While there are plenty of ways to invest in real estate, becoming a landlord by owning a rental property is the most common for many aspiring investors.
There are plenty of reasons why being a landlord can be a profitable venture. For example, your investment property will provide a steady stream of rental income while it appreciates in value. In addition, landlords may also be able to enjoy certain tax advantages while building equity in the house. The idea of making money in real estate is enough for anyone to start thinking about how to become a landlord.
However, buying and renting out an investment property can be complicated. Furthermore, because of the time and money involved in the process, the decision of becoming a landlord should be exercised with caution. This guide covers the most important aspects of how to become a landlord, split into 2 parts. After reading this, you’ll learn the right steps to take to start real estate investing in property, what to expect from becoming a landlord, and how to run your rental property business. Let’s get started.
How to Become a Landlord Part 1: Buying a House
The first part of the real estate investing process is buying an investment property. In order to successfully achieve this, beginner property investors need to take the following steps:
Get Your Financing in Order
The first question that pops up when you’re thinking of buying an investment property is: How can I afford it? Paying all cash for the purchase requires a large capital to cover both upfront costs and ongoing costs. Because not all of us have bags of money to invest in real estate, the most common path to financing a rental property is to save enough money for a down payment, then get a mortgage to cover the rest.
Conventional mortgage loans are the most common for beginner investors. However, there are a few things you need to sort out to be able to qualify for a mortgage loan. First of all, unlike the 3% down payment on a primary residence, you’ll need a greater down payment (at least 20%) to buy your first rental property and become a landlord. Mortgage loans also require high credit scores (620 – 680+). Lastly, your current income has to be enough to handle mortgages payments for both your residence and your new property.
There are multiple options available for real estate investors to choose from besides conventional mortgage loans. Other alternatives for investment property financing include seller financing, private money loans, and hard money loans. Of course, different loan options come with different benefits, and you need to choose the one that best suits your financial standing and investment goals. So, make sure you do further research on financing rental properties before moving on to the next step of how to become a landlord.
Find the Best Place to Buy a Rental
After ensuring that you’ve got the financing part covered, the first thing to decide as a real estate investor is where to buy a rental property. In real estate investing, location is the first factor that determines your total costs as well as your potential return on investment. A house for sale that seems to be a steal might be priced lower because it’s in a neighborhood where most people don’t want to live – with poor schools or higher crime rates, for example. Buying in such a location is not a smart investment decision.
When researching the best tips on how to become a landlord, many will advise you to invest in a property that’s near where you live. This allows you to check on it periodically, take care of repairs yourself, and meet with prospective tenants more readily. While many claim that investing out of state is a gamble, this doesn’t exclude the fact that you might find better deals outside of your area.
The best thing for property investors to do is to perform a real estate market analysis. This will provide you with data and information about the location’s property prices, values, appreciation trends, and more! Moreover, a neighborhood analysis is also a must. You want to buy in a neighborhood that is either already stable or is up and coming. In addition, check what real estate rental comparables (comps) are selling for and look at the rental rate in the area. All of this will give you an idea of whether the location will offer profitable investment opportunities or if you should invest somewhere else.
Find a Rental Property for Sale
In addition to the location, choosing the right type of rental property is also a big decision when learning how to become a landlord. A real estate investor can invest in a single-family home, multi-family home, condo, townhouse, beach house…the options are endless! The best type of income property for you depends on a number of factors including your budget, rental strategy, and target tenants.
After determining which type will bring you the highest profits, it’s time to find a rental property for sale of that type. This might be a challenging step for beginner investors, especially those investing out of state. However, with the right investment tool, you can actually find rental properties for sale in a matter of minutes! This tool is Mashvisor’s Property Finder Tool.
Our Property Finder allows you to customize your property search using different filters. So, you can select which city/cities you’re looking to invest in, what type of property you want to buy, and your budget. Then, the tool will show you a list of investment properties for sale that only match your criteria. On top of that, these properties will also be the ones that generate the highest return on investment in that area! Thus, you’ll be able to find the most profitable property that you can buy to start making money in real estate right now.
