Deciding to Become a Landlord
Renting out your first property can be both exciting and daunting. This guide will cover everything you need to know to make this venture successful
Table of Contents
Why Become a Landlord?
There are several potential benefits to becoming a landlord:
- Extra income – Rental income can provide regular, passive cash flow beyond your salary. This extra money can supplement your lifestyle, help save for the future, or even fully replace your salary if you own multiple properties.
- Investing in real estate – Real estate has historically appreciated in value over decades. Owning rental property allows you to benefit from this long-term wealth-building.
- Wanting to manage your own rental – Some prefer the control and flexibility of managing their own rental property compared to investing in REITs or other hands-off real estate investments.
- Using a property you already own – You can convert a primary residence or other property into a rental to start your landlord business.
Potential Downsides of Being a Landlord
However, landlord responsibilities also come with some key drawbacks:
- Dealing with maintenance and repairs – As a landlord, you’re responsible for fixing issues like appliances breaking, plumbing leaks, and other maintenance needs. This can mean unpredictable costs and having to be “on call.”
- Tenant headaches – Although many tenants are responsible and follow rental agreements, you may occasionally deal with issues like late rent, property damage, or even evictions.
- Laws and regulations – Landlords must follow all applicable state and local landlord-tenant laws, which can be complex. Fair housing laws also restrict reasons you can decline rental applicants.
- Less liquid investment – Money tied up in rental properties can’t be accessed easily compared to financial accounts. Selling properties to access funds takes time and incurs fees.
Overall, becoming a landlord has trade-offs to weigh. But with proper preparation, it can be a beneficial investment strategy.
Financing and Purchasing Rental Property
One of the most important decisions when becoming a new landlord is how to finance and purchase your rental property. You’ll need to decide whether to save up enough for a down payment or take out a loan.
When getting a loan, shop around to find the best rates and terms. Generally, you’ll need a down payment of at least 20-25%. Consider both conventional and FHA loans.
When deciding on a property, look at single-family homes, condos, duplexes, or small apartment buildings based on your budget. Location is key – look for up-and-coming areas with strong rental demand and employment growth.
Make sure to budget adequately for any repairs or upgrades needed. Inspect the property carefully and factor in costs like:
- Cosmetic renovations – fresh paint, flooring, appliances
- Major systems – roof, HVAC, electrical, plumbing
- Safety features – smoke detectors, securing pools
- Curb appeal – landscaping, exterior lighting
Avoid properties that need major structural work. Build out extra costs upfront rather than being caught short down the road. Purchase something rent-ready so you can start earning immediately.
Having the right financing and purchasing an investment property in a strong rental market will help ensure success as a new landlord. Do your homework before committing.
Preparing Property for Renting Out Your First Property
Before renting out a property, landlords need to take several steps to make sure it is ready for tenants. This involves renovations, repairs, furnishing, safety inspections, and obtaining required certificates.
Renovations and Repairs
- Update outdated components like appliances, fixtures, flooring, paint, etc. Tenants expect a property to be clean, modern, and functional.
- Do repairs like fixing leaks, patching walls, ensuring good water pressure, checking pipes and drains, etc. The property should be structurally sound.
- Improve energy efficiency with insulation, new windows, LED lights, etc. to lower utility bills.
- Ensure good ventilation and climate control. Install or repair heating and AC systems.
- Make modifications for accessibility if needed, like installing ramps, grab bars, wider doorways, etc.
- If you need professional help in preparing your rental property, consider using a service such as TaskRabbit to get fixes done quickly and less elbow grease on your part.
Furnishing and Staging
- Provide basic furniture if renting an unfurnished unit: beds, tables, chairs, couches, etc.
- Ensure window treatments are installed for privacy.
- Provide required appliances like refrigerator, stove, washer/dryer etc.
- Clean thoroughly and declutter before renting.
- Stage the home to showcase its best features. First impressions really matter.
Safety Inspections and Certificates
- Inspect for safety issues like loose railings, exposed wires, leaks, fire hazards, etc.
