Running a Rental

Over the last two centuries, nearly 90 percent of the world’s millionaires have been created by investing in real estate. Getting started is easy: buy your first house! Growing a real estate portfolio that creates passive income is more difficult. It requires that you play the role of a landlord at least long enough until you understand the role and can hire a property manager.

1. PHOTOS – I would start by getting professional photos of your home. Ask your realtor for a recommendation or go with a company like www.virtuance.com that will give you wide-angle images with brightening filters and a floorplan that will make your home stand out online. It is important to plan an ideal time to get photos when the house looks best. Ideally, take photos when the home is furnished nicely, cleaned, and during the Spring months when everything is green. You might use the same photos for years, so it is worth the investment (about $150). You don’t want to try to take photos with messy tenants.2. ZILLOW – Zillow has made being a landlord EASY. In Denver, most rental are not listed by a real estate professional on the MLS and no commission is paid. It is common practice for private landlords list on Zillow which also puts the listing on Trulia and Hotpads. Enter the basic information and upload the photos. Zillow also allows you to upload a “walk through” tour of the home and 3D tours. Once online, you should start receiving inquiries right away. If there isn’t much interest, you need to lower the price. If it is too overwhelming, you priced too low and should consider increasing your rent.

3. SHOWINGS – Pick one time per week in which you will allow showings and stack multiple showings into a two-hour window. You can even set the availability on Zillow. I recommend telling all inquires the showing window is Saturday between 11-1 pm. Most people can accommodate and space them out so you will have a chance to meet all the potential renters to tell them about the home. You are interviewing the caretaker of your biggest investment, so make sure you are asking lots of questions to make sure they are qualified and would be good stewards of your home.

4. SCREENING TENANTS – Zillow has a very nice platform for renter applications and they will also provide and credit report and background check for free. It is important to call a few references if you’re having any doubts about a candidate.

5. WRITE YOUR LEASE – Get a lease from a friend (I’m willing to share mine, email me) or you can find a template online. I would then customize the lease in google docs to make sure it works well for your property. Zillow does have a lease available through “rental manager”, but I found it to be too generic. Make sure your lease covers property maintenance, especially if you own a home with a large yard. You also might consider giving the renters an option: The expectation at the advertised rent amount is that the tenant would handle all lawn mowing, weed pulling, watering, leaf raking, and snow shoveling. However, you would be willing to hire a landscaping service for an additional $100/m.

6. COLLECTING RENT – You should start a separate bank account and LLC for your rental property. Set your mortgage, rent payments, water bill, and any expenses to go through this account and you will have a better experience when filing your taxes. If you are collecting a security deposit, it should be held in a special “escrow” account separate from your operating account. The security deposit is typically required upon accepting an application. Make sure that you’ve established clear expectations if multiple renters are contributing to the rent, the collective rent payment should come from one person in the group in a consistent payment form (establish this in the lease). You can use Zillow to collect rent payments. I prefer ACH direct deposit.

7. ORIENTATION AND WALKTHROUGH –  Make sure your tenants know all the intricacies of your home and how things work. Even things like trash pickup. Take time to show them everything so you don’t have random questions coming your way in the middle of the night. You also want to use a walkthrough checklist to document the condition of the property to make sure if anything is damaged it has been accounted for. I like this list I found online.

8. SIT BACK, COLLECT RENT, AND FIND A GOOD HANDYMAN. Questions and issues will come up. It helps if you have good renters, a quality home, and live nearby. Given the monthly income, even if you spend time managing the place every month it is a good deal. The biggest time suck is finding new tenants, so work on keeping your renters happy and you will save yourself time and money.

My favorite way to analyze the performance of a rental property is to use the “Cash on Cash Return” equation (see the visual below). When you purchase a home, even as your primary with no intention of renting you should make sure that your mortgage is less than you’d be paying to rent a similar home in the area. If you are buying primarily with the intention of renting, I would aim for 5-10% annual return. The appreciation of home values is just the icing on the cake. You can count on monthly income, you can’t always bet on appreciation. Cash on Cash return over 10% is really good in the Denver market. Below is a simple example of a condo. Need help? We would love to help you find a good investment property.