Becoming a landlord is one of the best investment or career options available. There are over 48 million rental units in the US, most of which are owned by individual landlords, making real estate one of the most popular investments in the country.
However, being a landlord comes with some unique responsibilities and a bit of a learning curve to overcome. Fortunately, we can help with that. Here’s what new landlords need to know before beginning their new venture!
1. Your Property Is a Business
First and foremost, your rental property is a business, and you need to treat it as such. This includes keeping money in reserves for a rainy day, accounting, and continuously investing money to earn more in the long run.
Adopting this mindset early on and treating your rental property like a business is essential. Before you start, you should draft a business plan like you would with any other enterprise. This should include your marketing strategy, financing, goals, and more.
Growth is achievable with rental properties. Once you have one, it’s a lot easier to get more. However, if you don’t start with a plan, you limit yourself.
Moreover, this is because you are 42% more likely to achieve goals that you write down. You’re even more likely to do so when you have a concrete plan on how to achieve those goals, especially when you account for unexpected expenses. Always plan for an extra 20% of additional expenses or lost income.
From there, you’ll be in a much better position to grow your enterprise down the line. Even one extra property or unit can double your income. Whether this is a side hustle, retirement income, or full-time venture, that’s worth pursuing!
2. Choose the Right Property
Your property (or properties) is your largest asset and the primary source of your income as a landlord. Therefore, choosing the right property is the most important decision you’ll make as a landlord.
Most importantly, you need to choose the right area. The local market will determine a lot about your investment, including rent prices and resale value.
If possible, choose a property in a relatively safe location. You can even purchase property in a different city from where you live. No neighborhood is 100% safe from deterioration, but there are factors that can help secure your investment.
For example, proximity to public amenities or downtown areas is a great indicator of long-term security! Even so, there are no guarantees in real estate.
From there, you’ll need to consider the property itself. Hire a reputable and qualified real estate agent, preferably one specializing in multifamily properties.
Once you’ve found a property that’s up to your standards, there’s no substitute for a thorough inspection. You want to limit the “unforeseeables” as much as possible. The last thing you want is to spend all of your money on a down payment and then need to pay for a new roof three months later.
3. You Need to Remain Available
One of the greatest challenges as a landlord is remaining available. If you like to travel, if you have a full-time job, or if you have a lot of personal responsibilities, this can pose serious challenges.
Faucets don’t wait to leak until you’re ready. If a pipe bursts at 3 in the morning, you’ll need the availability to either address the issue yourself or call someone who will. Emergencies like that can’t wait, as they will quickly cause greater damage.
Landlords are always on call. The only way out of this is by hiring a property manager. They will be the tenants’ only point of contact and assist with any needs 24/7.
4. Your Contact List Is Everything
Landlords need to have people they can trust for those pesky 3 am phone calls. While many landlords have the handy skills needed for most projects, even the most experienced contractors can’t handle everything.
Therefore, you need to have people who can fill in the gaps for you. Depending on your skills and your property, this may include:
- General contractors
- HVAC/R professionals
- Pest control professionals
Also, even if you have the skills needed for most of these issues, you have to account for your availability. What if you’re on vacation and your sprinkler system stops working?
Having these points of contact can make a major difference in your normal operations. You don’t want to have to handle every call, especially once you have multiple buildings or units, as these issues can become more frequent.
Always vet prospective contractors, read their reviews, and ask for references. Prices and services can vary widely depending on the contractor, so a little research can save a lot of money.
5. You Need to Utilize Online Tools
You will find dozens of online tools useful to landlords. Some are free and others require subscriptions. They can help with almost everything, including:
- Rent collection
- Accounting and bookkeeping
- Tenant screening (background checks, credit checks, etc.)
- Marketing platforms
There are plenty of other examples that may help you. You can even use free rental property calculators to determine the right prices to set. There’s no shortage of options, so use whatever works for your business!
6. Learning Basic Accounting Is a Must
If you’ve never been self-employed, this can be a major learning curve for you. Again, your property is a business, not just to you, but also to the IRS.
Therefore, you need to track your revenue and expenses just like you would with any business. When tax time comes, you’ll need to be prepared.
When you neglect revenue and expense tracking as a landlord, it’s much easier to piece together your revenue. In this case, you could easily overpay on your tax bill.
For example, when tax time comes and you didn’t save your receipts or track revenue, you’ll likely understand exactly how much you earned. It’s a simple formula: monthly rent x 12 and minus any vacancies.