- Install smoke detectors, and carbon monoxide detectors as required by local regulations.
- Obtain a certificate of occupancy to legally rent out the property.
- Schedule inspections for electrical, gas, plumbing, HVAC systems, etc.
- Check for lead paint, asbestos, mold and take necessary remediation steps.
- Consider a radon test to ensure safe air quality.
Taking the time to properly prepare a rental property helps attract quality, long-term tenants. It also ensures compliance with local housing laws and building codes. These upfront investments pay off through fewer headaches and costs down the road.
Setting the Rent When Renting Out Your First Property
One of the most important decisions when becoming a new landlord is determining how much rent to charge. Taking the time to properly research and set your rental rates can have a big impact on your long-term returns.
The first step is researching comparable rental rates in your area by looking at listings for similar properties. Compare the location, size, amenities, and condition of your rental. You can check sites like Zillow, Apartments.com, and Craigslist to find average going rates for 1-bed, 2-bed, etc. in your specific neighborhood. Drive around to look at “For Rent” signs and speak to other local landlords to get insight.
In addition to the market data, you need to consider your expenses when setting rent. Factor in your mortgage payment, property taxes, insurance, maintenance costs, and any utilities you cover. Aim for the rent to exceed your total monthly costs by at least a few hundred dollars to produce positive cash flow. You don’t want to price your unit too low and lose money each month.
Finally, decide on your preferred lease terms and length. Month-to-month gives tenants flexibility but less security, while 1-year leases provide more stability. Longer leases of 2-3 years may justify slightly higher rents. Be clear about your policies, rent increases, and timeline expectations upfront in the lease agreement.
To ensure you’re setting the right rent, consider these 10 crucial steps before marketing your property.
Taking the time to research comps, run the numbers, and set optimal rent will pay off hugely as a new landlord. The initial effort will lead to reliable passive income in the years ahead.
Finding good tenants is one of the most important parts of being a successful landlord. You want to fill vacancies quickly, but not at the expense of leasing to unreliable tenants. Here’s how to find and screen tenant applicants:
Finding and Screening Tenants
Where to Advertise Vacancies
- List the rental on major websites like Zillow, Apartments.com, and Trulia. These give the most exposure.
- Post on Facebook Marketplace and Craigslist. Though less robust, these are still widely used.
- List on your website or blog if you have one.
- For multifamily units, install a “For Rent” sign where visible.
- Network locally and spread the word that you have a rental available.
For a closer look at how to find tenants, check out our “How to Find Tenants: 7 Proven Tactics”.
Application Form and Screening Criteria
Require all applicants to complete a detailed rental application covering:
- Rental history – Get contact info for past landlords to check references. Look for consistent on-time payments.
- Income and employment – Require recent pay stubs proving income that covers the rent.
- Credit check – Set a minimum credit score requirement, often 600-650.
- Background check – Look for any red flags like convictions for fraud.
- References – Personal and professional references can vouch for character.
Set clear criteria for automatic denial, like prior evictions or violent felonies. You
Set clear criteria for automatic denial, like prior evictions or violent felonies. You can screen your tenants efficiently with this comprehensive tenant screening services such as Experian or MyRental.
Background and Credit Checks
Run a background check and credit report on all applicants to verify the info provided. Check:
- Credit score and history – Shows how financially responsible they are.
- Criminal records – Reveals any serious red flags.
- Eviction history – Past evictions are a major warning sign.
- Rental history – Confirm previous landlord references.
Avoid renting to anyone who seems deceitful or financially irresponsible based on their screening results. This minimizes risks when leasing your property.
For more ideas on how to find tenants, check out: How to Find Tenants: 7 Proven Tactics
Signing a Lease
One of the most important steps when becoming a new landlord is having a comprehensive, legally compliant lease agreement signed by both parties. This contract outlines the rental terms, rights, and obligations of both landlord and tenant.
There are certain clauses and disclosures that must be included in a lease by law. For example, you must disclose the presence of lead-based paint or asbestos on the property if applicable. Required notices may vary based on local and state laws, such as details about security deposits, rent increases, termination notices, and more. Consult an attorney to ensure your lease complies with all regulations.
