela.
At one property, he said, “We had to resurface the pool, repair an HVAC unit and fix a significant plumbing problem.”
Considering that roughly four in 10 Americans say they would have trouble scraping up even $1,000 to meet an unexpected personal cost or emergency, according to surveys, these people aren’t financially cut out to be landlords.
Hopefully, your rental income will be enough to cover the mortgage payment, insurance, property taxes, gardening fees and other expenses while budgeting for occasional big-ticket items. Those could include the need to replace carpeting or buy a new air conditioner.
It’s smart to keep at least a couple of thousand dollars in reserve for each property owned (excluding the tenant’s security deposit). For clean record keeping, it’s also wise to keep a separate checking account for each rental home.
Even more than big repairs or bad tenants, vacancies for weeks or months can really hurt landlords, Kuzel said. That’s one reason he won’t accept leases for less than a year.
3. Understand how to buy attractive rental homes
Part of the financial capability of landlords is affording the home purchase. If you must take out a mortgage, recognize that interest rates on rental properties typically are higher than on owner-occupied dwellings, and you might need to make a larger down payment.
The mortgage expense likely will be your biggest monthly outlay and can easily push you into the red.
“You are typically very lucky to have break-even cash flow on residential rentals if you have a mortgage,” Kisner said.
As with other homes, you want to buy in solid yet affordable neighborhoods, especially those with the potential for gentrification, or broad improvement, and where younger people like to live.
Kuzel cited areas near downtown Phoenix and Tempe Town Lake and Old Town Scottsdale as examples.
Kuzel said he prefers buying homes with at least three or four bedrooms and with at least 1¾ bathrooms, as smaller dwellings can be difficult to lease.
Although he cautions that a rental home should look at least as nice as other dwellings in the neighborhood, he cautions against getting carried away with expensive, trendy remodeling projects.
“You don’t want tenants to think they’re living in grandma’s house,” he said. “But you’re also looking for durability and something that won’t go out of style.”
4. Know how to screen prospective tenants
Landlords need to evaluate prospective tenants carefully, using credit and criminal-background checks and verifying information on applications (yes, some people will lie!).
A careful evaluation can weed out applicants with a history of not paying rent or causing major damage to property, or those who might use a home for criminal activity. Property managers can facilitate this, and companies such as National Tenant Network provide the screening services.
But few tenants have perfect credit records and might have other demerits, and landlords should know how to evaluate specific situations.
For example, Kuzel said he’s warier of people facing legal judgments than those who have had a bankruptcy, especially if it was several years ago. After all, a bankruptcy means an applicant has usually jettisoned most personal debt and now has a lighter load.
But a judgment could mean a wage garnishment still lies ahead.
He also recommends the Arizona Real Estate Investors Association, azreia.org, for people interesting in learning more about the rental business and making networking contacts.
5. Understand your legal obligations
Rental owners also must be familiar with state and other laws as they relate to landlord-tenant issues.
For example, landlords might need to collect sales taxes on residential rentals in most larger Arizona cities, though this tax isn’t commonly levied in other parts of the country. It’s smart to check policies in the cities where you own homes for rent.
The website of the Arizona Department of revenue. azdor.gov, offers a general description.
Landlords also must know other responsibilities, especially in dealing with tenants, such as how often and when they can come by to inspect a property. And they must be careful not to discriminate against prospective tenants on racial, gender or other grounds.
Landlords who hire property managers usually can trust these professionals to handle legal issues properly. Still, it’s smart to know your basic responsibilities.
The Arizona Residential Landlord and Tenant Act is at www.azag.gov, the website of the Arizona Attorney General, or here.