How To Become a Landlord
Investing in real estate is a great way to earn passive income and diversify your financial portfolio. One of the many choices you’ll make when considering a real estate investment property is whether you will rent out the property and if you want to be a landlord in order to maximize your profit.
If you’re considering a career change where nobody’s your boss, entering the real estate
market as a landlord might be a great fit for you. However, it can be quite confusing and
challenging trying to navigate the transition into a landlord.
If you’d like to become a landlord, or if you’re simply just curious about how people become landlords, then follow along as we dive into some tips and methods for a budding proprietor.
In order to become a landlord you will need to:
- Acquire or purchase a property that you use as your long-term rental
- Learn and understand all local, state and federal landlord-tenant laws
- Determine fair market rent for property
- Create accounting procedures for collecting rent, saving reserves, and tracking income and expenses
- Create a tenant screening policy
- Market your property
- Use a legal lease agreement and lease addendums
- Collect rent and a security deposit
- Track and manage maintenance requests
- Manage tenant turnover and move outs
- Perform property inspections
- Nurture your landlord-tenant relationship
- Actively communicate with your tenants and be responsive to their needs and inquiries
- Understand the legal eviction process and your rights as a landlord
- Utilize online tools and property management software to streamline management tasks
Where to Start When You Become a Landlord
The first thing to do is to figure out how you’re going to acquire the property. Is this an inherited property from a relative or are planning on purchasing a rental property.
Invest in a Property to Self-Manage
There are a number of options available, and while it’s entirely doable to purchase a
property outright with cash, it’s more likely that you’ll be taking out a loan on the property.
These are three of the most popular loans:
- Non-Owner-Occupied Mortgage: This type of mortgage is pretty self-explanatory in that it’s a mortgage on a property that would not be your primary residence. This type of mortgage has higher interest rates, shorter repayment terms, and higher down-payment requirements than a standard mortgage.
- Home Equity Loan: This loan is a great option for a second property if you already have a primary residence. Taking a loan out against your current residence will give you lower interest rates and more lenient repayment terms.
- Federal Housing Administration Loans: Also known as an FHA loan, these are great for anyone that is looking to become a landlord, but don’t have their own residence yet. These loans are strictly for a property that you’re going to make your primary residence, however, these loans are allowed to be used on properties that have up to four units, provided that you will be living in one of the units for at least 1 year.
Once you have an idea about how you would like to go about financing the property, it’s time to actually acquire the asset. Knowing how you plan to finance your venture will also show you your price range.
Find Your Rental Property
As the old adage of real estate goes, it’s all about location, location, and location. The placement of your rental can easily make your experience renting it out much easier, or much more difficult. There are a few things to take into account when trying to find the best-placed building to purchase:
- Centrality - It’s important to know how far the property is from modern luxuries; luxuries such as the central point of businesses in the area, the distance from highway access, as well as the proximity to schools and shopping centers.
- Type of Neighborhood - While mostly a preference, it’s one that should be considered ahead of time. Basically, this just means you should consider the demographics of the area and if that’s who you want to rent to (i.e. is it a college town, a predominantly retired community, young professionals, etc.)
- Median Income - This lets you know what the average resident is able to afford, but keep in mind that this also means that half the incomes in the area are above the median and below it. The average rent of the area should also be considered.
- Local Amenities - This refers to what places are within walking distance, places such as parks, gyms, public transportation, and restaurants/cafes. Although this might not be a selling point to everyone, it’s absolutely a selling point to some. You can use resources such as walk score to help simplify finding that answer.
While it’s unlikely that you’ll find a place that checks all of your boxes, hopefully, you’ll be able to find one that checks most of them. Once you find that property, it’s time for you to take the leap into becoming a landlord; buying your property.
Owning A Rental Property as a New Landlord
The actual process to acquire your rental is very similar to buying a primary residence.
The only true differences exist in the financing method (and that you don’t intend to move
in immediately upon purchase).
After purchasing your rental property, the next steps involve getting the property in shape for tenants. This same work will occur after every tenant during turnover. The only difference is that the first time is likely to be a bit more work, depending on how rent-ready the property is currently.
Here are a few steps to lead you toward your first tenants:
- Start scheduling for maintenance and vendors (for example, plumbers and locksmiths) to make necessary alterations to the property as soon as you close on it.
- Begin advertising your property to attract tenants. You can get some of the background screening out of the way while your vendors are making alterations to the place.
- Give the place a final inspection after your vendors have finished. You need to make sure that everything was done to your satisfaction and it’s a good idea to double-check so you don't forget to clean anything, or if any unknown issues arose during the alterations.
- Finally, meet with the new prospective tenants and give them a showing of the place as well as a copy of the lease.
- Celebrate! Once you have your tenants sign the lease, you are officially a landlord.
