When becoming a landlord, several key factors need to be considered before purchasing a rental property. Investor and landlord, Kaycee Miller offers her insights on buying your first rental property in this “Ask a Landlord” video.
Thinking about buying your first rental? Becoming a landlord or real estate investor for the first time can be exciting, but there are some key factors you should understand as you prepare.
Real estate investing is one of the most reliable ways to build long-term wealth, but understanding the financial, legal, and emotional side of becoming a new landlord is crucial. In this article and video, I walk you through all you need to consider and how to prepare for your first rental property investment.
By the end, you’ll have a clearer idea of what you can expect as a landlord and rental investor. I will walk you through the importance of understanding landlord-tenant laws, whether at the local or national level, as this is the most essential part of truly understanding your responsibilities as a rental property owner and housing provider in our country. You’ll also learn about financials beyond just thinking about cash flow in terms of rental income and mortgage payments. You will also have a few key tips that will set you up for success when you take the leap.
Key Takeaways:
- Rental expenses are different than owning a home yourself due to differences in insurance, wear, and management costs.
- Landlord-tenant laws change frequently — it is very important to know your laws.
- Emotions, both positive and negative, should stay out of consideration when renting out a home.
How to Prepare for Your First Rental Property Investment – Financial, Legal, Emotional
How to Prepare to Buy Your First Rental Property – Video Transcript
Thinking about becoming a landlord? Or, maybe you’re considering what it would be like to invest in your first real estate property. Well, there are a couple of things that you might want to consider before taking this exciting next step in your real estate investment strategy.
My name is Kaycee Miller. I work for Rentec Direct property management software. I’m also a landlord, an investor, and a real estate developer, and I’ve been writing in the industry for over a decade now. When it comes to buying your first rental property and taking that step to be a landlord, there are a couple of things that you want to think about. It’s not just collecting rent checks and watching that rental profit and income make your strategy grow for your investing. It involves some financial prowess, considering what your different options are, knowing what your legal strategy is going to be, and, of course, there’s an emotional element. Or, really, I should say, an emotionless element that you need to consider for owning and managing rental properties.
The Financial Side of Becoming a Landlord
Let’s break it down a little bit. I have about 20 units in my real estate portfolio. We do use a property manager, but a lot of them were self-managed at first, and these are some lessons we’ve learned along the way.
When it comes to the financial side of it, it’s more than just thinking about cash flow in terms of rental income and mortgage payments. And even if you own your current home, there are different expenses that come with owning a rental property compared to a primary residence.
With a rental property, sure, you have your mortgage and you have your property expenses, but maintenance expenses might be a little bit more than your traditional home because the wear and tear is a little bit higher with that rental property. We always say a good rule of thumb is to take about 10% of your rental income each month and put it aside in a reserve fund. Put it aside towards maintenance expenses.
In fact, we might even consider, in those first couple years, taking a little bit more each month to put towards a bigger reserve, because that reserve can grow over time and create this nice nest egg of money that you might use to replace a roof or an appliance or those big capital expenditures that you might want to use on your investment property. Another expense that you really have to consider is an insurance policy. You can’t just use your traditional homeowner’s insurance policy; you have to get a specific landlord insurance policy when you own rental property.
Learn more: Do You Have the Right Insurance for Your Rental Property? | Landlord Insurance vs. Homeowners Insurance
You also might consider your management fees. If you’re self-managing, what does that management fee mean? If you’re using a property management company, that’s pretty obvious, right? You’re paying a percentage for someone else to manage the property. But when we look at doing our expenses, I always recommend, if you are self-managing, still pay yourself that management fee because that goes into your big picture of your cash flow.
You can separate that income, take a little bit extra, and then you can see the profitability of a property if you are using a property manager, and then pay yourself that management fee. It’s a great way to set yourself up with the true income and expenses and the financial reality of having a rental property.
Learn more: Real Estate Investing for Beginners | Types of Properties to Build Wealth – VIDEO
The Legal Side of Becoming a Landlord
Let’s think about that legal side of owning rental property. It is vital that you understand the landlord-tenant laws in your area and comprehend your responsibility to adhere to those laws. This is the most important part of really comprehending when you own a rental property and you’re a housing provider in our country, and as a landlord, it is your responsibility to really understand the landlord-tenant laws in the area where you have rental property.
There are going to be city laws, state laws, county laws, and federal laws that you really need to understand and pay attention to. These laws include regulations around evictions, security deposits, application fees, and legal lease terms.
Anytime you mismanage any of those items, it can become your responsibility as a landlord. Not to intimidate you, it’s definitely something millions of people do in our country as landlords, but you really have to understand your responsibility and pay attention to when laws change. It’s great to join a landlord association or use a software that helps you be legally compliant.
There are lots of tools, even in Rentec Direct, that we have created and developed to help our clients be compliant with rules like application fees, how security deposits are managed, and how rent can be collected. All these tools within the software can help a landlord be compliant with all of these important laws that tell someone how to help their tenants and maintain a great property.
Learn more: The Best Way to Collect Rent Payments Online
The Emotional Side of Becoming a Landlord
The other part of it I mentioned was that emotional side of being a landlord. And I joked about being emotionless because I think it’s important to take emotion out of it. Buying a rental house and having it as a rental property is a huge expense, and it’s an asset in your portfolio. Naturally, there’s going to be some emotional attachment when you’re spending this much money. But I think it’s important to take that emotion out of it and recognize that this asset is a business, and you need to take emotions out of it to make strategic, smart business decisions.
You’re taking the emotion out of approving a tenant. You can’t pick someone because you like them the most; you need to follow your landlord-tenant laws about picking someone who is qualified. You can’t get frustrated that someone isn’t maintaining the property the way that you would because you’re the homeowner, versus a tenant. You can’t get frustrated with them and give them notices if they’re not breaking any lease terms. Maybe they’re not keeping the front yard cut the way that you would, but if it’s not in the lease, then they’re not breaking a lease term, and you can’t really bother them.
We’ve written articles on the Rentec Direct blog about “Is this landlord harassment, or just a picky landlord thing?”. It’s important you understand the difference as you start your landlord journey.
Getting Started as a Landlord
When you’re getting started as a landlord, it’s exciting. But let’s consider the financial aspects, the legal aspects, and the emotional aspects that come with owning and managing rental property. My name is Kaycee Miller, and I work for Rentec Direct property management software.
I’m a landlord and a property manager, and I love sharing tips on how we can help you succeed in rental management. Make sure to check out the Rentec Direct blog, where we’ve written about all sorts of topics over the past 15 years. We’ve covered almost everything, and if there’s something we’re missing, please let me know. I can talk about it on video or write an article about it.
We love covering these topics, and things change all the time. Please keep us updated with questions, and I’ll keep you posted with more tips about what it’s like getting started as a landlord.