When determining the deposit amount, aim for 1-2 months’ rent to cover any potential damages. Many states limit the maximum allowable deposit. The lease should clearly state when and how deposit funds will be returned, such as within 30 days after move-out if no damages are found after inspection. You can require the first month’s rent and deposit due upon lease signing.
A walkthrough inspection should be conducted just prior to move-in and after move-out to document the condition of the unit. Take photos and have the tenant sign your report as evidence. On move-in day, provide keys, access instructions, contact information, and anything else needed for a smooth transition. Orient the tenant on proper use and care for the property.
Having a strong lease agreement protects both you and the tenant. Work with a real estate lawyer to customize your lease template based on local laws and your rental policies. Carefully follow all move-in procedures to start the tenancy off right.
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Ongoing Property Management
Managing a rental property doesn’t stop after you find a tenant. To be a successful landlord, you need to take care of a variety of ongoing tasks and responsibilities.
In ongoing property management, the right software can revolutionize your operations. Features of property management software streamline tasks from tenant communication to maintenance, enhancing efficiency across the board.
Collecting Rent and Handling Repairs
One of the most important ongoing tasks is collecting rent from your tenants. Set up a system to clearly communicate when rent is due and how it should be paid. Stay on top of late payments by sending friendly reminders and following up. If issues persist, you may need to send formal late notices and eventually pursue eviction.
In addition to rent collection, you are responsible for handling any repairs or maintenance that come up. This includes issues reported by tenants as well as proactive upkeep. Establish clear communication channels for tenants to report problems and respond promptly. For major repairs, you may need to hire a contractor. Keep detailed records of all maintenance and costs.
Communications and Relationships with Tenants
Fostering positive communications and relationships with your tenants is key. Be responsive to any concerns they bring up. Check in occasionally to see how things are going. Address small problems before they become big issues. Having a good rapport makes it easier to work through challenges if they do arise.
Provide tenants with your contact information in case of emergencies. Let them know the best methods and times to reach you. Make it clear when you’ll be unavailable, such as during vacations. Designate an alternative contact for emergencies when you won’t be reachable.
Record Keeping and Tax Considerations
As a landlord, you need to have a record-keeping system to track income, expenses, maintenance, communications, and more. This provides documentation in case of disputes and helps at tax time. Consult a tax professional to understand what rental property expenses can be deducted from your taxes.
Keeping organized, detailed records also provides insight into the profitability of your rental. This helps you make smart financial decisions and determine the best time to raise rents or list the property for sale. Ongoing record-keeping and staying financially savvy are key to growing a successful rental property portfolio.
Dealing Tenant Issues in Your First Rental Property
As a new landlord, you will inevitably have to deal with various issues that arise with tenants. Learning how to properly address problems is key to maintaining positive relationships and an orderly living environment.
Enforcing Lease Terms and House Rules
All tenants should be provided a copy of the lease agreement and house rules upfront. Periodically remind tenants about important policies like noise levels, guests, parking, pet restrictions, etc. If a violation occurs, address it promptly with a friendly reminder about the relevant rule. For recurring or serious issues, provide a written notice explaining the violation and consequences of further infractions. You can charge fees or issue warnings, depending on the severity. Refer back to the lease terms for guidance.
Noise Complaints and Conflicts
Excessive noise and other neighbor disputes need intervention. First verify the complaint is legitimate by investigating the issue yourself. If so, speak privately with the offending tenant to discuss the problem. Offer solutions like using rugs, avoiding late nights, or moving a noisy appliance. Suggest mediation if neighbors have unresolved conflicts. As a last resort, give a violation notice or penalty. If the problem persists, evaluate your options like lease termination.
Late Rent Payments and Evictions
If rent is late, contact the tenant immediately to learn why and arrange repayment. Consider charging late fees per your lease agreement. Establish a formal eviction process for chronic late payments, such as issuing written notices after each incident. Only pursue legal eviction as a last option, as it is costly and prevents rent collection during proceedings. If eviction is unavoidable, research your state laws and serve proper notices before filing. Having an attorney can help navigate formal legal action. Stay objective when dealing with evictions, as emotions can run high.
