How to Become a Landlord?
The need for housing continues, no matter what the economy does. Rental properties represent 36.6% of American households. The average rental cost varies by location but the national median for a two-bedroom home is $1,196.
Becoming a landlord isn’t a get-rich-quick endeavor. The income from a rental property will fluctuate. Like other investments, approach being a landlord as a long term commitment. As the equity in your rental grows, so will the profits.
Being a Landlord
Owning a rental property comes with responsibilities. Don’t you think you can buy a rental, sit back and watch the money roll in. Once you own a property, here are a few of the tasks to expect:
- Manage rental applications
- Screen tenants
- Set terms for the lease
- Handle deposits
- Property maintenance
- Providing/replacing appliances
- Dealing with property damage
- Rodent or insect infestations
- Handling evictions
Before setting terms of a lease, landlords should familiarize themselves with the law. There are federal and local laws that may apply.
Depending on the state, county or city, laws and regulations will vary. Know which agency enforces what part of the housing code.
Landlords have responsibilities to their tenants. A simple example would be the number of smoke detectors required in a space. What liability does the landlord have if the rentals becomes uninhabitable?
Be clear on the law for evicting tenants. Some areas are landlord-friendly, and the process is fast. In others, it’s tenant-friendly and can drag out for months.
It’s helpful to consult a real estate attorney about how to avoid common pitfalls. Take advantage of forums, like Reddit’s “how to become a landlord” discussion thread.
Tenant turnover is expensive. The goal is to find and keep good tenants and get the bad ones out.
Buy a Rental
A loan for a rental property is different than a loan for a residential home. The interest rates are higher because rental properties are likely to default. There won’t be any fudging on the down payment. Expect to pay the full 20%.
The lenders looking at your application see a mortgage payment for 15 to 30 years. If you already have a home mortgage, that’s a lot of debt to carry. Your credit score at minimum should be in the mid to high seven hundreds. Some lenders may want to a reserve fund to cover 6 months of rental expenses.
If you’re going to become a landlord, you need to do it right. That’s how you make money.
- Getting the right property is the first step is setting up your rental business.
- Start small. Get a single-family home or duplex. Buying an apartment house right out of the gate is a recipe for disaster.
- Foreclosed homes may be an affordable option.
- Look for a property that’s close to your home. It’s much more convenient for showing it to prospective renters or getting repairs done.
- Know what tenants want. Price is the key factor – stay current with the market. The terms of the lease, the neighborhood and building amenities are other priorities.
- 34% of renters live in single-family homes.
- Know what the property is worth. Don’t take anyone’s word on price or value – confirm the numbers. Check rental prices for similar properties in the area so you don’t overpay.
- Calculate property costs vs return. Make sure the rent covers your costs but is still reasonable for the neighborhood. It’s suggested you use a percentage of the property’s value. A $100,000 house might rent for 1% of its value, at $1000 a month.
- When you make an offer, include a contingency based on the home inspection.
Once your offer is accepted, close on your property and pick up the keys. You’re one tenant away from being a landlord.
This is a Business
Never forget being a landlord is a business. Your record-keeping needs to be accurate and up to date. Filing your business taxes will be different than filing income taxes.
The rent is your income. Standard expenses include mortgage payments, insurance, utilities and professional services. Make sure you understand what can be deducted and what can’t. The tax law changes all the time – you may want to hire a CPA for your taxes.
A great free service to help new landlords keep accurate records is Stessa. You do everything online. Enter data about your property, drag and drop files to your account. The application organizes all your records and produces 4 reports:
- Income Statements
- Net Cash Flow
- Capital Expenses
- A Tax Package
Tenants are the source of your income. You want responsible people who pay on time and treat your property respectfully. How do you find them? There are two options – do it yourself or hire someone.
Do It Yourself
Zillow estimates that 73% of renters look online for housing. No matter what you do, post your rental online. Put free listings on Craig’s List, with a good description and rental requirements. Make sure you include pictures. A phone or text number will get more responses than email.
Social media is another free option. Post on your page or look for community pages for local products and services. If you have a website or blog, definitely use it to describe the property. Off-line, putting a For Rent sign in the yard doesn’t hurt.
There are websites for listing rentals, like Trulia, Zillow or Rentals.com. They’re not free but they boost your outreach. High quality photography is crucial.
A bigger issue is screening prospective tenants. Finding good tenants who pay on time can be challenge. Most landlords look at income, credit history and run a background check. Too many trust their gut instead and pay the price.
A history of eviction is the key indicator of reliability. Evictions are expensive. Check the tenant’s rent to income ratio carefully. Tenants with a history of eviction are a red flag.
Hire a Professional
There are two options to consider: a real estate agent or a property manager. Both charge fees but will handle the whole process. They do the listings, show the property and screen prospective tenants. Both have access to the MLS.
