Ever thought about becoming a landlord? There are plenty of reasons you might. Being a landlord can be a profitable move as it provides positive cash flow, while your property appreciates in value, and you might also be able to enjoy certain tax advantages.
The decision of becoming a landlord has to be taken with caution because time and money are involved in purchasing, maintaining, and renting out the property. Additionally, there are a lot of rules that apply to landlords, so it’s easy to feel overwhelmed at first. However, as long as you do your research, you won’t find it hard to meet these obligations and remain on the right side of the law.
Becoming a Landlord: Buying a Rental Property
The first step to becoming a landlord would logically be buying a rental property. The investment property you buy will be the main determining factor of how much you will make as a landlord. In addition, other factors need to be considered when choosing the best rental property such as the location, the type of property, the average rent in the neighborhood, the mortgage, the property taxes, etc.
The most important factor is location. When buying a rental property, it’s preferable to buy one close to where you live; this helps you save on transportation costs and allows you to show the property to potential tenants, check on the property periodically, and take care of repairs. As for the type of property, it’s best for you to start out small and simple if you are a beginner real estate investor becoming a landlord for the first time.
Becoming a Landlord: Calculate the Money
Every real estate investor aims at making money from his/her investment. You need to make sure that there is positive cash flow to be earned by calculating the capitalization rate. The cap rate is an investment property profitability metric that measures the rate of return on an investment property based on the expected annual rental income divided by the purchasing price.
The income you receive in the form of rent will supplement the monthly mortgage payments. Keep in mind that landlord insurance is higher because there are higher risks due to having renters living in the property. As for maintenance costs, they can vary depending on whether you choose to do repairs yourself or hire a professional.
Good news is that becoming a landlord makes real estate investors eligible for some tax benefits on costs associated with owning and managing your rental property like depreciation, insurance, mortgage interest, property repair, travel expenses, and others.
Becoming a Landlord: Know the Landlord-Tenant Law
There are federal laws involving landlords and tenants that you have to be familiar with before becoming a landlord. These laws vary from one state to another, but most states have specific provisions that cover issues such as habitability and anti-discrimination, security deposits, health codes, housing safety code, how much notice you need to give your tenants when you want them to leave your rental property, and the level of access to the property.
Related: Landlord Rights: Make Sure You Know Your Rights and Use Them
For example, as a landlord, you can’t expect to simply walk into the rental property whenever you wish unless certain conditions are met – if you need to conduct repairs or inspect the state of repair of your property, for instance. Also, one of the tenants’ rights is that a landlord can’t discriminate against tenants based on race, religion, color, nationality, origin, sex, disability, familial status, children, etc.
Before you rent out your property, consult with an attorney who specializes in landlord-tenant law to inform you of landlords’ rights and tenants’ rights, and to confirm that you comply with all local legislation including state and federal laws.
Becoming a Landlord: Landlord Insurance Policy
When becoming a landlord, it becomes the real estate investor’s responsibility to ensure the rental property against damage like fire and flood. You can get a regular home insurance policy, but it may not cover you if you rent out your property. Therefore, a landlord insurance policy is a better option, especially if you’re owning multiple rental properties, as it provides you with extra protection including:
- Liability cover: In case a tenant is injured on your property and tries to sue you.
- Alternative accommodation cover: If your property becomes damaged, a landlord insurance policy will pay for tenants’ accommodation while repairs are carried out
- Accidental damage cover.
- Loss of rental income: You could claim back the loss of rent if your property can’t be lived in as a result of a fire or other damage.
- Employer’s liability cover: This covers cleaners or other staff who may get injured in your rental property.
Becoming a Landlord: Pricing Your Rental Property
Since making money is the main purpose of real estate investments, the price you charge for rent is an important factor to think carefully about, seeing how affects your outcome. If you charge too much, you might not find a tenant. On the other hand, if you charge too little, you might not make ends meet, accordingly, you could lose money on your rental property. When becoming a landlord, it is crucial to find a number to charge for rent that allows you to:
- Cover the operating expenses.
- Earn a reasonable return on your real estate investment.
- Be competitive in the local rental market.
Related: Becoming a Landlord 101: How Much Rent Can I Charge for My House?
Becoming a Landlord: Picking Good Tenants
Once you are on your way to becoming a landlord, screening potential tenants is important. A challenge that most landlords face is finding reliable tenants to fill the rental property. Ideal tenants are those who are willing and able to pay rent in full and on time each month, keep the investment property in good condition, and follow the policies in the lease (rental agreement).
To find this ideal tenant, it is worth the time to do a background and credit check on potential renters. Furthermore, it’s a good idea to take the time to check references, mainly from past landlord and employers. In addition, landlords should conduct an interview with potential renters to make sure they’re comfortable communicating with them.
It’s helpful for real estate investors to a create criteria to use when selecting tenants. If you don’t have the time, interest, or patience to do all of this, an excellent option would be to hire a professional property manager to find good tenants for your property. Lastly, when you find good tenants, it’s best to notify them immediately before they sign a different lease and you have to begin the process again.
Becoming a Landlord: Customize Rental Lease (Rental Agreement)
You can use the help of a real estate attorney or a professional property manager to write a lease, or you use standard lease forms that are available online as a template. Still, you need to adjust the template in a way that matches your situation and preferences. In addition, you need to be specific. For example, do you allow pets? What kind? How many?
Now that you’ve tackled all previous steps and you’re becoming a landlord, don’t forget to inspect your rental property regularly. To avoid any problems and misunderstandings with the tenants, it’s best to explicitly state how often you want to inspect the property in the rental agreement. Usually, 3 months is a reasonable period; it allows you to keep an eye on the property without disturbing the tenants too much. Moreover, consider whether it is worth hiring a professional property manager. Sure, property managers come with a price, but they save you a lot of time and effort.
Related: What is a green lease and how can it benefit you as a landlord?
Conclusion
Becoming a landlord is opening a business like any other; therefore, it should be tackled carefully. Before you jump into becoming a landlord, make sure to know what being a landlord is about, to understand related laws, and to avoid mistakes made by beginner landlords such as: underestimating costs, breaking the law, neglecting screening future tenants, ignoring insurance policies, and failing to check the property regularly. Moreover, keep in mind that while becoming a landlord can be a way for making money and generating positive cash flow in real estate investing, it is not about getting rich quickly.
For more landlord help and information, whether you’re just starting out or you’ve been a landlord for years, and even more information on real estate investing and protecting your investment, find out more on Mashvisor.
