Most folks want to become a landlord because they’ve heard it’s a good financial opportunity. Investment properties are typically easy to finance, and with the right planning, they can be pretty profitable.
But being a landlord is also a lot of responsibility and not necessarily for the faint of heart.
So your first step is to figure out what the role entails and whether it’s the right fit for you. That’s where we can help. We talked to real estate experts for their pointers on how to become a successful landlord. Here’s what they said.
1. Find the Right Location
Location is everything in real estate, and that’s true for rental properties, too. Bill Samuel, a real estate developer, explains that being a landlord is a business and you need to approach it that way.
“Getting great tenants starts with having a good property in a good location,” Samuel says. “Good tenants want to live in clean properties in safe areas.”
Research the communities where you plan on owning a property. Get an idea of why tenants want to move to the area. Is it close to a business district or universities?
Next, take a look at the range of rentals in the area. A bigger, updated home will generate more rent than a smaller one that needs work. Estimate what your revenue will be based on the type of investment you make.
Start taking note of how much property in the area costs so you can build your budget or plan for a loan. Based on rental rates, you might decide that a smaller home will give you a better return on your investment even if you can afford a bigger property.
2. Understand Landlord-Tenant Laws
Research the landlord-tenant laws in your state and county. You’ll want to know what tenants’ rights are, what your obligations are as a landlord, and the process for eviction if necessary.
This part of your assessment can’t be understated. Being a landlord is a big responsibility, and your tenants are entitled to a safe and well-maintained home. You’ll need to make sure the property meets state and county guidelines regarding habitability.
3. Set a Budget
You already did research on the area and know property values and probable rents. Now it’s time to crunch the numbers and set a budget for yourself. Setting a budget requires more than just looking at a prospective mortgage.
“Most issues can be resolved with enough liquidity. Keep your house in order and ensure you have enough reserves to cover unexpected issues,” Edward Briggs of HomeReviews explains. “This also puts you in a prime position if new investment opportunities arise.”
When it comes to the purchase, think about the mortgage, closing costs, and any upfront capital needed for repairs to get the house up to rental standards. Don’t forget to consider other expenses associated with being a landlord, like:
- Mortgage cost.
- Property taxes.
- Property insurance.
- City licensing, mandatory inspections, and annual registration fees.
- Rental income taxes.
- Maintenance costs.
- Marketing and advertising fees.
Depending on the work you choose to outsource, you may also have to factor in the cost of a bookkeeper, property manager, and attorney to help draw up your lease or offer guidance on disputes.
Make sure the income you can charge for a property is enough to cover all expenses, including taxes.
4. Buy a Property
Once you have an idea of costs and potential income, it’s time to find your investment property. Your budget should dictate how big or expensive the property is. This is a business decision, so don’t get bogged down in negotiations that make the property more expensive. Keep the budget in mind at all times when making an offer on a property and securing it.
When you go through the escrow process, take advantage of all the inspections you can. You’ll want to have a good idea of the property’s condition, including the lifespan of its appliances and systems. You don’t want to buy a money trap that suddenly needs a new refrigerator or brand-new plumbing if you didn’t initially budget for it.
Go back to your budget and update the numbers based on the actual value and expected costs of the property you’re buying. You’ll be able to get exact data on property taxes, insurance, and any licensing fees.
5. Get Landlord Insurance
Your mortgage lender usually won’t let you close the loan without the right property insurance in place. Even if your rental property is a single-family detached home, you still need landlord insurance for it, not homeowners insurance. That’s because you’re protecting the structure and your tenants need to protect their own belongings inside.
6. Prepare the Property
Remember, your property must meet an implied warranty of habitability in almost every state. In Florida, that means basic structural elements must be intact, including floors, stairs, walls, roofs, etc. Common areas must be maintained and free of hazards. Electrical, plumbing, sanitary, heating, ventilating, and air conditioning systems must be operating safely. And it’s your responsibility to handle pests.
After you close on the property, make sure it’s ready to live in. Take care of any repairs and give the property a deep clean so it’s ready for staging.
