According to the IRS, 10.6 million taxpayers claim rental income every year. Are you planning to be one of them? Being a landlord is rewarding, but like all worthy endeavors, it’s hard work. Knowing what to expect and how to handle the unexpected will help you be a happy, successful landlord. Here are 12 steps to becoming a landlord, along with a few tips on how to handle the unexpected.
Buy a Property
If you think you’re ready to buy your first rental, there are a few things you’ll want to know. First, where should you buy? Get to know the rental markets in your state. Pay attention to the following:
- Job growth
- Population (increase vs. decrease)
- Median income
- Cap rates
- Property taxes
- State and local laws
Choosing the right location (one with job growth, an increase in population, and a strong rental market) will factor heavily into how quickly you can fill your rental, what rent you can expect to charge, and whether or not your renters will be long term.
Determine your down payment and what type of financing you’ll need. Depending on where you live, purchasing an investment property could have stricter requirements than buying an owner-occupied property. For example, you might need as much as 20 percent down when purchasing an investment property, rather than the typical five percent required for a conventional mortgage.
If you don’t want to go with conventional financing, there are other options, such as paying cash, finding investors, taking out a home equity loan, or getting a home equity line of credit. These options all have benefits and drawbacks, so research which option would be best for you.
If you’re debating whether to finance or buy with cash, consider your goals. Are you planning to flip the house in a few years, or do you consider this a long-term investment? You may see higher monthly income from your rental if you don’t have to pay a mortgage, but financing could give you a greater return in the long run. For example, if you put 20 percent down on a house that costs $200,000, your initial investment is $40,000. If the property’s value increases and in two or three years you are able to sell the property for $400,000, you stand to make a substantial profit.
Be sure you budget enough money to cover up-front costs such as repairs and renovations you’ll need to get your rental property in top condition. Certain upgrades, such as renovating the kitchen, can increase the amount you can expect to get in rent. Curb appeal is also an important factor when trying to attract renters.
Calculate Your Rental Expenses
So, what does it cost to be a landlord? Some of the expenses might surprise you. While you may already have a budget set aside for minor repairs (such as air filters and paint), you’ll also want to factor in those major repairs like a new roof or a new HVAC system. While these major expenses don’t occur often, you will eventually have to replace something pricey. Other expenses to consider include:
- The mortgage
- Utilities (even if your renters pay for utilities themselves, you’ll have to cover these expenses when the unit is empty)
- Fees and salaries (legal, subcontractors, employees)
- Vacancy repairs/updates
Keeping track of expenses is a major part of becoming a landlord.
Know the Laws
Are you familiar with the Fair Housing Act? This federal law prohibits housing discrimination based on race, color, national origin, religion, sex, familial status, or disability. If you aren’t aware of the law, you could get into serious legal trouble that will cost you thousands of dollars.
For example, you can’t ask a potential tenant how many children they have or if they are expecting. You can’t make rules that treat households with children differently. If you run a rent special, you must make it available to everyone. You can’t decline a rental application for any reason other than the applicant not meeting your stated qualification criteria. You can’t evict a hoarder — hoarding is a disorder protected under the Fair Housing Act. You’ll find more resources concerning discrimination on the National Fair Housing Alliance website.
Be sure to know your state laws, as well. What’s allowed in one state may not be in another, and the laws change often. Have a lawyer look over your lease contract because many common provisions put in leases are illegal.
If you are concerned about creating a lease that’s state compliant, give us a call we can help. .
Start planning now for tax season by reading up on tax laws and what you can and cannot claim. For example, did you know that you can claim travel expenses? Understanding what you can claim immediately and what you’ll have to depreciate will save you time and headaches when you do your taxes.
Get Landlord Insurance
Check your state requirements and get the maximum amount of rental insurance, liability, and any other required insurance.
If you state permits it, ask your tenants to carry renters insurance. It reduces your legal, financial, and personal responsibility if there’s a disaster like a fire. In some states, you may have to provide your tenants with a place to stay after a disaster. If they have renters insurance, their policy takes care of it so you can deal with repairing the damage. If your tenant causes damage to the building (such as accidentally starting a fire), your homeowner’s policy will cover the costs, but you are responsible for the deductible. However, if the tenant has renters insurance, it should cover your homeowner’s insurance deductible.
Trying to figure out how much to charge for rent can be a challenge. If you price too high, your rental could sit empty for months, costing you money. If you price too low, you might not make enough to cover expenses or earn any income. We can provide you with a rental analysis.
In addition to how much you’ll charge for rent, you should decide now if you’ll have a grace period and how much you’ll assess for late fees. Make sure your tenants know this policy before they sign the lease.
Advertise Your Rental Property
First, you want to include photos. People want to be able to see the property before they contact you. You don’t need a professional photographer or special equipment. Your phone will do just fine! Stage your rental. Make sure the room is clean, and try to take photos on a sunny day. Don’t forget to take photos of the outside (again — make sure the yard is tidy and the lawn is freshly mowed). Look around before you snap the photo. If you are taking a picture of the bathroom, close the toilet seat lid, empty the trash, and make sure you aren’t reflected in the mirror.
