Are you thinking about becoming a landlord? Not sure if you have what it takes to be a successful landlord? Don’t know where to even begin to find out if being a landlord is right for you?
Perhaps you are faced with a tough decision right now – sell your home or rent it out and wait for a better price.
I’ve been there. Like many other Accidental Landlords, I faced this dilemma too. I was faced with the tough decision to either sell my home at a huge loss or become a landlord and wait out the housing crisis. In the end, I decided it was better to wait it out even if it meant incurring monthly losses in the meantime.
Instead of selling, I dove right into the world of real estate investing as a DIY landlord. I learned how to manage a property, screen tenants, run the books, etc. And you can too.
But being a landlord is not right for everyone. It requires a special mindset and set of traits to be truly successful.
In this article I will:
- Define what it means to be an Accidental Landlord and how we are different than other real estate investors
- Give you the two most important questions to ask yourself BEFORE becoming a landlord
- Identify the key traits of successful landlords
- Give you a simple Landlord Mindset quiz to see if you have the right mindset to be a successful landlord
Are You An Accidental Landlord?
An Accidental Landlord is someone who didn’t intend to be a real estate investor or landlord. However, due to circumstances, they became one either by choice or not.
There are many situations which can cause you to become an Accidental Landlord. Here are a few:
- Can’t sell your primary home
- Don’t need or want to sell your primary home
- Inherited a rental property
- Moving in with a significant other
- Divorce or separation
What Makes An Accidental Landlord Different Than Other Real Estate Investors?
Accidental Landlords are similar to other real estate investors in most ways. But what sets us apart is that while we didn’t necessarily plan to be a landlord, we took advantage of the opportunity to build wealth through real estate. When we were faced with a rent vs. sell decision, we chose to make the most of it.
Most of us probably weren’t sure we were cut out to be a landlord. I know I wasn’t. However, I learned everything I could about property management and real estate investing to see if I had the necessary mindset and skills.
One more thing, we weren’t sure where to start but that didn’t stop us either.
Does this sound like you? Keep reading.
Two Important Questions To Ask Before Becoming a Landlord
There are two important questions you need to ask yourself before becoming a landlord. You don’t want to find out the answers to these questions after you have your first rental property. By then it might be too late.
- Do the numbers work?
- Do I have the right mindset to be a successful landlord?
This article will focus on the mindset and traits of successful landlords. But first, a quick word about the numbers.
Do the Numbers Work?
One of the very first steps for every would-be landlord is to see if the numbers make sense. Not every property is worth converting into a rental no matter the situation. Sometimes you are better off selling at a loss or trading a poor performing property for a better performing property.
An in-depth numbers analysis is beyond the scope of this article but here is an article and calculator that will give you the basics. However, you need to understand that there are two parts to the P&L – the revenues and the expenses.
Estimating rents (revenue) isn’t too hard when you know what the pros use to estimate rents.
Expenses are a little trickier. The key to forecasting expenses is to make sure you properly estimate the unanticipated expenses when running the numbers. You probably know your mortgage and utilities but do you know how to estimate vacancies? How much does landlord insurance costs? How much should you set aside for capital expenses? (What is a Capital Expense!?!)
Is It Worth It?
Once you have a handle on the numbers, you can now ask yourself “Is it worth it?” Does this look like an investment you would have made without these special circumstances? To answer this, you need to compare the rental Return On Investment (ROI) to your next best alternative.
Let’s assume you could reasonably expect to clear $400 cash every month. Let’s also assume you invested $50,000 in this property via down payment, principal pay-down and improvements. This would yield 9.6% Cash ROI. Not bad but how does it compare to what you could get elsewhere?
Most investors look for Cash returns well above 10%. Is 9.6% worth it? Only you can answer that question, but it will depend, in part, on your answers to the Landlord Mindset Quiz below.
What About Appreciation?
What if the cash flow numbers don’t quite break even? Can you rely on appreciation to make you whole or profitable?
Don’t count on it. Too many have been burned by that experience.
The only time I might make an exception is if you are running a small negative cash flow but you know you can get it to be profitable in a short time by improving your rental NOI. But I would avoid this as a new landlord unless absolutely necessary.
If you don’t take my advice, at least be sure to use the Net Present Value of the expected appreciation and not the gross value of the expected appreciation. See this explanation of Net Present Value to learn more about the concept of time value of money.
How Do I Account For Inheritance Taxes On A Rental Property?
Luckily, you don’t have to worry about inheritance taxes when you take over a rental. In fact, the government gives you a huge incentive to sell the property by offering two distinct tax benefits.
