Steps to Becoming a Landlord: A Comprehensive Guide
Published on Jun 12, 2023Landlords
Do you want to know how to become a landlord? Are you considering turning your current home into a rental property? Are you considering purchasing an investment property? If you have the capital and the time, becoming a landlord is a great way to generate income and generational wealth. But how do you get started? How much money do you need? How much time will it take? Will you need to quit your job? Do you need to consult legal experts? It’s easy to get overwhelmed when starting a new venture. There is a learning curve when starting anything new, and sometimes the most important thing to do is just get started.
Some people who want to become landlords fail to start simply because they are overwhelmed and never take that first step. While there is no one way to do anything, it helps to break significant problems into more manageable ones. Considering tackling each step one by one instead of the thought of starting a whole new business. You don’t need to be an experienced realtor or real estate investor to become a landlord
1. Assess Your Temperament and Treat Rental Property as a Business
You want to have the right temperament and mindset when starting as a landlord. The most important thing to remember is that being a landlord is a business and must always be treated as a business. What kind of temperament does it take to be a landlord? You need to be able to make difficult discussions and handle the shock of high costs. You’re dealing with homes, and as any homeowner or investor can tell you, repairs can be pretty expensive. Being a landlord also requires patience. Investing in real estate is a long-term investment, so don’t expect the early returns to be life-changing. It is also going to take up some of your time. Even if you hire a property manager to handle the day-to-day busy work, you will still need to consult with your property manager occasionally, especially regarding finances and repairs.
How serious are you about becoming a landlord? Even if you intend only to make it a part-time job, it still needs to be treated as a business. There are inherent risks, and to protect yourself and your personal finances, you need to take the necessary steps required of any business. You’ll need to plan long-term. You’ll need to protect yourself from liability, and you’ll likely need to consult with experts in both real estate and accounting. While you may be making all the decisions, getting good advice always helps.
2. Understand the Responsibilities of Being a Landlord
Do you know how to be a landlord? What are your responsibilities as a landlord? You are always responsible to both yourself and your tenants. This means you must protect your interests while holding up your end of the bargain regarding tenant rights. So what does this look like?
First, you will need to make sure your rental property is safe and habitable. This means all the locks on the windows and doors are functioning, and all the essential appliances are working. You’ll need to make sure the gas and electricity are functioning safely. All of this is done before a tenant moves into your rental property. Your responsibilities don’t end there, though. You’ll need to make all necessary repairs after a tenant moves in. You’ll need to be responsive to your tenant’s needs and communicate with them properly to protect their privacy.
You also have responsibilities to yourself and your business. You can’t just accommodate every single request from your tenant. For example, maybe they want a refrigerator with an ice maker and filtered water dispenser. This would be an excessive expense for your business and create potential long-term problems. Any time the ice machine breaks, or the water filter breaks, you’ll need to pay to have it repaired. Finding the right balance between your business needs and the needs of your tenant is a part of the job.
You also have your business responsibilities. This means keeping track of all your expenses and revenue. This means keeping records and paperwork for everything business related. You’ll also be responsible for filing taxes and budgeting for long-term success. All of your most basic responsibilities are going to be both legal and financial. This means knowing both the law and how to manage your finances. While you may not be an expert immediately, it is a good idea to begin learning for yourself, even if you hire an expert for assistance.
3. Buy an Investment Property
Buying an investment property is vastly different than purchasing a primary residence. When buying a primary residence, you buy for your personal preferences and needs. You may also be willing to pay more to satisfy those preferences and needs because, unlike an investment property, you don’t need to turn an immediate profit. When buying an investment property, you are buying based on the demand of the rental market.
The general rule of thumb when buying an investment property is the 1% rule. No, this doesn’t mean you must be in the top 1% of wealthiest Americans. It means you want your gross revenue from your investment property to equal 1% of the closing costs. If your closing cost is $300,000, you would need to generate $3,000 a month in gross revenue.
$300,000 x $0.01 = $3,000
This should allow you to generate enough revenue to cover all your expenses. Knowing the local rental market will allow you to determine an appropriate closing cost for an investment property.
