Are you looking for a quick and easy way to become rich? Well, then owning a rental property and becoming a landlord is probably not the best option for you. Nonetheless, if you are looking for good gains in the medium to long run, you should definitely consider buying a rental property.
Although making money with rental properties might be more complicated as well as time- and effort-consuming than other types of investments, it is also safer – generally, you can’t just lose everything because of a stock market crash, for example.
So, if you are considering investing in real estate, you should first learn what becoming a landlord is actually like. The basics are: a landlord is a real estate owner who rents his/her property to another person. However, don’t be mistaken – the landlord is not a person who just collects his/her money at the end of the month. Becoming a landlord is a business as well as a job, even if a part-time one. Thus, you have to think and plan carefully to make money as a landlord. So, now comes the question – how to become a landlord?
1. Buy A Rental Property
If you are not already owning a rental property, the first step would naturally be buying a rental property. There are many issues which you need to consider when choosing among rental properties: the location, the kind of property, the average rent in the neighborhood you are thinking about, the mortgage, property taxes, etc. After all, the property that you buy will be the main determinant of how much you will make as a landlord. With regards to the location, ideally you want to buy a rental property close to where you live. This will help you save on transportation costs and allow you to show the property to potential tenants, check on the property periodically, and take care of some of the needed repairs. With respect to the kind of property, if you are becoming a landlord for the first time, start out small and simple. Remember, you are buying a property to make money out of it, not your ideal home for yourself and your family.
Related: Buying a Rental Property
2. Figure Out The Money
Next, do the math. Before you even buy a rental property, make sure that there is money to be earned in your local market. Calculate the capitalization rate. The cap rate measures the rate of return on an investment property based on the expected annual rental income divided by the purchasing price. To calculate this, you need to obtain a more or less accurate estimate of the rent you will be able to collect from your future investment property. Mashvisor offers data on rents throughout the US and offers an interactive investment analysis that automatically calculates cap rate.
The landlord income that you receive in the form of rent will supplement the monthly mortgage payments; it could even match or exceed what you pay the bank. But don’t forget to include other expenses – which can add up to a lot – when doing the math. You will need to pay property taxes, and these can be much higher than what you pay for your primary home.
Landlord insurance is also higher because of the higher associated risks when you have renters living in a property. Maintenance costs can vary significantly based on whether you choose to do repairs on your own (which can be very time-consuming) or to hire a professional. Good news is that you might be eligible for some tax benefits on costs associated with owning and managing your rental property: depreciation, insurance, mortgage interest, property repair, travel expenses, and others.
3. Know The Laws
Learn the landlord-tenant law. First, there are federal laws related to habitability and anti-discrimination that you need to be familiar with. As a landlord, you cannot discriminate against tenants based on race, color, national origin, religion, sex, disability, familial status, children, etc. In addition, most states have further landlord-tenant legal provisions. These can regard a variety of issues such as security deposits, level of access to the property, notice you need to give the tenants before you want them to leave, etc.
4. Pick Good Tenants
Once you have bought an investment property and are on your way to becoming a landlord, you have to screen potential tenants. You should do a background and credit check on potential renters – it is worth the time. Although a credit score should not be the sole reason you accept or reject a tenant, it is a useful screening tool. Take the time to check references, particularly from employers and past landlord. You should also conduct an interview with the potential tenants to make sure you are comfortable communicating with them. Throughout don’t forget that it is illegal to discriminate against tenants based on the criteria listed above.
5. Write A Lease
Customize the lease. There are standards lease forms available online that you can use as a template. However, you need to change the agreement in a way that matches your situation and preferences. Be specific. For example, do you allow pets? What kind? How many? Should dogs be leashed in the common areas?
6. Maintain The Property
Inspect your rental property regularly. That’s why it is important to choose a location that is convenient for you. To avoid problems and misunderstandings with the tenants, explicitly state how often you want to perform inspection of the property in the lease documents. Three months is usually a reasonable period which allows for keeping an eye on the property without disturbing the tenants too much. Remember to document the move-in condition of your rental property by taking pictures in order to establish a baseline. If you find any problems during an inspection, it is a good idea to issue a notice and set another inspection in a week or two.
7. Stay Organized
Do proper accounting and bookkeeping. Start from day one, don’t postpone this work for later as you will get lost. You have to keep accurate records of all income and expenses and be able to provide documentary evidence. You will need these documents in order to monitor the rental property activities, to prepare financial statements, and to provide evidence if you are subject to an IRS audit.
8. Decide If You Need Property Management
Consider whether it is worth hiring a property manager. A property manager comes at a price, but he/she will save you a lot of time and effort. Usually a property manager can market your rental property, select tenants, maintain the property, create budgets, and collect the rent. If you opt for hiring a property manager, identify his/her responsibilities clearly. Whether you decide to go for a property manager or do these tasks on your own depends on your financial situation, other commitments, and personal and professional skills.
Before you jump into becoming a landlord, make sure to know what becoming a landlord is all about. While it can be a way to make money, it is not about getting rich quick. Learn your responsibilities and proper laws first. After all, becoming a landlord is opening a business like any other, so it should be considered and tackled carefully.