(1) Stepped-Up Tax Basis – you are allowed to value the property at the market value on the day you inherit the property. That means if you sell a home that grandma purchased in 1977 for $34,000 but is now worth $234,000, then you get to keep the extra $200,000 tax free.
(2) No Depreciation Recapture – Normally, when you sell a rental property, you are subject to Depreciation Recapture tax equal to 25% of the depreciation you were allowed to take against the income from the property. This magically disappears with inherited property.
Presumably though, you are interested in keeping this inherited rental. If so, consult a tax professional to ensure you are using the right cost basis when you place it into service under your name.
Final Assessment – Do The Numbers Work?
By now you’ve completed the first step. You know your estimated monthly cash flow and you did a Sell vs. Rent analysis and determined there is a positive ROI to keeping the rental.
Now you are ready for the next step.
Take the Landlord Mindset quiz.
Do You Have The Right Mindset To Be A Successful Landlord (Landlord Mindset Quiz)?
This (totally unscientific) landlord mindset quiz is designed to see if you might have the right mindset to be a successful landlord. Be honest with yourself as you answer these questions. Don’t just answer what you think is right, answer what you truly feel is right for you.
Grab a beverage and let’s get started!
Successful Landlord Traits Explained
It’s not necessary to completely agree with all of the preceding questions in order to be a successful landlord. However, the more of these beliefs and traits you exhibit, the better your chances of success.
Let’s examine each of these questions in a little more detail.
Q1 – Organization Is Important
As a landlord, you will need to keep records of EVERYTHING. There is a lot of paperwork in real estate. Leases, applications, credit checks, background checks, maintenance records, tenant communications, etc. Having a system to file and retrieve this paperwork is critical to being a successful landlord. Especially in the event of an eviction. Here are some organizational hacks for landlords.
Q2 – Don’t Listen To Nay-Sayers
There will be friends and family who will tell you that being a landlord is a terrible idea. Don’t listen to them, especially if they have never done it themselves. Talk to successful landlords to learn more about what you will be getting into.
Q3 – Being Fair Is Good For Business
It pays to be fair-minded as a landlord. Onerous house rules and strict lease terms will breed resentment with your tenants. Put yourself in their shoes and ask yourself – “what’s the fairest way to approach this situation.” This doesn’t mean being a pushover. It simply means being even-handed. Also, judges will view your rules and lease terms against this “fairness” test.
Q4 – Don’t Be Intimidated By Numbers
You don’t have to be an accountant or financial guru but you do need to be comfortable with the numbers. Success in real estate often depends on the numbers. From purchase to ongoing property management, running the numbers is crucial. Here’s a primer on the most important numbers for rentals.
Q5 – Do You Speak Legalese?
Being a Harvard Law graduate is definitely not necessary, but it helps. Real estate is a local business as the saying goes. It’s also National and State-wide.
Innumerable laws and regulations from the US government down to your local town control your business. You will need to get versed in the rules and regulations to be sure you are in compliance. Disobeying these laws can cost you big time.
Q6 – Do You Have A Thick Skin?
Having a thick skin is very helpful as a landlord. You need to be able to separate your emotions from the business. Don’t take it personally when a tenant or contractor is being abusive. The best landlords can keep their cool while sticking to their guns.
Q7 – Are You A Good Judge Of Character?
We all believe we are good judges of character and that no one ever got something by us. Be truthful. Can you really spot when someone is lying? It’s easy to spot common red flags as a landlord once you know what to look for.
- “I’d like to rent your apartment without ever seeing it.”
- “Will you accept 6 months rent in advance to hold it for me?”
- “My brother is just touring the property with me. He won’t be living here.”
But it’s really hard to spot the ones who make a living off of it. Not everyone is out to commit fraud but many are less-than-truthful when dealing with their landlord. You will need to learn to spot the potential lies to protect yourself and your business.
Q8 – Do You Have A Bias Towards Action
Being a landlord is not a spectator sport. It’s easy to get lulled into a false sense of “this landlording thing is easy!” when everything goes right. But when it doesn’t, you need to be ready to spring into action. Small problems become big ones (and expensive ones) very quickly.
Q9 – An Ounce Of Prevention…
..Is worth a pound of cure. This is absolutely true when managing properties. Successful landlords avoid big problems by staying on top of their maintenance schedules. They have a schedule so they know when a water heater needs to be serviced or replaced. Successful landlords don’t wait for a major failure to create an emergency.