When you write your ad, be sure to include some things about the property that stand out. If you chose that house to purchase as a rental property, what drew you to it? Be specific and include as much information as you can: amenities, special features, the location, area schools, parking, the yard, etc.
You could also use a realtor to advertise your rental property.
Screen Your Tenants
You should run a credit and background check on potential tenants. Establish subjective criteria in writing for income and credit required to lease your property. You also want to know if they’ve been evicted in the past. You want solid, reliable tenants, so don’t skip this important step.
Prepare for Move-In
Before your new tenants move in, you’ll want to inspect the rental property carefully. Check the locks to make sure they are turning smoothly, look at the electrical outlets for signs of burning or charring, and check the windows to ensure they are functioning and latching properly. Look for signs of pests, change the batteries in the smoke detectors, make sure the HVAC system is working and the filters are clean, and look for any security concerns.
Do a walk-through with your tenant. Take photos and videos as you walk through and document all issues that you or your tenant notice. Both of you should sign and date the walk-through checklist. Keep the checklist and the photos in a safe place. If there’s damage beyond normal wear and tear when your tenant moves out, this is your proof of the condition of the property when they moved in.
When you become a landlord, you might find that tenants ask some challenging questions. Be prepared to answer questions about fees, maintenance requests, and what your tenant can and cannot do in your rental. For example, are you comfortable allowing tenants to paint or change out light fixtures? Determine your rules ahead of time and include them in the lease.
Always review the lease carefully with your tenant and ask if they have any questions after each section. If they do violate the lease agreement, they won’t be able to claim they weren’t aware of the violation. Make sure you both sign and date the lease agreement.
Self-Manage Your Property or Hire Out
If you want to manage your property yourself, remember: this is your business, so treat it as such. Come up with a strategic plan. Set goals. Have office hours. Create a calendar for tracking things like maintenance. Set up a savings account for rental-related repairs.
When dealing with tenants, aim for friendly but professional. Consider not providing your home address to tenants. If you do so, it’s possible that if you have to send a late notice or an eviction notice, an irate tenant could turn up at your door. By the same token, consider using a system like Google Voice so you don’t have to give out your personal phone number. A Google Voice number will give users a number that will ring through to your phone.
Property managers are a terrific option if you are new to being a landlord and aren’t comfortable navigating the process on your own, or if you have multiple properties and need help managing all of them. Typically, property managers will charge you 8 to 12 percent of the monthly rental value of the property. If you believe having your property managed for you is worth the cost, do your research before hiring a property manager. You’ll want to check the company’s licenses and certification and carefully review their policies.
We don’t manage properties ourselves but we can provide you with a referral.
Document, Document, Document
Document everything and keep all of your receipts for repairs, checklists, and photos taken during move-in/move-out. Keep relevant emails and texts between you and your tenant, as well. Records of all work completed, agreements, and conversations are crucial if an issue arises. For example, if you keep part or all of the security deposit to cover damages but you can’t prove you needed the money to pay for repairs, your tenant could sue you and get up to three times the amount. Don’t rely on verbal agreements — you need everything in writing.
Properly Turn Over a Unit
When a tenant sends you a notice of non-renewal letter, there are some steps you’ll have to take to prepare your rental and find new renters. First, decide whether or not you want to show the unit while it is still occupied. Much depends on your relationship with the current tenant and if you trust that the property will be clean and organized when you show it. If your renter isn’t leaving on good terms or if you’ve had difficulties, it might be best to wait until they vacate to show the unit.
Conduct a final walk-through with your current tenant and make sure the property is in good condition. Keep in mind that you cannot charge the tenant for normal wear and tear, but if you see damage beyond what would be considered normal, be sure to note the damage on your walk-through checklist. Have your tenant sign and date this checklist and compare it to the move-in checklist when assessing the overall condition of the rental.
Any time renters move out, you’ll want to prepare the rental for new tenants. Make any repairs and paint the walls, have the carpets professionally cleaned, and rekey the unit. Always change the locks between tenants. Even if you collect the keys from your former tenant when they move out, you can’t be sure if they made a copy. For your new tenant’s safety and to protect yourself from liability, it’s worth the cost to change the locks.
Work to Retain Your Tenants
It’s much cheaper to retain tenants than to have to find new ones, so keep your tenants happy. Respond quickly to maintenance requests, keep the property in good shape, and be respectful of your tenants. Reward those tenants who consistently pay on time in some way, such as with a gift card to their favorite restaurant. Before you tenants move in, consider welcoming them home with small comfort items they might not have available before they unpack, like coffee and mugs, cleaning supplies, or bathroom essentials.
To become a successful landlord, make sure you have a properly prepared lease. Take good care of your property and respond quickly to maintenance requests. Save your receipts and document everything. Screen your applicants carefully and keep the lines of communication open. If you follow these steps, you’ll be a great landlord! Now, get out there and find your first property.