When you first start out in the real estate rental business you will probably discover that managing a rental property is more complicated than you anticipated. Despite this, being a San Diego landlord can be rewarding and profitable as long as you take some time to gain a basic understanding of key landlord responsibilities, property management marketing tactics, and applicable areas of the law. This knowledge is invaluable to help you find (and keep) good tenants, effectively manage your rental, and avoid common landlord mistakes.
The following are tips for new San Diego landlords, such as yourself, to help you succeed and get the most out of your real estate investment.
You don’t need to be a management pro, real estate expert or work for a San Diego Property Management Company to be a good landlord. You do however need to be willing and able to dedicate enough time to keep up with tenant requests, property maintenance issues, as well as handle the accounting and marketing of your property.
Treat your rental property as a business
Whether you have one property or several, treat the management of your properties as you would any business. First things first, establish (and stick to) a work schedule. Managing rental properties requires attention – at a minimum you must stay on top of expenses and general maintenance issues – and without a set schedule these tasks can become overwhelming. While you should always be ready to handle tenant issues outside of a set schedule, creating and sticking to a schedule will help you be more productive with your time and keep you in the mindset that your property is a business.
Treating your properties as a business will also help you maintain a professional relationship with your tenants. Quite a few self managing landlords find it difficult to keep the relationships with their tenants strictly business. While it is natural to develop a friendly relationship over time, it can be detrimental to develop too friendly of a relationship with a tenant. Becoming friends with your tenant can impair your ability to make necessary business decisions such as raising the rent when appropriate or collecting fines for late payments.
You should also consider creating a Limited Liability Company (LLC) to shield yourself from personal liability. Running your property business through an LLC can not only help protect you personally if legal actions arise involving the property, it allows you to retain the tax benefits of a sole proprietorship.
You can apply many of the skills you already have to landlording
Many skills from other professions and experiences are transferable to landlording. For example, customer service skills are very important to help you build and maintain a professional relationship with your tenants whereas marketing skills are useful when it is time to advertise your property for rent. Sales, accounting, and maintenance skills also all translate into helping you manage your property. So while there is much to learn about the rental real estate business, keep in mind that you most likely already possess skills and experience that will help you succeed as a landlord.
Stay abreast of the law
As a landlord, you must familiarize yourself with applicable federal, state and local laws to protect yourself and your property, especially if you are planning to manage it yourself. These laws are ever changing and as the property owner you are expected to know and abide by them; ignorance of the law is not a defense.
Understanding your real estate investment
Whether you have become an accidental landlord through inheritance or are looking to actively invest in one or more properties, the following tips are to help you better understand your real estate investment.
Find the right property
There are many factors to consider when looking for a rental property to purchase or when trying to determine the value of a property you have otherwise acquired. Price is obviously an important factor but the location is just as important. Take a look at the neighborhood – how accessible is it to public transportation or major highways? Are there grocery stores nearby? Are there any attractive area features or businesses closeby? Would you want to live not only in the property, but in the neighborhood? Potential tenants are not only looking for a nice property to rent, they are also looking for a nice area to live in.
Note: finding a property with tenants already in place is promising but do not assume this guarantees a built-in steady stream of income. Be sure to ask the current owner if the tenants are reliable in making their rent payments.
Determine your cash flow
Before purchasing a property, figure out if it has the potential to produce positive cash flow given current market conditions. A positive cash flow means there is more money coming into the property (through rent and auxiliary income streams such as parking) than going out of the property (through mortgage payments, taxes and maintenance costs). For example, if you collect $3,000 in monthly rent, and pay out $2,500 in monthly expenses, you will have $500 to put in the bank each month.
Before making a purchase you need to decide what your budget is and how much money you want to earn per month to make managing the property worth your time and effort. You should be very conservative with your financial projections for the property and be prepared for surprise expenses and missed rental payments. Remember, you are still responsible for the mortgage even if your tenant does not pay their rent or your property sits vacant, so you must be prepared to handle that cost regardless of rental income.
Set your rent
After you have acquired your rental property you need to figure out a profitable yet competitive amount to charge for rent. You first want to evaluate your approximate income and expenses, which you can do with online accounting software or simple spreadsheets. You must also decide if (and how) tenants will pay for utilities. This is a good time to check with a San Diego property management professional, as they are aware of laws in San Diego County that might affect how you go about handling shared utilities.