Q10 – Get Rich Slowly
If you are looking for a way to get rich quickly and retire early then being a small-time landlord is not for you. It is essentially another job you will do in your evenings, weekends or whenever an emergency happens. The financial rewards may begin from day one but they will usually be small – a few hundred dollars of cash flow per month if you are lucky. But the gains are cumulative and they accelerate as rents rise and mortgages are paid. Slow and steady wins the race.
Q11 – There Will Be Damages
It’s inevitable. The handier you are, the better. Even if you don’t plan to lift a (maintenance) finger, being handy will help you when dealing with property managers and contractors. It’s easy to spot an inflated estimate when you know what work needs to be done.
Personally, I can paint and do some other odd jobs, but I leave plumbing and most electrical to the professionals. I didn’t get into this business to learn a trade but YouTube is a lifesaver in a pinch.
Q12 – It Will Get Awkward
If you are a landlord long enough, you will need to deal with the occasional awkward situation. You might have to act as a go-between when neighbors are feuding. Or you may need to address your tenant’s disturbing habits. The more adept at dealing with humans, the better equipped you will be at landlording.
Q13 – Tenants Are Your Customers
You wouldn’t get aggressive with a customer if you owned a flower shop right? Being a landlord is no different. Show the utmost respect even in the face of disagreements and non-payment. Be firm but also be respectful. This also means respecting their privacy.
Q14 – Tenants Are Not Your Friends
Hopefully you have an apartment full of very nice tenants but they are not your friends. You are running a business and they are your clients. If you get too chummy, they will expect favors – like letting the January rent slide a couple of weeks while they recover from the holiday spending. Let them ask their friends for a loan. You are their landlord, not their college buddy.
Q15 – Do What You Say You Will Do
Being true to your word sets an example and an expectation. If you promise the tenant you will look into a maintenance issue, thank them for bringing it to your attention and have it looked at when you promised. If you let it slip, your tenants will assume it is ok for them not to do what they promised.
A lease is nothing more than a series of promises. Hold up your end of the bargain and expect your tenants to do the same. The law of reciprocity is always at work in your landlord business. Be sure it’s working for you.
Q16 – There Will Be Problems
You will occasionally need to find creative solutions to problems. No two tenancies are the same. There is always a unique situation that seems to pop up that requires your creativity. Maybe your tenant needs to break a lease early. Can you work together to find a mutually beneficial way out? There’s always more than one solution to every problem and the more skilled you are at finding creative solutions, the better you will be at managing rentals.
Q17 – Every Lease Is A Series Of Negotiations
When can I move in? How many pets can I have? Can I rent it for $100 less than what you advertised it for? Can I paint the bedroom orange? And so on. You have to be comfortable and prepared to negotiate as a landlord. The word “No” is your best friend but it can’t be the only response you ever give or you will find your tenancies to be short lived. You will need to find ways to keep tenants happy while respecting your business.
Q18 – It Will Seem Hopeless At Times
There will be moments when you will want to say “Forget This!” but you need to be able to take a long view. Having a long-term vision and a “why” is essential to sticking with the landlord business through the tough times.
My first rental flooded from the apartment above not once, not twice, but three times. I’m still a landlord and I still have that unit because I have a goal and I will not let a minor set back (or three) deter me from reaching it.
Q19 – He Card Reads Good
Excellent verbal and written communication skills are essential as a landlord. Explaining rules and lease clauses in no uncertain terms is crucial. Not everyone processes information the same way and you need to adapt. After the lease is signed you will need to stay in touch with your tenant periodically and address their concerns. Cryptic text messages won’t cut it. It’s too easy to have a misunderstanding so you want to be clear with your tenant. A best practice is to summarize any conversation with a written email or letter to ensure you both took away the same intention.
Q20 – Stop Signs With White Outlines Are Not Optional
I once convinced a friend of mine that any stop sign with a white outline was only optional. I didn’t let them actually drive without correcting that notion first but the point is laws aren’t optional. You are expected to abide by them regardless of how onerous and confusing they may seem. And there is often a bit of a gray area.
How many people are allowed in a rental? The answer is not as clear-cut as you would imagine. But as a landlord, you learn that the most important opinion on the matter is held by the county judge who deals with evictions and the local elected officials whose job it is to approve and regulate these things. And it helps if those rules are the same as State and Federal guidance but don’t count it.
The most important rules you need to learn in my opinion are Fair Housing, Eviction and Disability laws. Brush up on these before you become a landlord. Learning as you go could be a very expensive lesson!