Rental markets fluctuate, so you want to invest in a rental market that will likely see long-term growth. Two significant factors can determine the type of long-term growth of the rental market, and that is both supply and demand. A market that is seeing both population and economic growth will likely see rents increase even if there is an ample supply of homes. On the flip side, if a market is seeing a population decline, you can see rents stagnate or even decline if the population decreases enough.
Generating a gross revenue of 1% of your closing costs over 20 years isn’t ideal. As a property gets older, it becomes more expensive to maintain. Ideally, you want to be able to increase your rent by 1%-3% every single year. This will help cover expenses as the property ages and make your investment more profitable. So, how much do landlords make? It depends. Some make enough to earn a solid passive income, and others can earn enough to make it their full-time job.
4. Budget for Unexpected Costs
Budgeting for unexpected costs and repairs is a big part of being a landlord. There are a few ways to manage your finances in a way that can protect you from going into debt over unexpected costs. There is the 1% rule which is discussed in the previous steps. There are also a few other rules to help manage your finances.
There is the 50% rule. This rule says you should save 50% of your gross revenue from a property for potential repairs, maintenance costs, property taxes, and other expenses. If your monthly gross revenue is $3,000, you should save $1,500 for all costs
$3,000 / 2 = $1,500
Another rule of thumb you can use is the square footage rule. This states you want to budget one dollar per square foot yearly for repairs. If you have a 2,000-square-foot rental property, you want to set aside $2,000 yearly for repairs. While this may not cover significant, unforeseen costs, it will help you budget for the most basic repairs.
Ideally, start with a large cash reserve to handle significant expenses before renting your property. The last thing you want to have to happen is run out of cash before you can find any tenants. You may learn something about the property after it is purchased, which needs repairs before it can be habitable. If you don’t have enough cash for the repair, you may need to take out expensive short-term loans or, even worse, sell the property at a loss. Over the long term, you should save up a sizable cash reserve for unforeseen costs beyond an annual budget.
5. Understand Landlord-Tenant Laws
Landlord-tenant laws can be highly complicated. This is because there isn’t a single national consensus regarding housing laws and tenant rights. Federal laws and fair housing laws, through the Fair Housing Act, sets basic legal guidelines around discrimination issues but don’t say much about the issues of rent prices and eviction.
Next, you have the state-level laws. Every state has different laws that can go beyond fair-housing laws. For example, states like California go well beyond the Fair Housing Act regarding tenant rights. They have a state-wide anti-price gouging law that protects tenants from landlords making drastic rent increases to force them out. Landlords can’t just evict tenants because they don’t like them or hold some grudge against them. The state requires a lease violation to evict a tenant or if a landlord intends to take the home off the market and/or make it their primary residence.
After the state level, you have the municipal level. Some cities, especially the most expensive, often have rent control laws that limit how much a landlord can increase rent every year. Each rent control law for each city will have different limits and different ways of calculating the amount.
This can all sound very confusing, and people have dedicated their entire careers to understanding these laws. Not only can it be complicated, but these laws can change anytime. For example, San Diego recently implemented more tenant protections. The simple solution for those looking to become landlords is to enlist the services of those who know these laws best. This can be a legal counsel on retainer or a property management company.
There’s also the legal issue of what is a habitable home. This is far less than all the desired amenities a person would want. It’s fairly basic when it comes to what is considered habitable. A rental property is required to have basic plumbing and utilities. It is also required to have all the necessary security and locks on windows and doors. There are also health risks to consider. You can’t have toxic gases leaking into the property or have a mold problem. There is no requirement for luxury or basic amenities like a dishwasher. Still, it is required that a tenant will be able to live a healthy, safe, and secure life within the confines of the rental property.
6. Purchase Landlord Insurance
One of the most important aspects of running a business is protecting yourself and your business from liability. For landlords, this includes landlord insurance. Like homeowner’s insurance, landlord insurance can help protect you financially from problems created through externalities or acts of God. This can include things like burglary and vandalism. Some plans will protect a property from damage even when under construction. It can also cover the costs of bringing a building up to code during renovations. Like any other insurance plan, there are deductibles as well as limits.
These plans typically cover the main dwelling along with any other structures on the property, like a detachable garage. It can also cover any equipment used to maintain the property, like lawnmowers and leaf blowers. This isn’t the same as renters insurance and will not cover tenants’ belongings if damaged or stolen.