Determine Fair Market Rent for your Rental Property
One of the many roles of a property manager and landlord is setting the right rent
amount for an investment property. The right price for a rental property is a balance
between wanting to maximize your income from rent payments and wanting to ensure the
property is continuously occupied by trustworthy tenants.
Factors that help you set the rental price of your property:
- Number of bedrooms
- The inclusion of utilities, like electricity, gas, water, or Internet
- The allowance of pets on the property
- Property extras like additional storage, garage, parking, or backyard
- Property amenities like those found in multifamily complexes like pools, laundry, recreation room
Evaluate each property you own and determine the answers to the categories above (this also helps you develop the marketing features of the property when you advertise the property to future tenants). Use this information to find comparable rentals in the neighborhood and town of the rental you are determining the rent rate for.
Finding Good Tenants with Great Tenant Screening Criteria
Once you’ve established your rent price, you will want to create
screening criteria checklist that meets fair housing laws and will help you
find the most qualified resident for your property.
At a minimum it is good to evaluate an applicant’s credit report, criminal background, and eviction history. Kindly remember that the federal fair housing act and the fair credit reporting act are important laws that all housing providers, including landlords, must follow. Additionally, each state, county and municipality may have additional housing laws you must know and meet.
Market your vacant rental property
In order to find great tenants you need to market your vacant rental so people
know it is available. There are dozens of housing websites like Zillow and
Trulia that share rental listings.
You need to find out how renters in your area find housing. For example, in southern Oregon Craiglist used to be a popular site to find vacant rental properties but now a lot of vacancies are shared on Facebook.
You should ask other landlords or property managers in your area how they find new tenants. And consider joining a local landlord association or meetup where your peers will be happy to give recommendations.
Use a legal lease agreement and lease addendums
In order for your lease agreement to be valid you must ensure that the terms
and conditions are legally allowable. You cannot choose to have a rule for your
property that is illegal under your local housing laws.
To find legal lease agreements, consider checking a landlord forms website, your local landlord association, or enlisting the help of an attorney who will be able to review your lease.
Collect rent and security deposits
Most rental agreements require residents to pay rent each month. Consider how you
would like to collect rent. Online rent collection is convenient for residents and
will automatically populate into your accounting software. Plus, offering
rent payment options have been proven to increase on-time payments and reduce late
fees for tenants.
Collecting a security deposit allows you to hold money for your renter that can be used for unpaid rent and/or repairing tenant damage upon move-out, depending on your state’s laws. You’ll need to refer to your local landlord-laws to determine how much of a security deposit to collect and if you need to hold those funds in a trust account.
Track and manage maintenance requests
Any home will be prone to normal wear and tear and maintenance issues.
Since you will not be primary resident in your rental property, you need to
give your tenant an easy way to report maintenance issues. You might decide
a text from a tenant is a great way to let you know about a maintenance issue,
but you might consider the benefits of property management software to tracking
and maintaining maintenance requests and workorders.
A rental software with workorder management allows your tenants to submit workorders online, along with image attachments, which you can assign to vendors and track the status. You’ll be able to have a record of your communication and quickly follow up with your residents as needed.
Manage tenant turnover and move outs
When a renter moves out, you begin the tenant turnover process which includes coordinating with your renter move out dates, scheduling inspections, making repairs, returning security deposits, marketing the vacancies, and preparing the property for a new tenancy. Tenant turnover can be an expensive process mostly due to the time required to complete all the tasks.
Perform property inspections
Since you wont be actively living in your property, the best way to maintain its condition is to perform routine rental property inspections. Inspections allow you to identify maintenance issues before they become expensive repairs. You’ll also be able to check in with your tenant to reinforce your landlord-tenant relationship.
Nurture your landlord-tenant relationship
Having a great landlord-tenant relationship can make tenancy a breeze, and can
set you up for success for this lease term and beyond. And while there will be
roadblocks and situations that require careful communication, overall, the effort
you put into developing a great landlord-tenant relationship will certainly pay dividends.
To ensure a great landlord-tenant relationship, both sides must be willing to foster its growth. Landlords must be willing to listen to their renters, and always approach the interactions through a lens of customer service. It can be useful to create a fun and enjoyable environment for your renters–this is particularly true for multifamily properties where other properties will boast of their own amenities. Cultivating a sense of community and utilizing resident events whenever possible is a great way to do this.
Help ensure that your tenants become invested in your property, and give them the tools to make the space their own without causing damage. Above all, ensure that you have set knowable expectations for your renters from the start. At move-in, go over the lease details and elaborate on your maintenance response policies and procedures. Good communication is the key foundation of the relationship with your renters.
Actively communicate with your tenants
Your tenants should feel comfortable reaching out to ask any questions or voice
concerns at the property. This will ensure that they are satisfied with their
rental experience and will help prevent damage.
