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Wednesday, October 24, 2012

Tips for running a rental business

I've been running a rental business for a while now, and so has my wife. The income is very nice, the write-offs are really impressive, and unlike others you might have talked to, landlording is not nightmarish at all. It is, however, a business, and I suspect that people who run into trouble being a landlord simply are not running it like a business and try to take short cuts. So this blog post is a series of notes and tips for people who're about to start a rental business or might find themselves "accidental landlords."

Easily your best investment is the book, How to Manage Residential Property for Maximum Cash Flow and Resale Value. If you're just renting a room in a house, or a one-unit property, you might consider that most of this book irrelevant (it's targeted at multi-unit rental property managers). And you'd be WRONG. This book contains a huge number of tips that I used and saved me the money (and time) spent on the book several times over. For instance, the section on how to transition property from one renter to another has saved me a huge amount of hassle, time after time. Note that John T Reed's other books are about real estate investment. In particular, if you're thinking of buying rental property in the Bay Area, the answer is DON'T. Prices here have been driven to the point where it's difficult to get a good cap rate. The people I know who're successful at rental property tend to buy in cheaper places (outside the Bay Area), or bought into the bay area rental market decades ago. In most cases, I suspect the latter would have done even better by investing in Silicon Valley companies.

If you have a high turnover separate entrance property like a studio, your single best upgrade is a Keypad Lock.This enables you to switch between tenants by reprogramming the entry code, which saves the cost of getting a locksmith to change the keys. Even more importantly, your tenants can never lock themselves out again, so you will never get a call in the middle of the night asking you to let him or her in.

The next book to read is Every Landlord's Tax Deduction Guide.This is a big deal because certain tax deductions like rental property depreciation go into place the minute you list your apartment for rent on Craigslist. The difference between a repair and an upgrade is also huge, and you want to know the difference before you decide to replace something that isn't completely broken. You want to know all this up front.

Every Landlord's Legal Guide is also a very useful book. Not only does it cover what you can or cannot legally do (and if you're  a small time renter, a lot of the rules don't apply to you), it also comes with a bunch of forms that you can make applicants fill out. The thing is this: once people fill out a legal form, the very act of filling a form eliminates 90% of the miscreants  who think you will throw the book at them if they do something wrong.

Finally, you still need to use some form of a screening tool. I use e-renter, which does a decent job. The important part is to make sure that you're consistent so that you don't skip a step in the process. The times when I've seen landlords get into trouble is when they skip steps in order to get a tenant faster.

One final tip: if you're into optimizing the use of your assets, consider listing your property on AirBnB when you go on vacation. Silicon Valley rent and hotels are so expensive that a typical home can rent for a huge amount of money on a weekly basis, and you'll come out ahead. I've met people travelling across the country by driving and camping, and invariably what they tell me is that the most expensive part of traveling is paying rent (implied or real) in Silicon Valley.


Unknown said...

Hi Piaw,

Thanks for the very timely and useful information. Regarding the recommended book by John T. Reed, is Revision 6 substantially improved over Revision 5, for example?
Also, does your definition of "Bay Area" extend South into Santa Cruz/Capitola/Aptos, for instance?


Piaw Na said...

I read the older revision from the library, and haven't read the newer versions, so I can't comment on the version diffs.

I don't know enough about the rental/home price cnoditions in Santa Cruz/Capitola/Aptos. I do know that I have friends who've successfully bought and managed rental property in Pittsburgh, CA.

My take on this is that I already have enough exposure to California real estate and don't need any more. One big earthquake could take everything out. :-)