One reason you don’t want to use homeowner’s insurance on a rental property is you don’t want to pay to insure the belongings of your tenants. What you want to protect is the property and the income that is generated from it. For this reason, some plans will also protect your income from certain circumstances in which your property may become uninhabitable.
Every plan is different, so shop for what is best for you. However, it is important to go above and beyond to protect your business and your investment because homeowner’s insurance may not help with as much when it comes to an investment property.
7. Get Your Property Move-In Ready
After you have purchased a rental property, you will need to make sure it is move-in ready for renting it out. What does move-in ready mean? There is the legal definition which means that it is legally habitable, which was discussed in a previous section. But for this section, let’s talk about what is “move-in ready” to get the most revenue from your rental property.
You won’t be able to get the market rate rental price from your rental property if you only do the bare minimum. Just because it has running water, locks, and electricity doesn’t mean people will want to move in right away. You can create an essential checklist of things to do before putting a rental property on the market. This can include replacing old carpet, painting the walls with a fresh layer of paint, and replacing damaged but functional items like sinks or toilets. It can also mean upgrading old appliances.
This doesn’t mean you need to go out and add everything you would want in a home. It doesn’t mean you must install central AC, a dishwasher, or an in-unit washer and dryer. Some of these appliances will do very little regarding how much you can increase monthly rent.
You’ll also want to do a deep cleaning after repairs or maintenance. You can do this yourself or hire a cleaning service. This means making sure the place is spotless. All the floors, cabinets, baseboards, and bathrooms are spotless. You don’t want to show a property to a potential tenant and have them walking away, thinking you don’t put any effort into maintaining your property. Tenants want to know they are signing a lease with landlords who are proactive and responsive. A little effort can go a long way in ensuring you can get the most revenue from your rental property.
8. Determine How Much Rent to Charge
Before purchasing a rental property, you’ll need to know what you can charge. There is a difference between what you need to charge to make a profit and what you can charge. One way to figure out how much you can likely charge for rent is to look at various rental websites like Zillow and Apartments.com to see how much landlords are charging for comparable properties.
It’s not just the number of rooms and bathrooms or square footage that will determine how much you can charge. It will depend on the neighborhood and the quality of the home as well. Are you looking for a general market rate rental, or are you hoping to attract luxury tenants? Find homes that are listed not just with similar sizes and room/bathroom numbers but also similar quality.
This isn’t a foolproof way of determining what you can charge for rent, but it will get you in the ballpark. Be wary of outliers and landlords attempting to charge far more than they can get. Pay attention to how long they are advertised on the websites before they are pulled.
There are more modern methods to determine what the likely going rate would be. There are property m management software companies with far more useful and accurate data than just scraping rental websites.
The other option is to hire a property management company from the neighborhood or city with expertise in the area. When in doubt, hire people who know what they are doing. If you list a unit too high, you can lose revenue while it sits on the market, and you may have to lower it anyway. It’s best to get it right the first time around.
9. Marketing the Rental Property
Long gone are the days of tenants driving around neighborhoods looking for “for rent” signs. This doesn’t mean you shouldn’t put a sign up in front of your rental home. This can still be valuable in finding a tenant fast or if you have other rental properties and want to use the opportunity to try to fill those units as well.
The most common place potential renters look for rental homes is online. The easiest, low-cost place to start is free listing sites like Craigslist, Zumper, and Facebook. While these won’t cost you anything, sites like these tend to have more scams and unreliable posts. You’re also listing with landlords who pinch pennies and cut corners and may not be the best landlords when it comes to managing their properties. For these reasons, some renters won’t even bother using these sites.
The best option is to use pay-for sites like Zillow and Trulia. These sites, because landlords pay for posts, tend to be far more reliable and much safer for renters to use. The downside is these sites cost money, which means the longer it stays up, the more it will cost. This means you will want to list your rental property at a realistic monthly rental amount to lease the property as quickly as possible.
Whether you pay for a listing or not, it is crucial to make your listing as high-quality and professional as possible. This means hiring a professional photographer to take pictures of your listing. Real estate photographers know how to use angles and lighting properly to make your rental property more appealing online.