Real estate agents have strong local connections. They market themselves in the community which will benefit your listing. The typical commission is the equivalent of one month’s rent to place a qualified tenant, but fees can vary by location.
Property management companies also provide rental management services. The fees range from 4% and 10% of the gross monthly income. Some landlords hire these firms to manage the property long term. If that’s your plan, this might be a good option for finding tenants.
Before you hire a property manager, understand how they will keep you updated on your rental. Don’t walk away, protect your investment by staying in the loop.
Rental Software as Service
There are software services like Avail that modernize your rental business. They post listings on major rental sites and schedule showings. They do tenant screening, including a nationwide search on eviction history.
There is a digital signature for leases and tenants pay rent online. Track property maintenance to keep a record of updates to your rental. Avail is very affordable and helpful for new landlords.
Landlords and tenants both have rights. Keeping your property maintained makes it easier to rent.
It doesn’t have to be a palace. Renovations or non-essential updates are not currently deductible expenses. Unless your rental is a luxury property, don’t overspend.
Landlords are responsible for these basics:
- Secure all doors and windows. Locks and seals need to be in good working order
- Smoke detectors and carbon monoxide are in proper working order. (Some landlords provide swap out batteries once a year. Tenants don’t always remember.)
- Check the hot water heater to see if it’s working. If not, repair or replace it. Watch for leaks that can cause serious water damage if left unchecked.
- Maintain the HVAC system. Keep outdoor units clean and properly charged. It’s much cheaper than having to the replace the unit.
- If there are gutters, keep them clean. Clear sticks and branches from the roof and yard.
- Schedule a regular check by an exterminator. Take immediate action on rodent or insect infestation.
After a tenant moves out, check everything before you rent again. Most landlords will paint between tenants. You may need to replace carpet or have the space cleaned. The new tenant should find everything in working order.
When a tenant signs the lease, it’s a smart idea to document the condition of the property. Many landlords will ask them to sign off on a checklist. We’d suggest a video walk through.
Go through the space with a GoPro camera or use your cellphone. As you film the property, ask the tenant to confirm that condition. Then have them sign the checklist, confirming they had the tour.
This helps to protect you from liability. If a tenant denies damaging the property, you have a visual record. This puts an end to arguments about security deposits.
When a tenant has complaints, it’s important to respond promptly. If they have valid issues, they can escalate the problem to regulators or inspectors. That’s the last thing a landlord wants.
The most common complaints by tenants:
- Response time for repairs/maintenance
- Return of security deposit
- Insect/Rodent Infestations
A good landlord wants to avoid losing tenants. How you handle the complaint is as important as resolving the issue. Respond as fast as possible and document what you plan to do by when.
Negative online reviews add a new element. Tenants can post their complaints in a Google review or on social media. If you’re listed in the Better Business Bureau, they can publicize their complaint. When your rentals have a poor reputation, reliable renters will look elsewhere.
Even good tenants can occasionally be short on rent. Make sure your lease is clear about any late fees and penalties. Encourage your tenants to let you know in advance if they have an issue.
When tenants can pay online it’s easier for them and fewer bounced checks for you. Always get them a receipt as soon as payment is made.
Evicting a tenant is a major expense. It’s not only the legal costs to file and serve delinquent tenants. Landlords can expect to lose at least one month’s rent. Depending on the laws in your state, it can be multiple months.
Eviction-related expenses will run in the thousands if there’s a fight. While you’re trying to get them out, they are in the house. The potential for property damage is high. The chance of recouping money for repairs is nil.
Tenants who are getting evicted have nothing to lose. They make noise, cause problems, damage drywall and don’t properly dispose of garbage.
Be clear about the eviction laws (and loopholes) in your state. Don’t grab a generic lease off the internet and assume you’re covered. NOLO.com has data on the laws in all 50 states.
Once a bad tenant gets in, it can be hard to get them out. Protect yourself by pulling an eviction-history before the lease can be signed. It’s well worth it.
Is Becoming a Landlord Easy?
If you’re looking for easy, landlord may not be the job for you. But If you’re willing to put in some time and effort, being a landlord can be profitable. Owning rental properties is an investment. It pays off over time.
The longer you pay down the mortgage, the more equity you build. Multiple rental properties can provide the capital to expand. Commercial rental space or apartment complexes generate higher revenue with added complexity and risk.
Watch the Market
The economic impact of the coronavirus is affecting the housing market. As of this writing, rentals are stagnant. Unemployment numbers are the highest they’ve been since 1929. Most state are stopping evictions as a result. We’d assume that accounts for many people staying put.
Whenever the market is depressed, pay attention. There will be bargains to be had. Watch for some properties to sell short. Watch for signs of the inevitable upturn. Don’t stretch yourself thin but get in early if you can.
That’s how you become a successful landlord and real estate investor.
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