Becoming a landlord is a big step but it can pay off in the end. You won’t make money right away but over time you can gain significant profits. The money coming in will exceed the money going out.
There are several factors to consider before buying a piece of property to rent out. There are also steps you need to take if you want working in real estate to pay off.
We’re going to break down the essential steps to becoming a landlord so you’re prepared to jump into being a landlord head-on.
1. Make Sure You’re Going to Make Money
Before you even look at the property, you need to ensure that you can afford to become a landlord. There are more expenses than you’d think when it comes to having tenants.
First, there’s the expense of buying the property. To purchase property as an investor or landlord, you need a downpayment of 20%. You also have to figure out what your monthly payment on the loan is going to be.
Instead of getting homeowner’s insurance, you have to purchase landlord insurance. This is about 10% more than the homeowner’s insurance and covers any damage or lost money due to tenants.
Another expense added to the list is paying house taxes yearly or bi-yearly. Some areas require Homeowners Association fees.
Don’t forget you have to pay for repairs and maintenance on the property, regardless of what they are.
These are a few of the expenses required to keep up a rental property. The money coming in from tenants should cover what you’re spending but this might not be the case at first. Having money saved before you start renting is important but keep in mind that, down the road, you need to make a profit otherwise you’re just draining your finances.
You need to also calculate the capitalization rateas well which is the rate of return on an investment property. To do this, take the expected annual rental income and divide it by the purchasing price. You want that number to be high. The higher it is the better the profit.
2. Learn About Everything You Can
Once you have the finances to get and keep up with a rental property, it’s time to learn, learn, learn. You don’t want to run into real estate blind, not knowing what’s up or down. If you don’t have enough knowledge, you can end up broke or deep in debt. You can also end up with a piece of property that costs too much to repair and lease to tenants.
Learn about the different property types there are so you know what you’re looking for.
Know the price of rent in the area you want to check out. Pay attention to the patterns in the market.
You should also check out the rental laws in your state. Each state differs but there are specific laws you need to abide by. There are also federal laws and building codes for the rented property.
Don’t forget about discrimination laws. It’s illegal to deny someone’s rental application due to their race, gender, sexuality, or religion.
Once you have all the necessary information, you can move on to looking at rental properties.
3. Purchase the Right Piece of Rental Property
First, hire a real estate agent. This is their area of expertise and they have experience in purchasing property. A real estate agent can guide you through the entire process which can get complicated so there’s nothing wrong with having a helping hand.
To become a landlord who makes money, you need to have all the extra help and knowledge possible.
Here are some questions you should ask yourself when considering a property:
- What’s your budget? The first thing you need to consider is your budget. You don’t want to overspend and ruin your expenses but you also don’t want to underspend and end up with a piece of property that needs a lot of work. Of course, if you find a good deal, grab it up.
- What are the property taxes? If you’re eyeing a specific piece of property, check out the property taxes in the area. Can you afford them? Are they worth it for the area? Sometimes the worst neighborhoods have some of the highest property taxes.
- What’s the neighborhood like? The better the neighborhood, the pricier the property but, remember, this also means you can charge more rent. If you’re looking to rent to families, check out properties near schools. See if crime is an issue in the neighborhood. Is there steady employment in the area? Don’t be afraid to approach neighbors and ask them what the neighborhood is like. They know more than a quick look around can tell you.
- Are there a lot of repairs needed before you can rent it out? You might have the money to repair everything and that’s great. But not everyone will have that extra money to throw away. So, pay attention to the work that needs to be done.
- Is it close to where you live? As a landlord, you’ll be called whenever there’s a disaster or repair that needs to be taken care of. If you don’t plan on hiring a property manager, you need to live somewhat close to the rental property.
Make a detailed list of the qualities that are important to you. A piece of rental property should check all your boxes before you throw money down on it.
4. Decide Who’s Going to Manage the Property
This is where you have to ask yourself if you have the time and energy to actively manage the property. A landlord doesn’t have to be a property manager.
Living nearby to the property is a major plus if you plan on managing the property yourself. Keep in mind, you have to take care of repairs. That can mean fixing the issues yourself or speaking with a repairman.
Don’t feel bad if you’re not looking forward to this part of being a landlord. This is exactly why property owners hire a property manager.
Property managers take care of everything but paying the bills. They take care of repairs, collect rent, and even handle evictions.
On average, property managers take 10% of your total rent earnings. This can vary depending on your location. You can hire them through agencies or find someone with a background in managing real estate.
5. Get the Property Ready
You want the rental property completely ready before a potential tenant comes to look at it. Nobody is going to want to rent a property that has major damages or is excessively dirty.
First, clean up the property. Depending on who owned it before you, this could be easy or it could be an awful chore.
Repair any damages. This means you need to check the water heater and every appliance on the property. Check the foundation and walls. You want to check everything so there are new surprises when a new tenant moves in.
Don’t forget to check the building codes in your area. Make sure everything is how it’s supposed to be.
6. Choose the Best Tenants
Now, it’s time to pick out tenants for your rental property. But you don’t necessarily want the first person who applies to fill your vacancy.
Some people tear up a rental property and skip out on rent as if they don’t have a care in the world while others will be dream tenants.
First, place ads. You can use websites that let you post an ad for free but don’t ignore the option of paid ads. These can help you target the type of tenant you want.
Take high-quality photos of the property. Low-quality photos are going to turn potential tenants away.
Charge a small application fee. This means that they have to pay a small fee to even hand an application over to you. Application fees might seem pushy or like they’re asking too much but they can weed out tenants who aren’t serious about renting from you.
Screening each person that applies for your rental property is super important. We can’t reiterate it enough. Always, always screen tenants before handing them a key.
There are great services that allow you to do background or credit checks on potential tenants. You want a trustworthy tenant who hasn’t run from rent. Since most people have an iffy credit score, this might be a non-issue for you. But a background check lets you know if they have a criminal background.
References are a great way to gauge a possible tenant. You don’t just want references from friends and family. You want references from employers or previous landlords. Their previous landlord is going to be honest with you. If they were the perfect tenant, they’ll let you know. If they left the property inhabitable when they left, they’ll let you know that, too.
Pay attention to their income as well. Rent should only take up a third of their income. Otherwise, they’re going to be struggling each month to pay you.
7. Complete a Lease Agreement with Your New Tenant
Once you have a credible tenant picked out, you need a lease agreement ready to go over with them.
If you aren’t great at creating contracts, we’d suggest speaking with a lawyer about putting together a lease. You can also consult with other landlords about what their lease consists of and how you should go about creating one.
A basic lease lists the rent you’ve agreed on and how long the lease lasts. The length of the lease is how long they are going to stay on the property and pay rent.
The lease should also list rules the tenant has to abide by while on your property as well as the rules that you as the owner should abide by.
For example, you can’t barge into the property any time you want. You can’t come in for no reason. You can’t throw them out on a whim. The tenants’ rules can be policies about no smoking or no pets. It should also let them know that if they leave before the lease is up, they’re still responsible for the rent.
It’s important to have a lease. Without one, your tenant is free to do whatever they want. They could have dogs tearing up the house or put holes in the walls. There’s not much you can do without a contract spelling out what is and is not acceptable.
There’s a lot of responsibility and stress involved in becoming a landlord and even more responsibility than we could fit into this guide. But in the right conditions, all the stress is worth it. After a while, you’ll see the profits start rolling in.
We hope this guide helps you take the leap into becoming an investor. You can’t go big if you don’t take the first step towards your goals.