You also want to spend time on the description of your rental home. Tell the truth, and don’t try to hide anything. Even if the home isn’t very spacious, list the square footage. If something as simple as the square footage is left out, potential renters may assume it’s too small and not even bother looking. If they do show up and realize it was a lot smaller than they had hoped for, they won’t fill out a rental application. Make your listing sound as appealing as possible while being truthful and giving all the necessary info. This will ensure you don’t waste time showing the property to tenants who won’t rent the home.
The simplest option is to hire a property management company to handle your listings. This will remove all of the guesswork and streamline the process.
10. Screening Prospective Tenants
Every state and city has different laws governing how landlords can screen potential tenants, so before you do anything, check your local and state laws. If you have any questions, you can consult a lawyer or industry professionals. If you’re uncomfortable screening potential tenants, hire a property management company to manage your rental home.
The last thing you want is to create a tenant screening process that rules out qualified tenants. This can happen if you require too much income or too large of a security deposit. Some states and cities have laws that limit your ability on what you can charge. For example, California limits the income requirements to three times the rent and the security deposit to two times one month’s rent.
If there’s a housing shortage, you may be able to create a higher bar to clear when it comes to screening tenants. One way to look into the past of potential tenets is to pay for services that can do a background check, credit check, and eviction history check. Remember that not everyone who can clear a screening process will be a great tenant, and those with checkered pasts can be good tenants. Conducting thorough background checks costs money, and if you have a high turnover on your property, you will be spending a lot of money conducting background checks.
There is no foolproof way to screen out bad tenants. There will be problems that arise regardless of what you do to screen tenants before them signing a lease. Suppose you aren’t comfortable dealing with these problems, or you don’t trust yourself to be able to screen tenants properly. In that case, one of your best options is to lean on experts like property managers to handle the day-to-day business of running a rental property.
11. Signing Tenants to a Lease Agreement
To sign a tenant to a lease agreement, the first thing you need to do is determine the terms of the lease agreement. Is it a short-term lease or a standard long-term lease? Residential leases typically start at 12 months.
There are some instances in which shorter leases are preferable. Corporations often use short-term leases. For example, businesses may lease rental homes for 3-6 months when relocating a new or current employee. Professional baseball teams do this when they bring minor league baseball players to the majors.
There are standard leases that can be found online, or if you would like one specific to your property, you can consult a lawyer who can draw up a lease agreement for you. The other option is to hire a property management company that usually has in-house legal experts and standard lease agreements. This will take all of the guesswork out of writing your lease when you start.
When a 12-month lease ends, it doesn’t necessarily mean a tenant will move out. If they don’t submit a 30-day notice to move, the lease becomes a month-to-month lease. Every city and state has different laws regarding rental leases, so if a lease can only be available for the time given on the lease, that needs to be communicated with the tenant and put into writing.
12. Maintaining the Property
The most important thing to remember is that the property must remain habitable by legal standards. This means your rental property must be habitable to operate your business as a landlord. At times, maintaining a rental home to this standard can be costly. The best way to ensure it doesn’t get too costly is to identify necessary repairs and make them as soon as possible so they don’t become more prominent, more expensive repairs down the road.
Only some things need to be repaired or brought up to date. You don’t need to replace windows with high-end windows. You don’t need to replace the carpets with expensive wood flooring. However, you want your property to look the day a tenant signs a lease should be how your property looks at all times.
You won’t be responsible for every single repair when a tenant is renting a unit. If it is something they damage, that can be covered by their security deposit, or if they don’t intend on moving out, they can pay for the repair themselves.
The best way to stay on top of any necessary repairs is to make it easy for tenants to report any issues. This could be as simple as an email address dedicated to maintenance issues or using a web portal specifically designed for tenants to report any issues. Some tenants may hesitate to report maintenance issues because they fear being evicted or rent increases. If a home becomes uninhabitable, they may be forced to move out while all repairs are made. This is why it is essential to be responsive to all requests, communicate effectively, and never make your tenants feel like a burden for requesting repairs.
There is some routine maintenance you may want to consider even if a long-term tenant is in one of your properties. For example, if you want your carpet to last longer, you can pay for an annual carpet cleaning instead of hoping the tenant will do it on their own.
