Real estate investing is one of the most lucrative and reliable investment opportunities. This is due to its income potential and tax advantages. If you are thinking of owning a rental property, congratulations! With good management, being a landlord can help you achieve your financial goals.
However, being a first time landlord can be quite challenging. A first time landlord has to take the necessary steps and follow the best practices to set him/herself up for success in the business. Finding a good income property at a reasonable price is only part of the real estate investment game. You also need to know how to make money renting houses. Here’s a look at some of the best tips for the first time landlord to help you prepare for your first real estate investment:
1. Have a Checklist
First time landlords are often excited about renting out their first property but they are usually not experienced enough to know everything that goes into owning a rental property. There are many essential things you need to do. To get off on the right foot, ensure you have a checklist of all the things that you will need to be prepared as a landlord. This essentially is a list of all the items that should be checked before you bring a tenant into your rental property. Having a list will keep you organized and help you not to forget any important areas. Without some of these things, it is difficult to manage rental properties.
Here is a quick first time landlord checklist to help you start preparing your own:
- Rental agreement
- Rental application
- Landlord insurance policy
- Separate phone line and email
- Leasing criteria
- Credit/Background checks
- Dedicated bank account
- Legal entity
- Accounting system
- Landlord software
- Rental marketing
2. Know the Law
As a first time landlord, make sure you understand the legal ramifications of owning a rental property. Rental properties are governed by a specific set of landlord-tenant laws. These are rules that protect the tenant, owner, and the property in rental transactions. They may vary depending on your country, state, city or county. These laws also provide the guidelines for how a lease agreement is created. Failing to follow the law can result in a lawsuit and even income loss. It is advisable, as a first time landlord, to work with an attorney who is familiar with the laws governing your local real estate market.
3. Make Profit the Priority
Like any other business, landlords need to make a profit for their business to survive and expand. As a first time landlord, you need to make rent your priority since it is your revenue. Landlords who aren’t aggressive in pursuing rental income often end up with losses. First time landlords should ensure that there is a high occupancy rate and the rental rate can sufficiently cover the monthly mortgage payments with some money left over. Otherwise, they should consider finding other ways to profit from the rental property. For instance, they can make it a vacation rental.
Sometimes people suffer unexpected financial setbacks. However, if a tenant refuses to pay rent for months without any reasonable explanation or alternative arrangements, you need to start eviction proceedings as soon as possible. Evicting a tenant is not always an easy endeavor but it is sometimes the right thing to do.
Related: How Much Profit Should I Make on a Rental Property?
4. Screen Tenants Carefully
Performing tenant screening carefully is one of the most important landlord tips. Making mistakes in this area can cost a first time landlord a great deal. To have a profitable investment property, you need to find the right tenants. The tenant should be able to keep the property in good condition, pay rent on time, and follow the lease terms. Landlords should ensure that they properly screen prospective tenants for their criminal, eviction, and credit history. They should also try to verify the information by contacting the references given. If a tenant had a history of criminal activity or several evictions, that’s a red flag. Tenant screening also improves tenant retention since good tenants are likely to stay for longer.
Related: What Should Landlords Do to Find the Perfect Tenant?
5. Sign a Written Lease Agreement
Some first time landlords tend to do real estate transactions without having a written contract simply because they feel like they trust the other party. This is risky! Once you find the perfect tenant, it is essential to ensure that everything is documented to avoid any trouble in the future. Even if the tenant is a close friend or a family member, ensure you have a properly written lease signed by both parties. The lease should clearly outline all conditions of rental property use. It should be detailed and cover all elements so that no areas are left open.
Related: 9 Things Every Tenancy Agreement Should Include
6. Collect a Security Deposit
Another important tip for first-time buyers is getting a security deposit from tenants. Collecting a security deposit motivates the tenants to keep the rental property in good condition for as long as they stay in it. It communicates to the tenants that you care about the condition of your investment property and that you will penalize them for any damages caused. If the tenant damages the property or doesn’t keep it in the condition it was first rented, you will keep part or all of the security deposit to pay for the repairs. To ensure that there is no dispute about the initial condition of the property, make sure the tenant fills out a Renter’s Inspection Worksheet. This is done when the tenant first moves in.
7. Keep a Reserve Fund
A landlord should always have a reserve fund to be able to pay for property maintenance. It is the duty of a landlord to promptly respond to requests for emergency repairs and services. Even when the damage has been caused by the tenant, you might still be forced to make the repairs to keep the rental property habitable. You can then later deduct the expenses from their security deposit. Your reserve fund can also act as a savings account for property renovations.
8. Make Practical Renovations
Your rental property is a real estate investment. Therefore, you should avoid spending money on renovations that won’t lead to a higher rental rate or help to reduce expenses. You should avoid renovations that are overly expensive. You can make your house look great without spending lots of money. Some renovations also may need a lot of maintenance, thus bringing additional costs. Make renovations that will make your rental property more durable and not need frequent repairs.
9. Be Organized
One of the biggest mistakes made by first time landlords is not being organized. To be successful, a landlord should have a good bookkeeping process. You should keep proper records of all property expenses and revenues. How do you even expect to know how profitable your property is without property records? Being organized also helps to save on time through quick retrieval of information when needed.
10. Market Your Rental Property Effectively
Many real estate investors still advertise their properties using only yard signs or newspapers. While there is nothing wrong with using these methods, they are simply not enough. To find a good tenant for your rental property, you need to choose from a variety of people. You can accomplish this by advertising in the right places and using a number of techniques. There are many effective marketing techniques you can use to get tenants such as rental websites, online ads, social media, etc. You should use the right marketing channels depending on your target clients and the market you are in.
The Bottom Line
Being a landlord for the first time can be a highly rewarding and also challenging venture. Even though it can put you on the road to financial independence, there are also some risks involved such as unpaid rent, theft, surprise expenses, property damage, etc. You need to know the right steps to take and the pitfalls to avoid so as to maximize profits and protect your investment. The above 10 tips will help you get off to the right start and set yourself up for a profitable real estate investment.
Are you looking to invest in real estate? Be sure to visit Mashvisor to learn more about real estate investing for beginners.