Knowing how to become a landlord is the first step to starting your real estate business. We take a look at what you need to know.
Rental property investing and becoming a landlord, is a tried and tested strategy for building wealth. Real estate generally appreciates in value over time, and by renting it out you can turn your asset into an additional revenue stream to complement or even replace existing ones.
However, it’s not as simple as just buying a property. You need to ensure you invest in the right location, one that offers high ROI, as well as find and manage tenants, remain compliant with both federal and state laws, and more.
As a first-time landlord, this can be daunting which is why we’ve assembled this article to help you avoid potential pitfalls and successfully scale your portfolio from the get-go.
There are several ways to fund your investments from traditional financing and private lenders to seller financing. You need to know how you’ll afford this first rental and set money aside for potential expenses such as necessary refurbishments, emergency maintenance costs, and funds for mortgage payments should you not find tenants immediately.
Although it’s not a requirement to operate as a limited liability company (LLC) doing so can help you limit your personal liability by separating your personal and rental income. However, setting up an LLC comes with additional costs and may not be worth it for your particular situation.
LLCs are regulated at the state level and as such the process and cost of setting one up will vary widely depending on your property’s location. As such, before you purchase your first property make sure you’re aware of the pros and cons of operating as an LLC and consult with your financial advisor or CPA.
Whether you decide to set up an LLC or not, it is recommended that you keep all rental finances separate to make it easier to manage and track.
Buying an investment property isn’t like buying a home. You need to know what metrics to look at and how to assess locations objectively.
For example, investments in an area, new offices as well as schools and public transport networks are all factors that will impact a locations desirability and potential long-termn appreciation.
When assessing a property you also need to make sure that all the numbers add up, that your cash flow will cover all of your expenses and then some, and that you’re achieving the cap rate and ROI required for you to achieve your long-term financial goals.
A few key metrics investors need to know including the ones already mentioned that investors need to understand include, Cap Rate, ROI, IRR, Cash Flow, and Cash on Cash Return.
Certain counties require landlords to register their property with the city before they begin renting. This allows the city to better manage the rental stock. You will want to check with your local region if this is required for your property. Commonly called a rental registry if you are required to register the city government will want details such as the address, name of ownership, contact information and operating manager.
You can research local rental rules in your area to see if you need to allocate time to complete this step before listing your rental property.
The key to avoiding legal situations during the rental process is understanding and being aware of local landlord-tenant laws in your area. These laws have been created to protect both landlords and tenants and must be followed at all times. As part of this, for example, your property must meet certain health and safety standards and you may be legally required to have a written lease agreement.
Additionally, you must be aware of federal Fair Housing laws and local ordinances when finding tenants for your property. Failing to comply could land you in court, with hefty fines, and even result in you being forced to shut down your rental business. It’s also important to note that you should regularly check local landlord-tenant laws once you’ve launched your rental business to be aware of any major changes.
Related: Landlord-Tenant Laws By State
Knowing how much rent to charge can be a challenge. You will want to do an annual market comparison to see what similar properties in the area are charging to ensure your rental rates are competitive.
Charge too much and you’ll find it hard to secure tenants, charge too little and you’re leaving money on the table.
In order to find quality tenants, you will want to create an enticing rental listing with an exciting description and great photos and get your listing in front of as many potential renters as possible. You need to know where to list your rentals, and how to appeal to the best quality tenants.
In order to avoid nightmare tenants and extreme scenarios such as having to pursue an eviction, you will want to have an effective tenant screening process in place. This process should be designed to efficiently allow you to filter out unqualified tenants, allowing you to select the very best prospect from the pool of applicants.
Your tenant screening process, for example, should consist of a prescreening questionnaire and a streamlined tenant application process. You should also run a comprehensive tenant screening report and background check on all qualified applicants, and double-check landlord references.
The ultimate goal of this process is to identify the tenant that is most likely to pay their rent on time and in full every month as well as look after your property. As such you should look at things such as credit score and current income as well as previous rental history. As a final note, when screening your tenants make sure you don’t discriminate against any of the protected classes.
Find out more about tenant screening with Landlord Studio
In order to stay on top of all of the various expenses associated with operating a successful rental property so that you can file an accurate tax return and maximize your deductions (and profits), you will want to use a quality accounting tool.
Landlord Studio for example is a real estate accounting and property management software designed specifically for landlords. Accurately and efficiently track your investment’s expenses, easily digitize receipts, run accountant-approved tax and financial reports, and automate your rent collection and income tracking.
A few common operating expenses you need to track include:
Not tracking these accurately could not only open you up to a potential audit by the IRS but mean you end up overpaying your taxes by thousands of dollars each year.
Your rental property will naturally experience wear and tear the more it’s rented out, so it’s important to perform regular maintenance to avoid major repairs. You may want to clean the gutters, service HVAC units, or perform pest control throughout the year to ensure it’s a great environment for tenants to live in.
Having a system that allows you to keep track of all of these routine and unexpected maintenance tasks will help you maintain your property to a high standard, ensure you avoid sudden surprise repair bills, and improve your tenant retention to reduce costly vacancy periods.
Find out more about property maintenance with Landlord Studio
Knowing how to become a landlord is the first step to starting your rental business. Whether you own one property or multiple, Landlord Studio can help make renting easier by streamlining time-consuming processes — all without a property manager.
Each of our features are specifically designed to help you more efficiently manage your properties, from finding tenants to keeping your properties in great condition.