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How to Become a Landlord Part 2: Renting Out a House
After acquiring your first rental property, now comes the part of actually running your real estate investing business and becoming a landlord. Here’s all you need to know:
Understand Your Responsibilities
While there are many financial advantages of renting out a house, it’s important not to forget the reality and responsibilities of how to become a landlord including the following:
- Financial obligations: You’re responsible for meeting your monthly mortgage payment even if the rental property is vacant or if your tenant has not paid his/her rent.
- Legal obligations: As a landlord and rental property owner, you have to understand and abide by the rules and regulations relating to rental housing. You’re legally responsible for complying with all local, state and federal laws. If you don’t, you can be fined and tenants can file lawsuits and complaints against you.
- Round-the-clock availability: If your tenant calls at 3 AM due to water, electrical, plumbing or any other emergency, you have to be available to deal with it. If you can’t be available to respond to the tenant’s problems, you must designate someone to act and make decisions on your behalf.
- Maintaining habitability: Landlords are required to maintain safe and habitable properties for their tenants. If a tenant or visitor gets injured as a result of unsafe conditions, you can be held liable.
- Rental licenses: In some cities in the US housing market, landlords have to obtain a rental license, pay rental taxes, and annually meet an inspector. Also, while some laws can require basic things (like installing smoke detectors), they can go much further. For example, in some cities, landlords must give their tenant the first right to purchase the rental before selling.
Figure Out the Right Rent
The price you charge for rent is an important consideration that’ll affect your bottom line and return on investment. If you charge too much, you might not find a tenant; but if you charge too little, you might not make ends meet. When learning how to become a landlord, figure out how much to charge for rent and set a rate that’ll allow you to:
- Cover your operating expenses (mortgage payments, property taxes, insurance, maintenance, repairs, utilities, and administrative costs)
- Earn a reasonable return on investment
- Be competitive within the local rental market
To set the right price for rent, find out what similar rental properties (comps) in your area are renting for, and then price yours accordingly. Typically, Craigslist or local real estate agents can give you an idea of what rents are in the area where you’re investing. If your income property has extra features that make it more desirable, you may price it slightly higher.
Then again, if rental comps are somehow more desirable, a landlord may need to set a lower price to be competitive. You also need to take supply and demand into account. If demand is high and it’s hard for people to find housing, you can set a higher rent. But if supply is high, a smart landlord will decrease the rent to attract tenants.
If you’re thinking this is too complicated, you’ll be happy to learn there’s an investment tool that makes it easier for real estate investors – the Rental Property Calculator. With this tool, you can check the location where your investment property is and it’ll show you the median monthly rental income of that location to give you an idea of what landlords are charging.
You can find a Rental Property Calculator right here at Mashvisor! To learn more about our product, click here.
Maintain Your Rental Property
The last step in our guide on how to become a landlord is to maintain your investment property. Maintenance keeps your tenants happy and more likely to pay on time and stay for the long-term. It’ll also save you the cost of larger repairs if you take care of small issues as they happen. In addition, by properly maintaining the property, you’re keeping your investment in good shape which increases its value.
Maintaining the property starts with simple things like scheduling consistent pest control services, getting the gutters cleaned regularly and checking the HVAC units yearly. This allows you to know what works, what doesn’t but can be fixed, and what needs to be entirely replaced. This also keeps landlords aware of any damages that the tenant has caused. In general, a good rule of thumb for real estate investors is to set aside at least 1% of the price of the property for yearly maintenance costs.
Part of maintaining rental properties is keeping property insurance coverage up to date. As a landlord, this insurance is different than the insurance on your primary residence since investment properties are covered as if they were a business. Having the right amount and the right type of coverage can save you thousands of dollars if a storm hits or the property gets vandalized.
Final Words on How to Become a Landlord
In today’s real estate market, becoming a landlord can be a smart way to grow your wealth – but it isn’t for just anybody. Moreover, do not mistake becoming a real estate investor in a rental property for a way to get rich quick. This is a long-term investment that needs to be approached carefully and it turns into a full-time job.
This guide was put together to help you increase your chances of success and profitability with a rental property business in 2019.
Did we miss any major point that you think needs to be covered regarding how to become a landlord? Don’t hesitate to leave a comment down below!