You should also study the dynamics of the San Diego rental market. Remember that every neighborhood and property is different so compare other rentals in the neighborhood that are similar in size, quality and proximity to transportation and businesses. Study the local job market and factor in amenities, parking spaces, and other attractive property features. Keep in mind you need to continually keep track of changing market conditions to stay competitive and attract the right tenants. To help you do this, consider getting involved with a San Diego Property Management club and pay attention to the news in the area.
Managing your San Diego rental
You have done your research, found the perfect investment property, completed your due diligence and are now ready to get a tenant in place and start earning income on your investment property. The process of finding a tenant is an important one and one that you will repeat many times over the lifetime of your rental. Finding a good tenant might seem like a daunting task but it does not have to be. The following is a roadmap to help you find, onboard, and retain good tenants, which is the foundation of property management.
Locate the best tenant
These days most renters use the Internet to search for their next home, so you need to be where they are looking. Many landlords market their properties online using a free listing service such as Craigslist. You should also share your online listing with friends and family across your social media outlets – a referral from someone you know is a great way to find a tenant!
Your rental listing should be clearly written and include the basics like the number of bedrooms and bathrooms, square footage and any fees and deposits required at move in. Additionally, you want to highlight the amenities and the proximity to transportation and local points of interest.
It is also important to invest in high-quality photos of your rental and the more the better. Have professional photos taken during the spring or summer months (if possible) when your property looks its best. It is worth the expense to have professional photos taken since photos are the first impression potential tenants have of the property and of you.
Even though most people search for rentals online, it is still a good idea to place a professional looking “For Rent” sign in the yard. Whether it’s someone who notices your sign and shares it with a friend or someone driving around the neighborhood looking for a place to live, a sign is an inexpensive way to advertise your property.
Familiarize yourself with fair housing laws
Before advertising your property for rent, you need a basic understanding of the fair housing and discrimination laws. Fair housing laws are federal statutes that ensure equal access to housing for everyone and make it illegal to discriminate against anyone on the basis of race, color, religion, national origin, sex, familial status or disability. The State of California, as well as the city and county of San Diego have additional protections that you’ll want to become familiar with as well. When advertising your property, focus on the property itself, not on a group of people or features geared toward a specific group of people to keep from running afoul of the fair housing laws.
Show your property
As soon as you post your listing online, be prepared to get inquiries almost immediately. As a landlord you must be ready to take calls and set up showings quickly. You can show your property to tenants individually or host a rental open house, which saves you time and creates a sense of urgency among interested renters.
If the property is vacant make sure it is clean since a spotless property goes a long way in attracting a tenant. If the property is occupied, you must comply with notice requirements by giving the current tenant at least 24 hours notice before you plan to show the property.
You should also consider creating and giving each prospective renter a well-designed flier with high-quality photos listing the amenities and basics of your property. A professional, well put together flier communicates to prospective tenants that you value your property and helps your rental stand out.
Once you locate an interested potential tenant, the first thing you should do is have them fill out a rental application. A rental application allows you to review their qualifications and is an important way to document your rental process. Not only does the application allow you to screen potential tenants, using the same criteria and application form for each and every applicant allows you to evaluate candidates objectively and helps ensure your compliance with fair housing rules.
It is up to you whether or not you want to charge an application fee, but keep in mind that San Diego has regulations in place when it comes to rental applications, so you should consult a San Diego Property Management Company or an experienced attorney to determine what is permitted in San Diego.
Once a prospective tenant completes an application, use the information provided to confirm that the information on the application matches what the potential tenant told you either in person, via email or over the phone. After verifying the information on the rental application, you should run a credit check and background check, verify income sources with phone calls, and follow up with at least two previous landlord references, if possible. There are several online services, such as TransUnion’s SmartMove, that offer combined credit and background checks and you can request a pay stub or call an employer to verify income.
It is generally recommended that a renter not spend more than 30 percent of their monthly income on rent but this rule of thumb is not always applicable, especially in a hot rental market. And remember to follow the same screening process for each application you review to ensure you make an objective decision and comply with fair housing laws.