With proactive policies and prompt intervention, many issues can be resolved amicably. Strive to give tenants the benefit of the doubt while upholding your lease terms and property standards. Document everything in writing throughout the process. Enforcing rules in a professional, consistent manner will earn you respect and prevent problems from escalating.
Move-Out and Turnover
When tenants move out, there are several steps landlords should take to inspect the property, make any needed repairs, and prepare it for the next tenants.
Inspecting the Property and Returning the Security Deposit
After tenants move out, landlords should conduct a thorough inspection of the property as soon as possible. Walk through each room and make note of any damages beyond normal wear and tear. Take photos or videos to document any issues. Review your inspection notes against the move-in checklist you completed when the tenants first moved in.
If there are no damages, return the full security deposit to the tenants within the timeline required by your state, usually 30 days. If you identify damages that require repair, provide tenants with an itemized list detailing the costs and any deductions from their deposit. Only deduct for actual repairs needed, not for regular cleaning or maintenance.
Making Repairs and Preparing for the Next Tenants
Once an inspection is complete, start repairs and updates right away. This may include painting, carpet cleaning, appliance repairs, etc. Make sure all repairs meet quality standards. Complete any deferred maintenance and attend to items noted in your inspection reports over the tenancy.
Thoroughly clean the entire property. Replace any worn or damaged items with newer fixtures and fittings if needed. Staging the property with new décor and accessories can also help attract tenants.
Expanding Your Portfolio
Once you have experience as a landlord, you may consider expanding your real estate investments by growing your portfolio. There are several factors to weigh when deciding if and how to acquire more rental properties.
Pros and Cons of Multiple Properties
Expanding your portfolio can provide benefits such as increased cash flow, appreciation, and diversification across multiple markets and property types. However, more properties also mean more responsibility. You’ll have to decide if the potential rewards outweigh taking on the risks and obligations of additional rentals.
Some key pros of growing your portfolio:
- Greater rental income from multiple properties
- Diversification reduces market risk
- Leveraging appreciation to build equity and net worth
- Economy of scale with more units (i.e. maintenance)
Some potential cons:
- Increased debt and expenses
- More time and work managing properties
- Concentrated risk if properties are in one market
- Difficulty giving adequate attention to more units
For a deeper look at managing multiple properties, check out “5 Ways How to Manage Multiple Properties With Ease”.
Hiring a Property Manager
As your portfolio grows, hiring a property manager is worth considering. While it adds expense, a property manager can handle day-to-day operations, maintenance, rent collection, tenant issues, and more. This frees up your time while providing tenants with responsive service.
When interviewing property managers, look for ones experienced with your type of rentals. Clearly communicate your expectations. Start with one property to see if you work well together before entrusting them with your entire portfolio.
Expanding to Other Markets
Once you have a solid foundation as a landlord in your local market, expanding to long-distance real estate markets can provide geographic diversification. This spreads your risk should market conditions decline in one area.
Research unfamiliar areas thoroughly before investing there. Connect with knowledgeable local real estate professionals. Partner with an experienced property manager on-site. Start small by adding just one property until you understand the market dynamics.
Growing your real estate portfolio can generate larger returns but also requires careful evaluation of the increased responsibilities. Weigh the pros and cons, look for economies of scale, consider hiring help, and expand markets methodically over time.
Final Thoughts
Based on the insights and comprehensive guidance provided throughout the blog post, embarking on renting out your first property can be a rewarding venture. With careful preparation, understanding the responsibilities of being a landlord, and leveraging the right tools and resources, you can navigate the complexities of property management.
Remember, success in this endeavor comes from commitment, learning from experiences, and constantly adapting to the ever-evolving rental market. As you move forward, may your efforts in renting out your first property pave the way for a prosperous and fulfilling experience in the real estate industry.
