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ContinueKnowing 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, 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.
According to the National Multifamily Housing Council, 37% of U.S. households live in rentals, representing a massive market opportunity for new landlords. However, becoming a successful landlord isn't as simple as just buying a property and collecting rent checks.
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. And as a first time landlord, the prospect can be daunting.
This guide will walk you through everything you need to know to avoid potential pitfalls and successfully scale your portfolio into a profitable rental business.
A landlord is someone who rents out property (such as a house, apartment, or condo) to tenants in exchange for monthly rent. Being a landlord means you're responsible for maintaining the property, collecting rent, handling repairs, and complying with local and state rental laws.
As a landlord, your responsibilities include:
Don't be mistaken, being a landlord isn't just about collecting money at the end of the month. It's running a business that requires both labor and skill.
Before diving in, it's important to understand what you're getting into.
Passive Income Potential: Rental properties should have positive cash flow, meaning they provide an additional source of income.
Property Appreciation: While markets fluctuate, real estate generally appreciates in value over time, allowing you to build equity over time.
Tax Deductions: Rental properties provide significant tax deductions you can claim when filing your federal and state taxes. You can deduct mortgage interest, property taxes, insurance, maintenance costs, and more to reduce your tax burden.
Wealth Diversification: By investing your wealth into multiple financial areas, you protect your finances from depleting if one area enters a slow period.
Control Over Your Asset: Unlike stocks or mutual funds, you have direct control over your real estate investment. You decide on improvements, tenant selection, and rental rates.
Time Commitment: Property management requires ongoing attention. You may need to handle emergency repairs, respond to tenant issues, show properties to prospective renters, and manage maintenance schedules.
Financial Risks: High upfront costs and leveraging risks mean that market fluctuations could see you fall into negative equity, and large unexpected expenses like a failed HVAC system or roof repair could wipe out cash reserves.
Difficult Tenants: You may face late payments, property damage, or even the costly and time-consuming eviction process.
Legal Liability: As a landlord, you can be held liable for injuries on your property or violations of housing laws. Failing to comply with local regulations could land you in court with hefty fines.
One of the first questions aspiring landlords ask is: "How much will this cost me?"
Down Payment: Investment properties typically require a larger down payment than primary residences. Expect to put down 15-25% of the purchase price. For a $200,000 property, that's $30,000-$50,000.
Closing Costs: These vary significantly by state. According to real estate data:
Reserve Funds: You'll want to set aside 3-6 months of mortgage payments and operating expenses. This protects you if you don't find tenants immediately or face unexpected repairs.
Renovation Budget: Unless you're buying a turnkey property, budget for necessary refurbishments and upgrades to make the property rent-ready.
The 1% Rule: This quick screening tool says that your monthly rent should equal at least 1% of the purchase price. For a $200,000 property, aim for $2,000/month in rent.
The 50% Rule: Plan for about 50% of your rental income to go toward operating expenses (not including the mortgage). This covers property taxes, insurance, maintenance, vacancy, and management costs.
Related: 11 Real Estate Investing Metrics that Investors Need to Know
There are several ways to fund your investments:
Traditional Financing: Conventional mortgages work similarly to home loans but typically require higher credit scores and down payments for investment properties.
FHA Loans for Multi-Family: If you're buying a 2-4 unit property and plan to live in one unit, you might qualify for an FHA loan with as little as 3.5% down.
Private Lenders: Private or hard money lenders can provide funding when traditional banks won't, though typically at higher interest rates.
Seller Financing: In some cases, the seller may finance part of the purchase, allowing for more flexible terms.
For those wondering how to become a landlord with limited capital, creative financing options and partnerships can help reduce the cash you need upfront.
Before purchasing your first rental property, honestly assess whether you're ready for the commitment.
Ask yourself:
If you just want to diversify your portfolio and earn passive income without the hands-on work, consider alternatives like real estate investment trusts (REITs) or real estate crowdfunding platforms.
Not all rental properties are created equal. Your choice will impact your management workload, tenant pool, and return on investment.
Single-Family Homes: Ideal for first-time landlords. They're easier to manage, appeal to long-term tenants like families, and are easier to sell if needed. However, vacancies mean zero income.
Multi-Family Properties: Duplexes, triplexes, and small apartment buildings offer multiple income streams. If one unit is vacant, others still generate revenue. Management is more complex but can be more profitable.
