Running Your Rental Like a Business
Running Your Rental Like a Business
By Meaghan Beasely
How many times have you stopped to consider an enticing commercial promising positive cash flow on a rental property? It sounds like easy money up for grabs. But before you jump into the role of landlord, take a moment to consider the time and effort that goes into property management.
Some owners choose to manage a rental by themselves; others will hire a company to help out. No matter the approach, a rental will not bring income unless it is run like a business.
We spoke with local realtor Sara Kristof about the ups and downs of owning rental property. Both a vacation property manager and the owner of a long-term rental property, Kristof speaks highly of the potential rewards.
“With a weekly rental you can defray the cost of owning a vacation home at the beach as well as take in summer income. And with both a weekly and a long-term rental, you have a second home that could be looked at as a potential retirement home or a source of passive income once the mortgage is paid off.”
All homeowners know maintaining a home of one’s own takes work – and money. There are fixed costs, such as a mortgage payments and insurance, as well as the larger expenses that come with home maintenance: the replacement of appliances, HVAC systems, and a roof can all be cumbersome.
In addition to your own residence, how do you budget for a rental property as well?
Finding the Sweet (Money) Spot
Start by determining your cash flow. “What you paid for your property and the terms of your loan will determine your monthly mortgage payment,” says Kristof. “The market sets the bar for how much rental income you can collect. In there, you’ve got to look at what you owe each month and then factor maintenance into your long-term expenses.”
Determine Your Cash Flow
- Establish Your Monthly Fixed Costs
- Mortgage Payment
- State/County Property Tax (divided over 12 months)
- Property Insurance (divided over 12 months)
- Determine a Maintenance Factor
- Using Fixed Costs as a base, estimate an additional:
- 5% on home 0-10 years old
- 10-15% on home 10-20 years old
- 15% on home 20+ years old
- Decide your Rent
- Research the market by looking at comparable properties and rental rates
- Determine what the market will bear
- Cash Flow
- Rent – Total Fixed Costs (Monthly + Maintenance Factor) = Cash Flow
“You need to price your home properly to make more money,” advises Kristof. “Say on a long-term rental, the market would bear $1200-1500 per month on a two-bedroom, two bath space. If you price at the high end, you may wait up to eight months to find someone willing to pay that much, and you’ve lost all that potential income. Whereas, if you priced around $1300, you would rent it sooner. It’s the same thing with vacation rentals: when you miss an opportunity in the rental world, there’s no making up lost time. You need to be smart about your pricing.”
In addition to working the cost of your maintenance into the rental price, Kristof says to take it one step further.
“Have a contingency fund. There are crazy things that happen out there and you have to budget to cover those expenses. You could have a possum crawl under your house and get into the HVAC line,” an unexpected and pricey task to fix. “Owning a rental property requires you to have a mindset to confront those issues when they come up – and you need to budget for them, as well.”
Making Your Home Theirs
Owning a rental property, be it a long-term rental or a vacation home, means a plan for keeping your home in its best condition. Devising a maintenance schedule will help keep you ahead of most problems before they have a chance to worsen into more expensive repairs.
“There’s a lot of responsibility,” Kristof reminds us. “Upkeep of the property falls on the homeowner. There are issues that need attention annually as well as those that will have to be addressed five, ten, and twenty years down the road.”
When determining your maintenance needs, Kristof says to factor in the age of your property, its condition, as well as occupancy. She also points out the increased risk of accidental damage where children are concerned.
“There’s the spilling of juice on carpets, pulling strings on blinds, poking holes in screens,” all of which need to be inspected regularly. “When you open your home to the public, you have to expect damage will occur and you have to think about how you will handle that, be it with the security deposit, a damage waiver or if you offer rental insurance.
“You’re going to receive a lot more wear and tear if you have a family of four with a dog and a cat than if you’re renting to one single person,” she adds.
Owning a pet-friendly rental means more frequent carpet cleaning or adding a seasonal flea spraying. There could also be pet damage from scratches on doors and walls, windowsills and screens.