Accept or reject an applicant
Once you determine that an applicant is qualified you have found your tenant. Let them know as soon as practicable so you can finish the process and get them moved into the property. Do not forget to remove or update your online listings to reflect that the property is no longer available. Conversely, if you decide that an applicant is not qualified based on the facts you uncover in their application or credit check, you should call and let them know immediately. You should also send a written notification via email or U.S. mail letting them know the reason for your decision.
Collect a security deposit
Before you have the tenant sign the lease you need to collect the security deposit, which is meant to cover the cost of property damage beyond normal wear and tear or help defray lost rental income if the tenant breaks the lease. Security deposits are permitted in San Diego but you should familiarize yourself with the laws governing the maximum amount you can require as well as the time frame to return a deposit at move out. Similar caution needs to be taken with how you hold the funds because there are laws regarding the account types you must use and what you must do with any interest earned.
Sign the lease
A lease agreement is a binding, legal contract between you and the tenant. As such, you want to make sure it thoroughly addresses the rules, policies and conflict resolution procedures for living on your property, and clearly defines tenant and landlord responsibilities. There are many generic leases online, but if you choose to use one make sure it complies with San Diego’s local and state laws. When starting out in this business it is a good idea to have a legal professional review your lease. You should use the same lease agreement for all of your tenants and make sure to keep it up to date when new laws or ordinances go into effect. You should also look into software that gives tenants the option to sign the lease online. Not only does it make your job easier, but copies of the necessary paperwork are sent to both you and the tenant automatically.
Do a Move In Inspection
Once the lease is signed but before handing over the keys perform a walk-through with your tenant to assess the condition of the property. During the walk-through make notes and take pictures of any issues or damage you find. Go room by room and document the condition of the floors, walls, windows (including screens), blinds, closet doors and doorstops. Once complete, have your tenant sign and date the document and give them a copy. Creating a document with this detailed information will help protect you if a problem arises during the tenancy or there is damage beyond normal wear and tear at move out. It can also help encourage your tenant to take good care of your property as it shows you pay attention to detail.
Maintain your rental
Once your tenant moves in, managing your rental property should be a fairly passive endeavor. Regardless you must still meet your landlord responsibilities which include ensuring the property is safe, performing regular rental property maintenance, and responding quickly to tenant requests. While there are laws in place that prevent you from entering the property too often or without advanced notice, it is okay to periodically drive by and assess the outside condition. You should also try to get to know the neighbors surrounding your property. If the neighbors know you and have your contact information they will feel comfortable contacting you if there is something that needs to be brought to your attention.
As far as maintenance or repair issues go, if you have the time and are handy, you can complete many maintenance tasks yourself, which will help keep down your costs.
Collect the rent
There are many ways to collect the rent, but these days tenants expect and prefer to pay online. A number of sites offer this service, some of which are free or low-cost. Offering this convenience to your renters is not only most likely their preference, it can help ensure that rent is paid on time.
You should include a clause in your lease that allows you to collect late fees if the rent is not paid on time. While it is good to maintain a friendly relationship with your renters and be considerate when there are extenuating circumstances, remember that this is your business, so be clear and firm about your expectations and do not hesitate to charge for the late payment of rent.
Renew the lease
Several months before the lease is up, check with your tenant to see if they are planning to renew. This is also a great time to do another market analysis to see if you should increase the rent and if so, by how much. If you do decide to increase the rent, give your tenant sufficient notice so they can decide if they still want to stay in the property.
Understand Move Outs
While a move out does not need to be complicated, there are laws in place that could get you into trouble if you are unaware of them. Before a tenant moves out you must offer to do a pre-move out inspection in writing and instruct them about their rights to reclaim any personal property they abandon. This is where the move-in inspection documentation is invaluable because you can easily compare the before and after and charge the tenant for anything beyond normal wear and tear.
California law requires the security deposit be returned to the tenant within 21 days after they return possession to you. If you fail to return the security deposit within the 21 days you are subject to punitive damages up to double the amount of the deposit in addition to having to return the entire deposit (and this applies even if the tenant trashed your property).
Whether you plan to be a full-time landlord or decide to hire a San Diego Property Management Company, owning an investment property can pay long-term dividends. San Diego is a desirable rental market and has a great pool of tenants waiting to find a perfect rental. Maximize your success by keeping your property in excellent condition and taking the necessary steps to find the right tenant. Educate yourself about landlord/tenant laws, establish rental screening procedures and create a schedule for managing your business to help you be a more efficient, compliant and profitable landlord.