7. Set the Rental Price
Revisit your research to determine the rental price you’ll charge. Remember that the rental price needs to be more than the mortgage amount to cover additional expenses, like taxes and insurance. That said, you do want to keep the price competitive so the property rents quickly and attracts good tenants.
8. Market the Property
Take high-resolution, well-lit pictures of the property to use in your marketing materials. Write an enticing description of the property that highlights its best features, whether that’s the pool in the backyard, the large windows that let natural light in, or its recent renovations.
Upload your photos and description on rental property websites like Zillow, Rentals, or Trulia.
Another great way to market the property is to ask for referrals, especially if you’re expanding from one property to multiple properties.
“Leads are a dime a dozen, but for us, nothing beats referrals from our best tenants. Tenants who sign a lease through a referral stay longer and are generally great fits for the community because they already know someone in the building who had a positive enough experience to refer them,” Mike Catania, CEO of the referral program Locaris explains. “Further, as vacancy rates are starting to climb from the economy’s downturn, a referral from a great tenant makes an applicant with a lower credit score more attractive because someone we know is vouching for them.”
9. Screen Prospective Tenants
Create a process to screen potential tenants. Ideally, you budgeted to pay for credit checks and background services on potential candidates. But you may want to prescreen tenants so you don’t pay for each candidate.
On the flip side, you could incorporate the credit check or background screening cost into an application fee so you don’t need to worry about it.
Either way, make sure you get the right information before you sign a lease. Look for candidates with a solid work history, no criminal background, and good credit scores. Your application may also screen for things like pet breeds or a number of children that will be in the household.
This is where knowing the laws is important. You may have a two-bedroom home and have an applicant with four children. That might not meet the city’s occupancy standards and you’ll need to decline the applicant.
When screening tenants, use objective standards and comply with anti-discrimination laws like the Fair Housing Act.
10. Sign a Lease
Never rent out your property without a fully executed lease. Get the lease signed and collect the deposit before you turn over the keys. Verbal agreements and handshakes won’t protect you if there’s a dispute.
Your lease should clearly spell out the terms and conditions of the property, including rent due dates, late fees and penalties, exit terms, and grounds for eviction. Include a property inventory form that states what you provide (e.g., washer and dryer) and the condition of those things as well as the condition of the house. You’ll refer to this property inventory and walk-through form when the tenant leaves to determine how much, if any, of the security deposit is owed.
The goal is to develop a good relationship of reasonable expectations from the start. The relationship will hopefully strengthen over time.
“Good relationships can mean that repairs are done quickly and efficiently, payments come and go at a more efficient rate, and overall the experience is just better,” as Lucas Robinson, CMO of Crediful, points out. “Welcome them with lots of respect and be nice to them. They are staying there for some time, so they should feel like this is their home, not somewhere they feel sad or unsafe.”
11. Maintain the Property
Congratulations! You’re officially a landlord. Now the work of maintaining the property begins.
You’ll want to have a good handyman in your contacts for all the little repairs that pop up, like fixing leaky faucets or installing weatherstripping. Keeping up with maintenance helps keep tenants happy, as Ethan Taub, CEO of Loanry, explains.
“Those small fixes you leave for now could turn into something big if you ignore it for too long,” says Taub. “So when your tenants show you something, take it seriously and sort it out. That house will outlive their time in it, so you have to take good care of it for everyone who will stay there.”
Not only is property maintenance important to keeping good tenants, but it also helps keep your property value up. Appreciation in the property can become a valuable asset, so do what you can to improve it.
12. Consider Hiring a Property Manager
Being a landlord can be a lot. Tenants call at all hours when they need something. Rent is invariably hard to collect at times. Maintenance and repairs can take a lot of your time as you coordinate contractors and oversee repairs. If your budget allows for it, hiring a property manager could be a big help.
Property managers take care of everything from tenant screening to collecting rent and dealing with those 2 a.m. emergency calls. If you want to be a hands-off landlord, a property manager could be right for you. While some property managers charge a flat rate, you can expect to pay between 8 and 12 percent of your net collected rent for a property manager.
Stay tuned for more tips on how to successfully rent and manage your property.