Now comes the most rewarding part, renting out the home and generating passive income.
Finding a Tenant
Realtor – Hiring a realtor and having them list it within their internal system. The realtor will do all the work in terms of listing and showing the place. They’ll also help run background checks and the credit score of applicants. What we have found is that folks with a credit score greater than 650 are the best tenants to rent to as they are the best about paying on time. One other benefit is that they will help to draft the rental contract so that you and the tenant only need to sign the paperwork. The downside of hiring a realtor is that they generally will charge one month rent + a small marketing fee. Our recommendation is that if it is your first time finding a tenant it may be worthwhile to have a realtor help walk through the process.
Craigslist – Listing the home on craigslist can be hit or miss depending on the tenant. It’s free but there is downside potential of getting a bad tenant which can be a huge headache. Most states have laws that make it hard to evict a tenant even if they do not pay on time. For example in Illinois it can be around 6 months before the tenant can be evicted. When going with this route, it may be worthwhile to run a credit check online (usually around $20) and also meet the person before renting your home to them.
Word of Mouth – Finding a tenant through work, friends, and family can be a reliable way to find tenants. Depending on how well you know the person it may not be necessary to even sign a contract. The likelihood that they don’t pay rent or mess up the property is quite low as you all may be in social circle. Generally they are also the easiest to work with and are quite reliable.
Zillow: Zillow is also an option when it comes to listing your property. It specializes in the home sale and purchase business and is also a platform for rental properties. The upside here is that Zillow is free, and similar to craigslist recommend that potential landlords run a credit check and also meet potential tenants before renting out the property.
Rental Contract Negotiations
In terms of the final contract negotiations, anything can be on the table. For example we’ve rented to tenants with lower credit scores but required a downpayment of 2-3 times the monthly rental. For a few renters we also increased the late fee to 10% of the monthly rental price as we were worried that they may pay late each month.
For any piece of the rental contract, make sure to negotiate the terms to something that you are comfortable with, as at the end of the day you want to generate income and also make sure the home is in great shape. (Negotiation terms can be on price, rental duration, payment date, late payment amount, down payment amount, repairs and maintenance, furnishing, etc.)
Making it Passive
Now that you’ve found a tenant and started generating income, one of things that we believe in is to start making things more efficient and easier to run. A couple of suggestions here:
Automate Rental Income/Expenses – We recommend setting up Chase Quickpay or a service like it to for online rent payments. Chase Quickpay is an online banking service that allows funds to be transferred from one bank to another via the click of a button. It makes it easier for the landlord and the tenant as payments are all done electronically and helps to eliminate the need for sending checks or rent pickup. The service is also free if either the landlord or the tenant is a Chase customer (most banks have a similar service, so it may be worthwhile to inquire about your banks online payment system)
The other piece of automation is the expenses side. Our primary expenses each month are the HOA (Home Owner Association) Fee and the monthly Mortgage. We have these set up as an auto deduction each month, and has helped us eliminate the need to remember to pay as well as the work associated with paying these.
Finding a Handy Man – One of things that will be inevitable when owning a rental property is the need to fix something at the rental home. Whether it be something small like trash disposal gets clogged, or something big like the water heater goes out. We have found it quite convenient to work with a handy man that we trust and to have help out when our tenants need anything fixed. It makes it convenient to work with one person who can address most fixes, although for large items you may still need to look for companies to come out.
At this point anything that you can think of to help make it easier to manage, and to save you time in managing will make it more passive. After everything is set up we find that we probably spend on average about 1 hour a month on the rental property as well as work through anything that breaks (usually 1-2x a year).
We hope that these steps help give you a primer on generating passive income from real estate and wanted to leave you with the following quote “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.” – Robert Kiyosaki author of Rich Dad Poor Dad