Condos and Townhomes: Lower maintenance responsibilities since HOAs typically handle exterior upkeep. However, HOA fees cut into profits, and you must follow association rules.
Short-Term vs. Long-Term Rentals: Short-term vacation rentals can generate higher income but require more active management and may face strict local regulations. Long-term rentals provide stable, predictable income with less turnover.
When evaluating locations, look for:
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.
Fair Housing Act: You must be aware of federal Fair Housing laws when finding tenants for your property. The Fair Housing Act prohibits discrimination based on race, color, national origin, religion, sex, familial status, or disability. Failing to comply could land you in court with hefty fines.
Landlord-Tenant Laws: Landlord-tenant laws are set by states and vary across the country. These can cover:
You can research local rental rules and find your state's specific requirements through our Landlord-Tenant Laws By State guide.
Rental Registration: Certain counties require landlords to register their property with the city before they begin renting. 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.
Licensing Requirements: Some jurisdictions require landlords to obtain licenses. Check with your local housing authority to determine if this applies to you.
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.
Sole Proprietorship: The simplest structure. You report rental income on your personal tax return. However, your personal assets are at risk if you're sued.
Limited Liability Company (LLC): 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. LLCs offer personal liability protection and can provide tax flexibility.
Setting up an LLC comes with additional costs and may not be worth it for your particular situation. 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.
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.
Traditional mortgage lenders typically require:
Portfolio Loans: Some banks keep loans in-house rather than selling them, allowing more flexibility in underwriting.
Home Equity Line of Credit (HELOC): If you have equity in your primary residence, you might tap into it to fund your investment property.
Partnership: Partner with another investor to split costs and responsibilities.
House Hacking: Buy a multi-unit property, live in one unit, and rent out the others. This allows you to qualify for owner-occupied financing with lower down payment requirements.
For more detailed financing guidance, check out our article on Getting Financing for Your First Property.
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.
Investments in an area, new offices, schools, and public transport networks are all factors that will impact a location's desirability and potential long-term appreciation.
When assessing a property, you 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 to achieve your long-term financial goals.
Cap Rate (Capitalization Rate): Net operating income divided by property value. A higher cap rate indicates better potential returns. Most investors target 8-12% cap rates.
ROI (Return on Investment): Total profit divided by total investment. This shows your overall return percentage.
Cash Flow: Monthly rental income minus all expenses. Positive cash flow means you're making money each month.
Cash on Cash Return: Annual pre-tax cash flow divided by total cash invested. This shows the return on your actual out-of-pocket investment.
A few key metrics investors need to know include Cap Rate, ROI, IRR, Cash Flow, and Cash on Cash Return.
For guidance on location selection, see our guide to the Best US Cities to Invest in Rental Properties.
Before listing your property, ensure it meets all health and safety standards and is attractive to quality tenants.
Safety and Code Compliance
Repairs and Improvements
Deep Cleaning
A well-maintained unit attracts higher-quality tenants and can justify a higher rent price. Taking care of maintenance requirements now can reduce your maintenance costs in the future.
Standard homeowners insurance won't cover you when you're renting out a property. You need landlord insurance.
Property Damage: Protection against covered perils such as fire, vandalism, severe weather, and theft affecting the structure and any appliances you provide.
Liability Protection: Coverage for medical and legal costs if a tenant or visitor is injured on your property due to your negligence.
Loss of Rental Income: Reimbursement for lost rent if your property becomes uninhabitable due to a covered event.
Umbrella Policies: For landlords with multiple properties or significant assets, an umbrella policy provides extra liability coverage beyond standard limits.
Requiring Renters Insurance: You should encourage (and in some states you can require) your tenants to purchase renters insurance. This protects their personal belongings and provides them with liability coverage. Your landlord insurance won't cover tenant belongings.
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.
Research Comparable Properties: Look at similar properties in your area (with the same number of bedrooms, bathrooms, square footage, and amenities). Check listings on Zillow, Apartments.com, and local rental sites.
Factor in Your Costs Your rent should cover:
Consider Amenities: Features like updated appliances, in-unit laundry, parking, yard space, or modern finishes can justify higher rents.
Stay Competitive: Price slightly below comparable properties when first listing to generate more interest, then increase rent at lease renewal once you've proven the property's value.
For more detailed guidance, see our article on How Much Rent Should You Be Charging?
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.
Pre-Screening Questionnaire: Before scheduling showings, ask basic qualifying questions about income, move-in date, pets, and smoking.
