Investing in rental properties may not be the fastest way there is to become rich. But it’s generally safer than most other types of investment. For example, a stock market crash won’t wipe you out. However, you will have to put in the time and effort to make it work. So, if you’re considering putting your money in real estate, you must first understand what it takes to become a landlord.
A landlord is a person who rents his property to another person. But it’s not just as simple as collecting rent every month, it should be treated as a business. Therefore, it requires careful planning and strategizing to make money as a real estate owner.
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So You Want to Become a Landlord? Here Are the Steps That You Need to Know:
Buy a rental property
To get started, you naturally need to buy a rental property if you do not have one already. There are several considerations to make before choosing the right rental property to buy. After all, the property you buy will be the primary determinant of how successful your real estate venture will be. You need to consider the location, the type of property, the mortgage, the average rent in your target neighborhood, etc. Your first property should be something small and simple. And preferably close to where you live. This makes it easier and cheaper for you to show the property to potential tenants, check on the property regularly and carry out repairs on time.
Carry out a profitability analysis
Your endpoint is not just to own a property, but to make money off it. So, before you even buy a rental property, make sure you can earn money on it. A simple tool to help you with that is the capitalization rate. The capitalization rate is a measure of the estimated rate of return on an investment property. It is calculated by dividing the expected annual rental income (after deducting all expenses) by the present market value of the property.
To do the math, you need to get an accurate estimate of the rent you can collect from renting out your property. Some websites like biggerpockets.com offer data on rent across the US, and some also feature an analysis tool that calculates the capitalization rate for you.
On the bright side, you may qualify for some tax benefits on expenses associated with owning a rental property. These include insurance, depreciation, mortgage interest, travel expenses, property repair, etc
Know the laws
To avoid any potential legal issue, learn the laws governing the landlord-tenant contract. Especially the federal laws that relate to anti-discrimination. You must not discriminate against prospective tenants based on their religion, race, nationality, sex, disability, children and others. Also, become conversant with the local state legal provisions concerning issues such as security deposits, notice you need to give tenants when you want them to leave, access to the property, etc.
Note that fair housing laws have serious implications when you violate them. Thus, you have no excuse for not educating yourself on the relevant laws in the real estate industry.
Select your tenants with care
Screening potential tenants is a very critical step in your journey to becoming a landlord. Take the time to do a background check and credit check on any intending renter. Also, check references from former landlords and employers. It is necessary that you interview the potential tenants to see if you are comfortable dealing with them. Watch out for red flags in a prospective tenant such as credit score lower than 600, no references from previous landlords or employers, and no steady job. Also, check if they had been evicted previously or committed a felony recently.
One of the biggest mistakes you can make is letting in the wrong person. That will be a recipe for disaster – delayed rent, extensive property damage, and costly evictions. However, be mindful of breaking the law as regards to discriminating against tenants based on the criteria earlier discussed.
Prepare a lease agreement
A lease agreement is a legal agreement or contract between you and your tenant. It spells out all the rules that you both agree to follow throughout your rental relationship. You can get the standard lease formats on the internet which you can customize to your preferences and situation. At its most basic, a lease agreement identifies the parties, the terms of the rental, the property and the amount to be paid as rent. State clearly what is permitted or what is not. Financial Samurai has an example of a good lease agreement on his website. For instance, are pets allowed? What kinds? How many?
Make rent your priority
As a landlord, you don’t acquire property just to cross off an item on your bucket list.
Rent is your income.
It’s necessary that you make it a priority. Aggressively pursue rent payments and late charges. Sometimes, your tenant may need help in meeting up with their rent payment, and it’s OK to work with them if they communicated appropriately. But if you have renters who simply stopped paying rent and ignores all your calls or texts, then you need to initiate eviction proceedings immediately. Because, before you know it, six months have passed, and you haven’t collected a dime. You might as well start a homeless shelter charity. A good resource for rental market news is rentcafe.com.
Stick to set rules
You cannot afford to allow your tenants to trample all over you. While it’s OK to be accommodating and understanding, people are notoriously good at taking a mile when offered an inch. If you become too sweet and cuddly and let your tenants get away with breaking the rules as stated in the lease agreement, they’ll just keep on doing it. For instance, if a tenant fails to pay rent on time, and you do not apply daily late payment fees, they’ll continue to pay at their own convenience – and sadly, at your inconvenience.
If you have fulfilled your obligations as a landlord, you should also expect your tenants to reciprocate as at when due. Therefore, set firm ground rules and let them know there will be consequences for infractions. Put your foot down when they go against the stated agreements and apply appropriate sanctions for damages, late rent payments, nurturing in-house mural painters that decorate your walls and any other breaches. Avoiding confrontation won’t go well for your rental business.
Maintain the property
Periodically check on your rental property. This is why it’s important to choose a location that is close to where you live. In the lease agreement, you must categorically state how often you will want to inspect the property. This is to avoid having issues with your tenants. Checking once every 3 months is a reasonable interval which lets you keep an eye on the property without intruding too much on your tenant. Always take pictures (or crappy cell phone videos) to document the state of the property before any renter moves in. This serves as the baseline against which you’ll measure the condition of the property on your inspection runs.
Treat your rental property as a proper business. Right from the start, do proper accounting and bookkeeping. Keep accurate records of all income as well as expenses. This documentary evidence will come in handy when you need to prepare financial statements, monitor your rental properties’ activities and for responding to an IRS audit.
Set up systems that will ensure things go on smoothly even when you are not around. If you approach your rental business with the organization and planning like you would any other business venture, you’ll be amazed at how much you’ll excel.
You may need to hire a property manager
You may consider handing the management of your property over to a property manager. Professional property management comes at a cost but may be necessary if you don’t have the time to do an excellent job of managing your property. A property manager can help market your property, carry out maintenance, choose tenants, and collect the rent. When hiring a property manager, ensure to state his/her responsibilities explicitly. Opting to go for a property manager is not a bad idea if you can afford it and do not have the time to manage the property yourself due to other commitments.
To become a landlord is much more than just collecting rent every month while sitting on your favorite couch surfing channels. It requires some financial muscles, managerial skills, attention to details and hard work. You should know what it is all about before getting into it.
Choosing the right property can be challenging, but it’s critical for the success of your rental business. Carefully consider the location, average rent in the neighborhood and mortgage before selecting your rental property of choice. Learn the relevant national and local laws as it affects your area and thoroughly screen prospective renters. Keep an eye on your property and set money aside for repairs.
Set firm rules and enforce them when necessary, while treating your tenants with respect of course.
Becoming a landlord can be a path to wealth and financial freedom. But you have to do it right and put in the necessary work.