Q21 – There Is Opportunity Everywhere
Whether you are looking for a new property to buy or trying to make the numbers work, there is usually a way to find value that others overlook. Can you add a parking spot and charge for additional parking? Can you find a way to squeeze a washer dryer into the unit and charge an extra $200 in rent? Be that person who finds value and you will be very successful.
Q22 – Brush Up On Your Accounting
You don’t have to love accounting but you do need to understand the basics and keep good records. Real estate tax deduction rules are complex and always changing. Know the difference between a Capital and Operating expense.
Be sure to keep good records of every allowable expense and document all miles driven in pursuit of your business. You will thank me come tax time.
Q23 – Keep Things In Perspective
Know why you want to be landlord. Be sure to have a clear goal of what you want to achieve so when you do get that 3AM call that the AC is out, you can go back to bed and wake up eager to take on the challenge. If you aren’t sure of why you are becoming a landlord, it will be tough to keep going when it gets hard.
More millionaires made their fortunes in real estate than any other business it has been said. While that saying may not be as true as it once was, real estate is still a great wealth builder. This is especially true for Buy & Hold investors like landlords. Successful landlords inherently understand this and it keeps them motivated in tough times.
If you are ready for slow and steady wealth growth that accelerates as the years go on, then being a landlord is right for you.
Q24 – Learn To Say “No”
You have to be firm, but fair as a landlord. Saying “No” isn’t always easy but it is sometimes necessary. Treating tenants consistently and fairly is the best way to steer clear of legal issues and avoid disputes down the road. For example, don’t let your tenants pay late “just this one time” as it sets a precedent the judge will consider if you need to evict.
Tell tenants politely but firmly that you are unable to make an exception to your policies as it has implications on your business. Avoid saying you are “sorry” because that sounds like it is an arbitrary decision.
What about that great tenant who always pays on time and never complains? Can I make an exception for them? No. Find other ways to compensate them. Give them a rent freeze for one year or offer them a new appliance depending on the issue. Find a creative way to meet their needs without breaking your policies.
Q25 – Successful Accidental Landlords Never Give Up
This may seem obvious, but the best landlords all had their share of issues in the beginning but they stuck with it despite setbacks. Myself included. They learned from their mistakes and moved on. If you are prone to abandoning things when it starts to get tough, then I suggest you not become a landlord.
This is probably the single biggest success factor for Accidental Landlords. They have a long-term goal in mind and don’t let setbacks deter them from achieving their goals. They don’t mind making mistakes and sucking at first.
How Did You Score?
90 – 100 Points: BOSS LANDLORD
Congratulations! There is a good chance you would be a successful landlord! Start by connecting with other landlords at local Real Estate Investment clubs. Pick their brain. Ask them how they got started and what they love and hate about being a landlord.
80 – 89 Points: AWESOME LANDLORD
You could be a successful landlord but you might want to go back and review your answers. What kept you from scoring higher? Was it the thought of managing terrible tenants? Fear of the numbers? I encourage you to dive deeper into those areas where your agreement was less than “Somewhat Agree.” This will help you reassess these areas and help you determine if maybe in fact, you do have what it takes to be a successful landlord.
70 – 79 Points: STANLEY ROPER
Maybe dealing with a rental property directly isn’t for you. However, if you still need to consider renting your personal property, I strongly recommend you look into a good local property manager. This will keep you out of most of the day-to-day issues of landlording but it won’t insulate you entirely. You still have to manage your property manager!
60 – 69 Points: Mr. HECKLES
Landlording may not be your best chance at success in real estate investing. However, if you are still attracted to real estate, consider other ways to invest such as Fix & Flip, REITs, etc.
0 – 59 Points: AMANDA WOODWARD
Fugheddabouddit! Stay away from rentals! Don’t even get a turnkey rental with a property manager. Buy some Index funds or find another place to park your money. Rentals aren’t for you.
If you are currently faced with a tough dilemma and aren’t sure if you should become a landlord, there are two things to ask your self:
- Do the numbers make sense?
- Do I have the right mindset to become a successful landlord?
Accidental Landlords aren’t that different from other real estate investors. We recognize the wealth creating potential of real estate and were willing to invest in educating ourselves about real estate and rentals. We didn’t let the fact that we were unsure what to do at first stop us.
Running the numbers is easy once you learn the basics. Figuring out if you truly have what it takes to be a successful landlord requires a little more soul-searching.
Take the Landlord Mindset quiz and see if you have what it takes to become a successful landlord.
Still have questions about becoming a landlord? Shoot me a message or leave a comment below.
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