Owning rental properties and becoming a landlord is one of the best strategies for earning passive income and growing your wealth. Research shows that at least 36% of Americans live in rental properties, with the rental rates increasing over the years. Since most renters are still unable to purchase a home amid the Covid-19 pandemic, the demand for rental properties will continue growing in 2021. When it comes to investing in rental properties for beginners, learning how to become a landlord is crucial.
What is a landlord? A landlord is simply the owner of a single family home, condo, multi family home, or apartment which is leased or rented out to a tenant.
How to become a landlord
Here are the steps to becoming a landlord:
- Buy an income property: If you don’t already own a home, the first step would be buying rental property. An ideal property would be one that is within your budget, in good condition, and with the potential to generate a good return on investment. The Mashvisor Property Marketplace is a great place to find off market properties such as tenant-occupied rentals, bank owned homes, short sales, foreclosed homes, and auctioned homes in top-performing markets. Real estate market analysis is an important step in finding the best places to invest in real estate in 2021. To locate exactly what you are looking for, you can use filters like location, listing type (traditional or Airbnb), budget, number of bedrooms, and desired cash on cash return.
- Analyze the property: After spotting an ideal property, use the Mashvisor Rental Property Calculator to analyze its investment potential. This calculator will estimate startup costs, recurring monthly expenses, occupancy rate, rental income, cash flow, cap rate, and cash on cash return. The estimations are based on credible real estate data from Airbnb, Zillow, and the MLS, which Mashvisor uses to apply its machine-learning algorithms.
- Understand landlord-tenant laws: Becoming a landlord requires knowledge of and compliance with local, state, and federal landlord-tenant laws. One of the most important federal laws that landlords should be aware of is the Fair Housing Act. This law prohibits discrimination against tenants based on religion, national origin, sex, color, race, disability, or familial status.
- Buy landlord insurance: Landlord insurance will safeguard your home from sudden loss and accidents like fires, burglary, flooding, and natural disasters. If you are becoming a landlord for the first time, consult an insurance agent to learn what kind of coverage you require. However, landlord insurance does not cover tenant’s belongings. You should therefore encourage your tenants to buy renters insurance.
- Prepare the home for renting out: Ensuring your house for rent by owner is move-in ready involves cleaning up, making any necessary repairs, installing upgrades, and getting the home up to code. This will make the investment property comfortable and more attractive to renters.
- Set your rent right: If your rent is too high, you might not find tenants. On the other hand, charging a low rent will mean missing out on potential profits. To decide how much to charge, find out the rental rate of similar rental properties (rental comps) in the area.
- Find and screen tenants: You can market your houses for rent by owner using flyers, open houses, social media ads, or word of mouth. Be sure to run a background and credit check on all potential tenants. Screening is a crucial part of how to rent a house when becoming a landlord for the first time.
- Sign the lease agreement: The real estate lease agreement outlines the rules and expectations for both the landlord and the tenant. Get a legal professional to look at the document before using it. You and your tenant must sign the agreement before the rental property is occupied.
- Maintain the property: Becoming a landlord involves regular maintenance tasks like servicing HVAC units, cleaning gutters, pest control, and property walkthroughs. If you don’t have the time or experience, you can hire a professional property manager to handle these tasks.
What to know before becoming a landlord
Though being a landlord can be a very lucrative venture both in the short and the long term, it comes with significant risks which real estate investors should be aware of. Sometimes investors buy a rental property before knowing what it really takes to run a successful real estate business. Here are the most common dangers associated with being a landlord which get overlooked:
1. Extended vacancy
A rental property could experience extended vacancy due to hard economic situations, poor property condition, setting the rent too high, poor marketing, or being in an undesirable location. To avoid this, do your due diligence before choosing a home for purchase. Use effective marketing strategies and set a reasonable rent.
2. Bad tenants
Having an irresponsible tenant can be a nightmare for any landlord. Bad tenants can be the source of numerous problems including non-payment of rent, property damage, and complaints from neighbors. Having a thorough tenant screening process will minimize the chances of ending up with such tenants.
3. Economic downturn
No one can predict future economic conditions. In an economic downturn, good tenants could lose their jobs and be unable to pay rent. You might be forced to lower your rates, which could leave you with a negative cash flow. To prepare for the unexpected, it would be advisable to own multiple rental properties in different locations. A well-diversified real estate portfolio means that an economic downturn in one location will not necessarily affect all your properties. You could also consider becoming a Section 8 landlord since your rental income will be guaranteed.
4. Unexpected maintenance
Maintenance is inevitable when becoming a landlord. Huge maintenance issues could cost landlords tens of thousands of dollars. While insurance could cover some unexpected costs, you might have to pay for others out of pocket. To minimize this risk, don’t invest in properties that are more than 10 years old. Moreover, get a professional home inspector to check the property before signing on the dotted line.
5. Lazy property managers
Having a lazy property manager means poor tenant placement, higher risk of vacancies, and badly maintained rentals. Do your research before hiring a property management company. This should include checking reviews from previous or current clients.
If you’d like to learn more about what it takes to become a landlord, make sure to watch our video below:
Despite all these pitfalls, becoming a landlord is definitely something worth considering. Before investing in rental property, be sure to have a becoming a landlord checklist to help you get ready before you start renting homes. How much profit should you make on a rental property? The return on investment on properties for rent all depends on various factors including location, condition of the home, amenities provided, and rental marketing skills. To start searching for and analyzing investment properties for sale across the US market, sign up for a 7-day free trial of Mashvisor followed by a 15% discount for life.