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?
How to Become a Landlord Part 1: The 6 Steps to Becoming 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.
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.
Related: 11 Costs First Time Real Estate Investors Should Consider
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.
Related: Professional Property Management: Pros and Cons
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.
How to Become a Landlord Part 2: 7 Things to Know Before Becoming a Landlord
Owning a rental property can be a very lucrative venture. With home prices continuing to rise in the US, the demand for
rental homes continues to grow. Becoming a landlord means filling this demand and in doing so, you’ll enjoy a good return on investment. Of course, being a landlord comes with a number of other benefits like asset diversity and tax deductions. When you retire, a rental property can even be a good source of passive cash flow.
However, simply signing on the dotted line and becoming the owner of a rental property doesn’t guarantee that you will be a successful landlord. It’s best to prepare yourself by learning a thing or two before you even start searching for property. Here is what to know before becoming a landlord:
You need to choose the right location
When it comes to buying a rental property, the first thing you need to know is that the location can either work for or against you. The neighborhood where your rental property is located will determine the profitability of your investment.
You can find the ideal location for investing in rental properties for beginners using Mashvisor’s real estate heatmap tool. This investment tool will help you distinguish different neighborhoods based on performance. It comes with four main filters; rental income, listing price, Airbnb occupancy rate, and cash on cash return.
When you click on the name of any area, you will land on the neighborhood analytics page which provides the following additional data:
- Number of properties (investment, Airbnb, and traditional)
- Walk Score
- Optimal rental strategy, property type, and number of bedrooms
- Real estate comps
- Historical traditional and Airbnb rental income
With this data, you are sure to choose a great location for buying a rental property and becoming a landlord.
Related: How to Evaluate a Neighborhood Before Investing
Finding the best-performing rental properties for sale is key to your success
Once you’ve identified a great neighborhood, the next step in becoming a landlord is to find the right single-family home, condo, multi-family home, or apartment. And by this, we mean a rental property that promises positive cash flow and good returns. This is key to your success – you don’t want to purchase just any property for sale.
Strategies you could use to find the best investment property include driving for dollars, hiring a real estate agent, checking newspaper ads, or direct mail. Alternatively, use software like Mashvisor’s property finder tool. This software allows you to find properties that match your requirements in terms of optimal rental strategy, listing price, property type, return on investment, and market availability. The property finder will show you the best performing homes in terms of rental income, rental property cash flow, occupancy rate, listing price, cash on cash return, and cap rate.
Get your finances in order early on
Before becoming a landlord, you need to get your finances in order. Lenders look at several things when considering your eligibility for a loan:
- Credit score – This number shows lenders if you will be able to pay off a mortgage. Most loans out there require a credit score of 620 or more. If you have a poor credit score, do your best to improve it before applying for a loan.
- Debt-to-income (DTI) ratio – DTI refers to the amount of your income that goes towards debt repayment. A low debt-to-income ratio will boost your chances of getting approved for a loan. You can improve your DTI by paying off as much debt as possible and avoiding credit cards.
- Cash reserve – How much money do you need to become a landlord? Well, to qualify for a mortgage, you might be required to make a down payment of up to 20%. Make sure you have enough cash saved up to cover the down payment and closing costs.
When it comes to mortgage options, the most common are the conventional mortgage, Veterans Administration (VA) loans, and Federal Housing Administration (FHA) loans. Once you’ve chosen a lender, you will need to get pre-approved for a loan. Presenting a pre-approval letter to a seller will enhance your chances of clinching the deal.
Alternative sources of funding when buying your first rental property include hard money lenders, real estate partnerships, seller financing, private money lenders, and home equity loans.
Learn how to screen tenants
When it comes to traditional rentals, tenant screening is very crucial. Proper screening will help you identify tenants that are more likely to pay on time, take care of your property, and stay longer. It will help you better avoid eviction and the costs that come along with it.
Find out if your potential tenant is employed and how much they earn. Check their credit rating, criminal record, and eviction history. Ask potential renters for references from employers and previous landlords. Preferably, have a face-to-face meeting with tenants before allowing them to sign the lease agreement.
Related: How to Screen Tenants for a Rental Property: 7 Steps
Get familiar with the fair housing laws
It is very important that every first-time landlord understands and follows the fair housing laws. These are federal laws that prohibit discrimination of tenants based on factors such as sex, national origin, race, familial status, religion, age, and disability. Violating these laws could result in serious consequences for any landlord. However, the following kinds of homes are exempt from fair housing laws:
- Housing units run by private clubs and religious organizations which limit occupancy to their members
- Owner-occupied residences with not more than four rental units
- Housing specifically designed for senior citizens
Have a comprehensive lease agreement
You cannot talk about how to become a landlord without mentioning the lease agreement. This is a legal document that will protect your interests as a landlord. It usually contains details such as:
- Rental rate and deposits
- The due date for rent
- Fees or penalties for missed or late payment
- Right of entry
- Pet policy
- Activity restrictions
Before finalizing the agreement, be sure to check with a real estate attorney that is familiar with landlord-tenant law. This will help you avoid potential legal issues as you are becoming a landlord.
Related: 9 Things Every Tenancy Agreement Should Include
Adhere to health and safety requirements
Due to the coronavirus pandemic, there is a new aspect to consider before becoming a landlord and that’s COVID-specific health and safety requirements. This is especially important if the rental property you’re purchasing will house multiple tenants, contains common areas, or if you use the property as an Airbnb.
The US Centers for Disease Control and the World Health Organization have come up with mandatory safety practices for renting a house on Airbnb. For example, guests and hosts must keep a distance of 6 feet from each other at all times. In addition, they must wear a mask when engaging in person. Anyone that has been exposed to COVID-19 is not allowed to host or travel. There is even an enhanced Airbnb cleaning protocol that hosts must follow between each stay.
Conclusion
It’s important to know that becoming a landlord is a long path that requires a lot of hard work. However, if done right, that path will be lined with wealth!