Rental Application: Your streamlined tenant application process should collect:
Credit Check: Look at the credit score and current income. Most landlords require a credit score of 620 or higher and a monthly income of at least 3x the rent.
Background Check: Run a comprehensive tenant screening report that includes criminal history, eviction records, and rental payment history.
Verify References: Contact previous landlords and employers. Ask specific questions about payment history, property care, and any issues.
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 a final note, when screening your tenants make sure you don't discriminate against any of the protected classes under Fair Housing laws.
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.
Not tracking expenses accurately could not only open you up to a potential audit by the IRS but could also mean you end up overpaying your taxes by thousands of dollars each year.
A few common operating expenses you need to track include:
Landlord Studio 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.
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.
Quarterly Tasks
Semi-Annual Tasks
Annual Tasks
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.
Learning from others' mistakes can save you time and money.
As noted by Kathy Hertzog, president of LandlordAssociation.org, "The biggest common mistake landlords make is being too nice".
You have to look at your rental property as a business. If someone says they can't pay rent today and wants you to accept a late payment or partial payment, you are setting a precedent that will make it difficult if you ever have to evict them and go to court.
Failing to document the property's condition at move-in and move-out can lead to disputes over security deposits. Always conduct thorough inspections with photos and written reports signed by both parties.
Small issues become expensive problems when ignored. Address maintenance requests promptly to keep tenants happy and prevent minor repairs from becoming major expenses.
Keep separate bank accounts for your rental business. This makes accounting easier, tax preparation simpler, and creates clear documentation if you're ever audited.
Always maintain an emergency fund equal to at least 3-6 months of expenses. Unexpected repairs and vacancy periods will happen, so make sure you’re financially prepared.
Rental regulations change frequently. Stay informed about new laws and requirements to avoid penalties and legal issues.
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 (without a property manager).
Each of our features is specifically designed to help you more efficiently manage your properties, from finding tenants to keeping your properties in great condition. With tools for tenant screening, online rent collection, expense tracking, maintenance management, and tax reporting, Landlord Studio simplifies the complexities of being a landlord.
Ready to get started? Take the first step toward building wealth through rental property investing. Create your free Landlord Studio account today.
How do I become a first-time landlord?
Start by assessing your finances and researching your local rental market. Purchase a suitable property, prepare it for tenants, obtain proper insurance, screen tenants thoroughly, and create a solid lease agreement. Consider starting with a single-family home to keep things manageable while you learn.
Are there any requirements to be a landlord?
Requirements vary by location. Some jurisdictions require rental property registration, landlord licenses, or specific safety certifications. All landlords must comply with federal Fair Housing laws and state-specific landlord-tenant regulations. Check with your local housing authority for specific requirements.
Is becoming a landlord hard?
Being a landlord can be challenging, especially at first. It requires financial investment, time commitment, and the ability to handle various responsibilities from maintenance to tenant management. However, with proper preparation, systems, and tools in place, many landlords find it rewarding and manageable.
How much money is needed to become a landlord?
Expect to need 15-25% of the property's purchase price for a down payment, plus closing costs (0.7-6% depending on location), reserves for 3-6 months of expenses, and a renovation budget. For a $200,000 property, plan for $40,000-$60,000 in initial capital.
Can you be a landlord without owning property?
Some people sublease properties (rent them and re-rent to others), though this typically requires the property owner's permission and isn't common for long-term rentals. Another option is "master leasing" where you lease a property with the right to sublet. However, traditional landlording requires property ownership.
Do I need a license to be a landlord?
Licensing requirements vary widely by location. Some cities and counties require landlord licenses, rental property registration, or safety certifications. Many areas don't require licenses at all. Check with your local housing authority to determine requirements for your specific location.
Should I hire a property manager as a first-time landlord?
If you live far from your property, lack time for management tasks, or want to minimize stress, hiring a property manager can be worthwhile. Property managers typically charge 8-12% of monthly rent but handle tenant screening, rent collection, maintenance coordination, and legal compliance. Many first-time landlords start self-managing to learn the business before deciding if professional management is worth the cost.
Landlord Studio is an easy to use property management and accounting software designed for landlords.
Find and screen tenants, collect rent online, track income and expenses, run reports, and more - all for free.
Maximize your rental property tax deductions and file with confidence before the deadline with property management accounting software designed for you.
Hosted by: Logan Ransley, Co-founder of Landlord Studio
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