According to the IRS, 10.6 million taxpayers claim rental income every year. Are you planning to be one of them? Becoming a landlord is rewarding, but like all worthy endeavors, it’s hard work. Knowing what to expect will help you be a happy, successful landlord.
What Is a Landlord?
A landlord is an individual or entity that owns real estate which is rented or leased to another party, commonly referred to as a tenant. The role of a landlord goes beyond merely owning property; it encompasses a diverse range of responsibilities aimed at maintaining the property and ensuring that the lease agreement terms are adhered to by all parties involved. Responsibilities include regular maintenance and repairs of the property, collecting rent, managing tenant complaints and conflicts, and adhering to all local and federal housing laws. Being a landlord requires a commitment to providing a safe and habitable living environment for tenants, as well as the ability to manage the legal and financial aspects of the rental property.
Is Being a Landlord Right for You?
Deciding to become a landlord can be a significant turning point in your finances and career path, but you need to weigh the pros and cons before taking the plunge. On the upside, being a landlord provides a steady stream of passive income, can be a lucrative investment if property values increase, and offers tax advantages such as deductions for mortgage interest, property tax, operating expenses, depreciation, and repairs.
On the other hand, being a landlord requires a substantial time commitment to property management, dealing with tenant issues, and maintaining the property. It can be stressful, especially for those who are not naturally patient or struggle with confrontation. Financial resources are also something to consider; aside from the initial investment, landlords need a buffer for periods when the property might be vacant or for emergency repairs.
Before deciding, consider your willingness to commit time to property management, your ability to handle tenant and property issues calmly and effectively, and whether you have the financial resources to manage the property long-term. Being a landlord can be rewarding, but it's not suited for everyone.
Steps to Becoming a Landlord
If you have determined that becoming a landlord is right for you, here are 12 steps to becoming a landlord, along with a few tips on how to handle the unexpected:
- Buy a property
- Calculate rental expenses
- Understand landlord-tenant laws
- Purchase landlord insurance
- Determine rent price
- Advertise your property
- Screen tenants
- Get your property ready for move-in
- Properly turn over your unit
- Stay organized
- Self-manage your property or hire out
- Work to retain tenants
1. Buy a property
If you think you’re ready to buy your first rental, there are a few things you’ll want to know. Where will you buy, and how will you budget? These are important considerations before investing in your first rental property.
Choose the right location
When choosing the location to purchase your rental property in, you’ll want to invest in an area with job growth, an increase in population, and a strong rental market. These will factor heavily into how quickly you can fill your rental, what rent you can expect to charge, and whether or not your renters will be long-term. Get to know the rental markets in your state and pay attention to the following:
- Job growth
- Population (increase vs. decrease)
- Median income
- Cap rates
- Property taxes
- State and local laws
Determine your down payment
Depending on where you live, purchasing an investment property could have stricter requirements than buying an owner-occupied property. For example, you might need as much as 20 percent down when purchasing an investment property rather than the typical five percent required for a conventional mortgage.
Decide what type of financing you’ll need
If you don’t want to go with conventional financing, there are other options. Consider the following:
- paying cash
- finding investors
- taking out a home equity loan
- getting a home equity line of credit
These options have benefits and drawbacks, so research and speak with a real estate accountant to determine which option would be best for you.
Consider your goals if you’re debating whether to finance or buy with cash. Are you planning to flip the house in a few years, or do you consider this a long-term investment? You may see higher monthly income from your rental if you don’t have to pay a mortgage, but financing could give you a greater return in the long run. For example, if you put 20 percent down on a house that costs $200,000, your initial investment is $40,000. If the property’s value increases and in two or three years you can sell the property for $400,000, you stand to make a substantial profit.
Prepare for the unexpected
Be sure you budget enough to cover up-front costs such as repairs and renovations you’ll need to get your rental property in top condition. Certain upgrades, such as renovating the kitchen, can increase the amount you can expect to get in rent. Curb appeal is also an essential factor when trying to attract renters.
2. Calculate your rental property expenses
So, what does it cost to be a landlord? Some of the expenses might surprise you. While you may already have a budget for minor repairs (such as air filters and paint), you’ll also want to factor in those significant repairs, like a new roof or HVAC system. While these major expenses don’t occur often, you will eventually have to replace something pricey. Other expenses to consider include:
- Mortgage
- Utilities (even if your renters pay for utilities themselves, you’ll have to cover these expenses when the unit is empty)
- Insurance
- Taxes
- Fees and salaries (legal, subcontractors, employees)
- Vacancy repairs/updates
- Advertising
Keeping track of expenses is a significant part of becoming a landlord. If you are using Apartments.com rental tools, the Expense Tracker is a great way to organize your expenses and receipts.