“There’s potential for more wear and tear, but there’s potential for more income as well, no matter whether you’re renting long- or short-term. Making a rental pet-friendly can extend your weekly rentals into the shoulder season. Vacationers in the spring and fall tend to travel with their pets,” Kristof says. She also points out that in North Carolina, no renter with a service animal can be turned away as their animals are not considered pets.
Here an example of a stepped-up cleaning and maintenance plan to cover added wear and tear from pets:
|Carpets Cleaned||1-2 times/month||1-2 times/year|
|Exterminator||1-2 times/month||As needed or 1/year|
“It’s in the best interest of the homeowner to have a well-maintained home,” says Kristof, particularly when it comes to vacation rentals. “Someone’s not going to come back to a house that doesn’t look like the homeowner has invested any money or time into it. You’ve got to stay ahead of the game in order to lead the pack, you need to be a show-stopper.”
Speaking about both short and long term properties: “The goal is to have renters who think of your home as their home; then those renters tend to treat the property with a little more respect, which leads to less wear and tear overall.”
And don’t forget the air filters. “Regular filter changes are very helpful. When you own a rental property, you don’t leave it up to the renters to purchase air filters – leave them in a stack on the property and ask your renters to change them; drop filters off every couple of months; or go in yourself and replace them.”
Where Does the Time Go?
When speaking of running her own long-term rental, Kristof wishes someone had warned her at the start, “about the time commitment. I really thought I’d buy it and it would just run itself.” Not so.
“Weekly rentals are extremely intensive. A lot of work goes into them all the time; they can be a full-time job. They really become an around-the-clock responsibility.” Kristof advises homeowners to consider signing up with a property management company for short-term rentals.
“I think it would be very difficult to manage a vacation rental on your own. You need to be available day and night. And unless you’re willing to get on your hands and knees and service your pool twice a week, you need to have a Rolodex of vendors you can call for HVAC, carpets, plumbing, electricity, etc.”
Add the weekly housecleaning chores that must be accomplished in the few hours’ time between each set of renters, and it’s easy to see how the hours add up to that of a part-time job.
However, a long-term rental can also become a part-time job. “You collect the rent, take care of maintenance issues and upkeep,” Kristof says, but she acknowledges that some of the responsibility for home maintenance can fall onto the renter.
“In the Outer Banks area, landlords must maintain the water line to the house and the bill. But leases can be written up in all different ways; I have written into my lease that my renters are required to maintain the carpets and the landscaping; that’s pretty typical down here.”
As a landlord, Kristof warns to be ready any time your renter needs assistance.
“Are you willing to pick up the phone at 11 at night and have your renter tell you the A/C isn’t working or the fridge isn’t cooling? You have to be ready to start emergency service. And when dealing with a vacation rental, that availability is a 24-hour-a-day job.”
On The Bright Side
“The Outer Banks is a really great market for rental properties,” says Kristof.
Prospective landlords, take note: Kristof points out an area of untapped possibility in the local market.
“Since the island is so transient, there is a lot of potential for long-term rentals down here,” Kristof says. “There is an extreme shortage of long-term summer rentals because a lot of owners would rather rent weekly for more income. It creates a problem for local businesses trying to find housing for summer employees.”
For those looking to get into the long-term rental game, there is endless potential. Whether you’re just thinking about entering the property management game or you’ve been at it for years, it always helps to think about the long-term.
“Each year, people come to expect a little more,” says Kristof. “Just like owning any home, you’re always going to have put money into it. And there’s routine maintenance to help things along.”
If you take the time to research the market, set aside the necessary resources, and plan accordingly, owning a renting property could be just the investment you are looking for.
Long-Term/Short-Term Rental Maintenance Plan:
Caulking in Bathrooms/Tubs
Areas of Potential Mold
Power Wash Decks/Siding
Change Air Filters
-washer, dryer, disposal, stove, refrigerator
Exterior Siding Replaced
-door handles, lights, ceiling fans
Short-Term Rental Specific Maintenance:
Weekly in Season
Plastic deck furniture
Wood Deck Furniture
Sara Kristof has worked in property management for eight years while maintaining a long-term rental for nine. She is a licensed realtor in Corolla, NC.
Meaghan Beasley is a freelance writer and is heading out right now to get some air filters.