You should also conduct an annual inspection of your rental home. This requires communication with your tenant to let them know when you will be coming by for an annual inspection. You can conduct this with someone who handles general repairs and ask for them to look at any current issues or things that may become problems down the road. This is crucial if you have had the same tenant for multiple years. If you have a property with high turnover, then you are usually getting regular inspections every time someone moves out. That isn’t the case with long-term tenants.
13. Staying Organized
Staying organized can be difficult regardless of the job, but managing a rental property involves many moving parts, coordination, and communication. It requires time management and short and long-term planning. There can be stretches with little work and sprints of intense work.
When a rental property is leased, it won’t require as much day-to-day work. When that same unit is being turned over to a new tenant, it can require much work and organization. To help keep track of what needs to be done every time a property is turned over, use a checklist. This will help you coordinate with all your hired workers to complete each task. For example, you may need to replace the carpet, paint the walls, and give the entire rental property a deep cleaning. Using a checklist will help your plan be as efficient as possible.
You should also stay organized with all your paperwork. This is a business, and to protect yourself from liability, you should maintain records as long as they are required. Each state may have different laws for how long records must be kept, so check with an expert to know which records to keep and for how long.
You should keep your lease agreements, annual inspection checklist, move-in/move-out dates, and move-in/move-out inspections checklists. This will protect you in case you need to dispute anything in court. For example, a former tenant may dispute charges and funds withheld from their security deposit. If you have all your records kept in order, your claims will likely hold up in court.
14. Deciding If You Want to Hire a Property Manager
When should you hire a property manager? That’s a question of both time and knowledge. How much time can you commit? How much time are you willing to commit? How knowledgeable are you about real estate? The more properties you own, the more time-consuming and stressful the business of being a landlord will become.
If you don’t have the time, hiring a property manager is a good solution. If being a landlord isn’t your full-time job and you want to make passive rental income off your rental properties, the best way is to hire a property manager to handle all the busy work for you.
The real estate market is constantly shifting from both a supply and demand standpoint, as well as a legal standpoint. It takes a lot of time and effort for experts to keep current on all these ever-changing factors. If you don’t know or don’t believe you will have the mental bandwidth to learn, hiring a property manager might be the best option for you.
Property managers have contractors they work with. They know how to protect your assets. They understand the local real estate market. They are dedicated to that one job of managing rental properties. While their fee will eat into your potential profits, the time it saves you and their expertise will eventually allow you to grow your business without managing each property.
15. Keeping Records of Move-In and Move-Out Inspections for Security Deposit Purposes
Keep your records. Keep them in paper form as well as digital. It is the best way to protect yourself from liability and keep track of your business. You don’t want to be a hoarder, though.
You should only keep paper records for as long as you are legally required. You don’t want rooms filled with boxes of paper from 20 years of leasing a rental home. If you’re unsure how long to keep your paperwork, scan it and store it digitally.
Your move-in/move-out inspection checklists are one of the most critical items to keep. It isn’t uncommon for a former tenant to dispute the charges and try to get more of their security deposit back. If you keep these records and have your former tenants sign off on them when they move-in/move-out, you will be less likely to see disputes in court.
You’ll also want to keep your rental agreements. This is in case a tenant has violated a lease in a way that results in their eviction. For example, you may have language that states a tenant can be evicted if they are selling drugs or conducting other illegal activities from the rental home. If this is the case, you will want to be able to point to this in the lease if your tenant attempts to dispute and refuse the eviction.
The eviction process can cost a lot of time and money and is one of the most challenging aspects of being a landlord. The best way to protect yourself from spending time in court disputing claims from current and former tenants and to keep proficient records.
Being a landlord requires a lot of time and knowledge, and if it is something you are considering getting into, it would be wise to start learning before taking your first step. There are professional real estate agents, lawyers, accountants, and property managers who have dedicated their entire careers to knowing specific areas of the industry. It’s unrealistic to think a person just getting started would ever be able to know enough on day one.
But you can learn on the job. You can learn from consulting experts and hiring others to help with specific tasks. So, is becoming a landlord worth it? It can be. This isn’t something you need to do on your own. If you run the business properly and become a successful landlord, it is the type of business that can create generational wealth and set you and your family up for decades. Do your research. Make sure you know exactly what your goals are and what you’re getting into. Find the right experts to consult or hire. It can be done, even if taking the first step can be scar