Tenants who have multiple ways to contact their landlord or manager are much more likely to reach out with a small problem; this means that you are much more likely to find out about a simple maintenance issue before it becomes an expensive maintenance disaster. This also means that you are tenants are going to feel more confident expressing concerns before they become deal-breaker issues.
Offering multiple sources to contact you can ensure that you’re not vetting phone calls all day long. An email address or a tenant portal through property management software can be a much better contact option for tenants who have a small and non-urgent issue. Tell your tenants that they are welcome to call your phone with any important or urgent issues that need to be addressed more quickly.
Understand the legal eviction process and your rights as a landlord
Should you experience lease violations or non-payment of rent, you might need to
move forward with an eviction
in order to get the resident to vacate the property.
Each state and city has a specific legal process for how to move forward with eviction.
If the eviction process is not followed exactly, you might risk voiding the timeline or
worse, owing your tenant money.
If a renter does not pay rent, you should check our local laws and consult with an attorney about how to move forward with a cure or quit notice and eviction.
Utilize online tools and property management software to streamline management tasks
Online tools for rental management give you convenient ways to fill vacancies,
collect rent, maintain accurate accounting records, and communicate with your tenants.
With all the tasks you undertake when you become a landlord, finding a digital tool to
help you manage all your new roles will help you streamline your workflow.
Property management software is specifically designed with landlords in mind, giving you one system to track your tenants, properties, and cashflow. It can also help with marketing, rental applications, tenant screening, and online rent collection. Most landlord software companies, like Rentec Direct, were created by a landlord who wanted the exact tools you are looking for and need.
The key to finding the best property management software is to assess your current and future needs. The best property management software will give you the tools to grow. As your portfolio and your business grows, you never want to feel you have outgrown your software. While doable, migrating to a new property management software can be time-consuming. For this reason, when evaluating features, be forward-thinking. You need to ensure your needs will be met now and in the years to come.
What To Know Before Becoming A Landlord
You likely have a basic understanding of what becoming a landlord entails: you own a rental property, maintain the property, and people pay you so they can live in it. However, there are some important things to know and consider before you start looking to buy your first rental property.
There are plenty of stories about nightmare landlords, but there are also many stories of nightmare tenants. When you’re just starting out, you’re at your most vulnerable to being taken advantage of by a tenant, even if it was unintentional. It’s vital to perform adequate tenant screening to ensure that you only accept a tenant with an excellent renter history.
Don’t Risk More Than You Can Afford To Lose
You can take all the precautions to vet your tenants before renting to them,
but there can still be unexpected situations that arise. Make sure you have a
financial safety net in place before beginning to rent. Having to rely on somebody
else carries a lot of uncertainty with it, so it’s not advised to anticipate the
income from renting to be guaranteed. This mindset has caused some landlords to
run into trouble with their payments toward the loan on the property.
There have been an incredible number of stories from landlords unable to pay the loans on their property during the height of the pandemic due to the unforeseen job loss. It didn’t matter how well-vetted the tenants were, the unexpected situation of the pandemic caused unavoidable obstacles.
Enlist The Help Of Professionals Of The Field
New landlords can be taken advantage of or make errors simply due to lack of
knowledge of the ins and outs of the rental industry. The best thing that you
can do to protect yourself, in the beginning, is to hire professionals that
have already been in the field to help you out.
The two most important professionals would be a lawyer to draft up rental contracts, and provide advice on legal issues should they arise (like evictions, notices, and changing landlord-tenant laws).
You might even consider using a property management company for certain tasks, like tenant placement, and while you perform the property maintenance or rent collection as the landlord. A property management company can help with facilitating leases, payments, and performing background checks.
Make Room In Your Schedule
If you decide to be a DIY landlord and avoid hiring a property management team,
remember that being a landlord is a profession, and as such, it will require a
good deal of your time. Your time will be spent physically managing the place,
as well as on advertising, giving walk-throughs, shopping around for businesses
to perform specialized maintenance, and more.
Property management software can be a helpful tool to make those extra daily tasks more efficient. A cloud-based property management software can give you access to essential industry-specific tools such as a tenant portal that allows your tenants to log in to and make maintenance requests and pay their rent. You can even utilize built-in tenant screening that connects your online rental applications to instant tenant screening reports. This can cut back on some of the headaches associated with being a landlord.
Regardless, the time investment is especially taxing when you’re just starting out since there will be a lot that you’re unfamiliar with until you’ve become accustomed. It may take a few years before you’re able to relax and actually feel like your rental is generating passive income.
Now that you’re a landlord, you’ll have to ensure that your tenants are happy and satisfied with the property and your maintenance of it. Happy tenants mean longer tenants and better word-of-mouth advertising for you, ultimately limiting the time you’ll spend dealing with tenant turnover for future rentals. As time goes on, it’s important to keep track of all the expenses accrued in the maintenance and upkeep of your property so that you can adjust your price accordingly for future leasing terms.