3. Understand landlord-tenant laws
Part of being a great landlord is fostering a safe, comfortable, and welcoming environment for all tenants. One way to protect yourself and your renters from unintentional discomfort and legal trouble is to familiarize yourself with landlord-tenant laws before renting your property.
Know the Fair Housing Act
Are you familiar with the Fair Housing Act? This federal law prohibits housing discrimination based on race, color, national origin, religion, sex, familial status, or disability. If you aren’t aware of the law, you could get into serious legal trouble that will cost you thousands of dollars.
For example, you can’t ask a potential tenant how many children they have or if they are expecting. You can’t make rules that treat households with children differently. If you run a rent special, you must make it available to everyone. You can’t decline a rental application for any reason other than the applicant not meeting your stated qualification criteria. You can’t evict a hoarder — hoarding is a disorder protected under the Fair Housing Act. You’ll find more resources concerning discrimination on the National Fair Housing Alliance website.
Be sure to know your state's laws
What’s allowed in one state may not be in another, and Landlord-Tenant State Rental Laws and Regulations change often. Have a lawyer look over your lease contract because many standard provisions put in leases are illegal.
If you are concerned about creating a lease that’s state-compliant, Apartments.com offers an online lease wizard that will walk you through the lease process step by step to generate a lease legally compliant with your local laws.
Read up on tax laws
Understand what you can and cannot claim. For example, did you know you can claim travel expenses? Understanding what you can claim immediately and what you’ll have to depreciate will save you time and headaches when you do your taxes.
4. Purchase landlord insurance
Check your state requirements and get the maximum amount of rental insurance, liability, and any other required landlord insurance.
If your state permits it, ask your tenants to carry renters insurance. It reduces your legal, financial, and personal responsibility if there’s a disaster like a fire. In some states, you may have to provide tenants a place to stay after a disaster. If they have renters insurance, their policy takes care of it, so you can deal with repairing the damage. If your tenant causes damage to the building (such as accidentally starting a fire), your homeowner’s policy will cover the costs, but you are responsible for the deductible. However, if the tenant has renters insurance, it should cover your homeowner’s insurance deductible.
5. Determine rent price
Determining how much to charge for rent can be a challenge. If you price too high, your rental could sit empty for months, costing you money. If you price too low, you might not make enough to cover expenses or earn any income. When you list your rental on Apartments.com, we provide you with free rent comp reports. This valuable information gives you a clear understanding of the market so you can price your rental right, compare your property’s value to other similar properties, and review market conditions like the average days on the market and the average rent rates. In addition to how much you’ll charge for rent, you should decide now if you’ll have a grace period and how to calculate and enforce late fees. Make sure your tenants know this policy before they sign the lease. If assessing late fees makes you uncomfortable, consider collecting rent payments online. Your tenants can set up automatic payments, and an automated email goes out with the late fee included if the payment is late.
6. Advertise your property
Marketing your property is a big step in attracting prospective tenants. It’s the first thing renters see about your property, so you’ll want to ensure your efforts make an excellent impression. There are several ways to advertise your home, but your best option is to start with Apartments.com Rental Tools. On Apartments.com, you can advertise one rental property or multiple all under the same account, making it easy to find the perfect renter. Below are some tips on how to get your rental property listing to stand out online.
Stage your rental
Before you start taking photos of your rental property, make sure the room is clean, and try to take photos on a sunny day. You want to make sure your photos are as inviting and accurate as possible, so potential renters get a real feel for the property. Once you start taking photos of your property be sure to capture an image of each room. Don’t forget to take pictures of the outside (again, ensure the yard is tidy and the lawn is freshly mowed). Look around before you snap the photo. If you take a bathroom picture, close the toilet seat lid, empty the trash, and look for bad mirror reflections.
Include photos in your ad
Next, you’ll want to include photos in your advertisements. People want to be able to see the property before they contact you. In fact, according to Social Media Today, a listing with photos will get 94 percent more views. To have high-quality photos for your listing, you don’t need a professional photographer or special equipment to have high-quality photos for your listing. All you need is a smartphone with a camera. Be sure to take pictures of each room from different angles. Here are some tips for photographing your rental property.
Write your ad
When you write your property description, include some things about the property that stand out. What drew you to purchase the house as a rental property? Be specific and include as much information as possible: amenities, special features, the location, area schools, parking, the yard, etc.
7. Screen your tenants
Run a credit and background check on potential tenants and look for any red flags. You want to ensure the tenant makes at least three times the rent, has a decent credit score and doesn’t have a criminal background. Apartments.com makes it easy to screen tenants, get the information you need, and find a qualified renter fast. Unlike our competitors, who use various third-party resources to collect information, we partner with TransUnion to provide you with screening reports for evictions, credit, and criminal history. Another feature you’ll find only on Apartments.com is support for co-signers, guarantors, and co-applicants. If you need more information to make a decision, you can request supporting documents from potential tenants directly on our platform. Get all the information you need to find the right tenant quickly and easily.