However, if you don’t keep track of maintenance costs, repairs, property taxes, insurance, mortgage interest, and other expenses, you’ll have to pay your tax rate on that grand total. Make sure you keep track of these throughout the year. Developing a system to do so should be a top priority early in your venture.
7. Market Your Property Correctly
Marketing a property is likely more precise of a science than you’d think. You want to find the right target market, limit applications, and fill vacancies as quickly as possible.
You’ll find plenty of challenges when marketing a rental unit. Most importantly, you don’t want to reach the wrong audience, you want to be clear about expectations, and you need to entice potential tenants.
Consequently, a listing should include:
- Clear and thorough images
- Important policies (pets, smoking, etc.)
- Rent price
- Move-in costs (first, last, security, brokerage fee, etc.)
- Square footage
- Utility estimates (if separate)
- Essential features and highlights
The list goes on. Every property will have special circumstances worth mentioning, so let’s talk about some of them.
Features to Include or Avoid
A major challenge of listing a property is determining which features to highlight and which to avoid. For some obvious examples, include which floor the unit is on, amenities (pools, balconies, etc.), and anything that will help entice your intended audience.
Also, you’ll want to highlight any location benefits. Is the unit close to a school, downtown area, or other helpful amenities? Location can help drive up desire (and prices), so add these in.
However, there are some features you may want to avoid mentioning. Some, you will have to disclose by law. Still, try not to highlight any challenging neighbors, lease policies (rent increases, tight restrictions, etc.), or anything else.
At the same time, some perceived “negatives” can help you narrow your search to find the right tenant. These include policies like:
- Maximum number of residents
- Guest policies
- Noise policies
- Accessibility issues (i.e. no wheelchair access)
- Industrial disruptions (noise, smells, etc.)
Again, you’ll want to balance reaching a wide enough audience while also trying to weed out candidates who may not be the right fit.
8. Screen Tenants Thoroughly
We mentioned that the location of your property and the property itself are out of your control after purchasing, and that they can do a lot of damage to your investment. Well, there’s a third piece to that puzzle: tenants.
After you sign the lease, there’s no going back. Much like market research and property inspections, tenant screening is your best defense against several serious issues. Don’t underestimate the damage they can do.
One bad tenant can deter potential renters, take away months of income before eviction, or cause damage leading to an entire unit renovation. A security deposit isn’t enough to cover that.
At the very least, look for prior evictions on their records and verify their income to ensure they can cover rent. Ideally, their monthly income should be three times the rent price or more (preferably 4x).
From there, you may consider a criminal background check and a credit check. A criminal background check will help avoid issues like tenants dealing drugs out of your apartment, and it will help your other tenants feel safe.
Moreover, a credit check will tell you how well they have managed their bills. The right property manager will cover all of this for you, but if you’re doing it on your own, make sure you’re as thorough as possible with every applicant.
9. Get Quality Insurance
Make sure your insurance covers rental properties specifically, even if you live in the property. This is different from homeowner’s insurance, and it may cost a little more, but it will offer the coverage you need. If you have the wrong insurance coverage, you could be left uncovered in the event of a natural disaster, fire, crime, or any other potential issue.
Also, it doesn’t hurt to require your tenants to have renter’s insurance. This can prevent any legal issues should something happen, removing your liability for certain incidents. Your insurance will not cover damages to their property.
10. Draft a Quality Lease Agreement
If you take anything away from this list, let it be this. Your lease is your strongest legal protection if you run into any issues with your tenants. We highly recommend working with a legal professional or experienced property manager when drafting this agreement.
Otherwise, you could be left to front the bill if and when issues arise later on. Assuming you have over a dozen tenants in your time as a landlord, the chances that none of them cause any trouble are slim. Landlords file 3.6 million evictions every year across the US, and yours could be unsuccessful if your lease agreement doesn’t offer adequate coverage.
As a first-time landlord, it’s hard to imagine all of the potential issues that could arise. Again, this is why it’s important to sit down with an experienced professional when drafting your lease agreement.
Consider Becoming a Landlord Today
Now that you know some important aspects of becoming a landlord, you can make an informed decision as to whether or not it’s right for you. Being a landlord certainly isn’t the ideal fit for everyone, but the passive income you can earn is! If you want to earn a long-term, sustainable income and still have a tangible asset to grow in value, then real estate is a great option.
Stay up to date with our latest real estate tips, and don’t hesitate to contact us with any questions or for help with your property management needs!