8. Get your property ready for move-in
Before your new tenants move in, there are a few essential steps to ensure your property is clean, comfortable, and renter ready.
Inspect the rental property
Carefully inspect your rental property to ensure everything is running correctly. Check the locks to ensure they turn smoothly, look at the electrical outlets for signs of burning or charring, and check the windows to ensure they are functioning and latching correctly. Look for signs of pests, change the batteries in the smoke detectors, make sure the HVAC system is working and the filters are clean, and look for any security concerns.
Do a walk-through with your tenant
Take photos and videos as you walk through and document all issues you or your tenant notice. Both of you should sign and date the walk-through checklist. Keep the inventory and the photos in a safe place. If there’s damage beyond normal wear and tear when your tenant moves out, this is proof of the property’s condition when they moved in.
Know the rules
When you become a landlord, you might find tenants ask some challenging questions. Be prepared to answer questions about fees, maintenance requests, and what your tenant can and cannot do in your rental. For example, are you comfortable allowing tenants to paint or change light fixtures? Determine your rules ahead of time and include them in the lease.
Always review the lease carefully with your tenant, ask questions and add any clauses. If they do violate the lease agreement, they won’t be able to claim they weren’t aware of the violation. Make sure you both sign and date the lease agreement.
9. Properly turn over your unit
When a tenant sends you a notice of non-renewal letter, there are some steps you’ll have to take to prepare your rental and find new renters.
Organize showings
First, decide whether or not you want to show the occupied unit. Much depends on your relationship with the current tenant and if you trust the property will be clean and organized when you show it. If your renter isn’t leaving on good terms or if you’ve had difficulties, it might be best to wait until they vacate to show the unit.
Conduct a final walk-through
Conduct a final walk-through with your current tenant and ensure the property is in good condition. Remember, you cannot charge the tenant for everyday wear and tear, but if you see damage beyond what would be considered normal, note the damage on your walk-through checklist. Have your tenant sign and date this checklist and compare it to the move-in list when assessing the overall condition of the rental.
Repair and maintain your property
When renters move out, you’ll want to prepare the rental for new tenants. Make any basic repairs, deep-clean the unit, have the carpets professionally cleaned, and most importantly, change the locks. Even if you collect the keys from your former tenant when they move out, you can’t be sure if they made a copy. For your new tenant’s safety and to protect yourself from liability, it’s worth the cost to change the locks.
10. Stay organized
Document everything and keep all of your receipts for repairs, checklists, and photos taken during move-in/move-out. Keep relevant emails and texts between you and your tenant, as well. Records of completed work, agreements, and conversations are crucial if an issue arises. For example, if you keep part or all of the security deposit to cover damages but can’t prove you needed the money to pay for repairs, your tenant could sue you and get up to three times the amount. Don’t rely on verbal agreements — you need everything in writing.
11. Self-manage your property or hire out
If you want to manage your property, remember this is your business. You want to stay as organized as possible.
Form a plan
Develop a strategic plan outlining your short and long-term objectives. Establish specific goals to work towards. Consider implementing regular office hours to enhance productivity and communication. Create a detailed calendar to track essential tasks, including maintenance schedules. Additionally, it's beneficial to set up a dedicated savings account to cover any future repair costs related to your rental property.
Stay professional
When dealing with tenants, aim for friendly but professional. Consider not providing your home address to tenants. If you do so, it’s possible an angry tenant could turn up at your door if you have to send a late rent notice or an eviction notice. Consider using a system like Google Voice, so you don’t have to give out your phone number. A Google Voice number will give users a number that will ring through to your phone but it’s not your personal phone number which will allow you to keep some privacy.
Decide if you want to hire a property manager
Property managers are a terrific option if you are new to being a landlord and aren’t comfortable navigating the process on your own or if you have multiple properties and need help managing them. Typically, property managers will charge you 8 to 12 percent of the property's monthly rental value. If you believe having your property managed for you is worth the cost, do your research before hiring a property manager. You’ll want to check the company’s licenses and certification and carefully review their policies.
12. Work to retain your tenants
It’s much cheaper to retain tenants rather than finding new ones, so keep your tenants happy by responding quickly to maintenance requests, maintaining the property, and respecting them. Perhaps, reward great tenants in some way, such as with a gift card to their favorite restaurant. Before your tenants move in, consider welcoming them home with small items they might not have available before unpacking, like coffee and mugs, cleaning supplies, or bathroom essentials.
Our Solutions Can Help
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