One of the biggest shifts in the US housing market since the 2008 financial crisis has been the growth of the rental market. Student-loan debt, lower earnings, and tight lending practices have created barriers to homeownership – all of which have made renting more practical. Also, many people simply prefer renting over buying as it can offer more flexibility, less maintenance, and less commitment. These factors are expected to keep driving the rental market growth in 2019 and beyond. Consequently, this is creating excellent opportunities for real estate investors – and not just the big players, but anyone thinking of becoming a landlord!
A rental property is an attractive investment option as it provides a steady income stream, appreciates in value, and enables you to enjoy certain tax benefits. It’s no surprise that many have found success and made fortunes as landlords or real estate investors. However, as with any investment, it’s wise to do your homework before making any financial decisions. So, whether you’ve always dreamed about a career in real estate investing or you’re an accidental landlord, this guide is for you. We’ll cover what you need to know from start to finish to help you start and run your rental property business with confidence.
Know the Landlord-Tenant Laws
While there are many advantages to investing in rental properties, it’s important to know and be familiar with the Local, State and Federal laws of being a landlord before getting started.
- Local laws determine requirements for the structure, facilities, and essential services like water and heat. They may also cover the same standards as state laws like raising rents, the handling of security deposits, and the eviction of tenants.
- State laws generally regulate landlord-tenant matters such as evictions, housing standards, landlord’s right of entry, repairs and maintenance, and security deposits. These laws change periodically, so it’s important to stay updated on rental laws and statutes.
- Federal laws cover discrimination and landlord responsibilities regarding environmental and health hazards. Every landlord must follow the Civil Rights Act, which specifically prohibits race-based discrimination. You must also comply with the Fair Housing Act which bans discrimination based on race or color, religion, national origin, familial status or age, disability, handicap, and gender.
Before renting out a house to make money in real estate, it’s best to consult with a real estate attorney. A qualified attorney who specializes in landlord-tenant laws will inform you of landlords’ rights and tenants’ right to confirm that you comply with all rental laws and regulations.
Study the Rental Market
Every beginner real estate investor is advised to check the location before investing and committing to a rental property. While you might think it’s best to invest in your local housing market so you don’t have to deal with any headaches, this may not always be the smartest choice. Basically, you need to work out if there’s any rental demand in your area. Locations with a strong demand for rental properties are the best places to invest in real estate. You could buy the most beautiful investment property in the market, but if there’s no demand for rentals, you’ll face a risk of it sitting vacant.
In order to avoid this happening to you as a first-time landlord, simply research the housing market where you plan to invest in real estate. Look at trends regarding home prices, the population and demographics, the job market and unemployment rate, etc. It’s also important to check school ratings, walkability, crime rates, and factors that determine how desirable a location is for renters and, thus, make for a good place to invest in rental properties.
For more details, read: How to Identify the Best Places to Invest in Real Estate
Calculate the Cost of Owning a Rental Property
As a landlord, you operate a rental property business. And, as with any business, this comes with costs – some are startup costs and others are monthly costs. Because your main goal is to make money with your real estate investment, you have to have enough money to cover these expenses. Not only that, but any landlord should make sure there is positive cash flow to be earned. This means that your rental income has to cover your rental expenses and leave a profit margin that goes to your pocket every month. Some of the rental expenses to cover as a landlord include:
- Monthly mortgage payments
- Maintenance and repairs
- Insurance
- Property management
- Utilities like water and electricity
The good news for you is that becoming a landlord makes you eligible for certain tax cuts on the costs associated with owning an investment property. For example, you should be able to deduct interest payments on your rental property mortgage, as well as the following expenses:
- Advertising (to find tenants and people to help you maintain the property)
- Depreciation (for the property and the cost of major improvements that add value)
- Insurance premiums
- Losses from casualties or thefts
- Property taxes
- Repair and routine maintenance costs
- Travel and transportation
- Wages and fees paid to people you hire to help maintain the property
Buy a Rental Property
Now that you’re familiar with the basics, the next step to become a landlord is to actually acquire an investment property. If you’ve inherited one and have become an accidental landlord, you can skip this step. But, if you’re planning on buying a rental property to get into real estate investing, then there are a couple of tips we’ve got for you. First of which is to start small.
Because you’re new to the business, it’s not the best idea to jump straight into owning a condominium or an apartment building. Instead, the best option of property type for you is a single-family home. Not only are these properties easy to buy and manage, but the single-family rental market is growing. Single-family home rentals are developing faster than any other segment of the housing market and they’re always in demand.
Our second tip is to always perform an investment property analysis before putting an offer on any home for sale. This is the secret to successful real estate investing as it allows you to find out what return on investment you can expect before investing your money. Thus, you’ll always be sure to invest in a rental property that will actually make money.
Related: How to Do Investment Property Analysis
This is something we’ll help you with! Start your property search with Mashvisor to find and analyze the best investment properties in your city/neighborhood of choice in a matter of minutes.
Price the Rental Property
Choosing how much to charge your tenants for rent is an important factor for successful rental property investment. You shouldn’t charge so much that tenants can’t afford to rent your place, but you don’t want to charge too little and not make ends meet. As previously mentioned, your rental income needs to cover your expenses in order to generate positive cash flow. So, how can new landlords determine how much to charge for rent?
This should be a well-thought-out process based on your specific property, costs, and the local housing market. Speaking to other local landlords and real estate agents will give you a good idea about the local market and they’ll offer pricing tips too. You can browse real estate websites for similar rental properties in your area and see what people are charging. Alternatively, simply use an online Investment Property Calculator to make things easier. Using our calculator, for example, shows you an estimated comparable rental income of the property readily calculated based on rental comps in the area.
Our Investment Property Calculator does so much more! To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
Find and Screen Tenants
Now that you’re an owner of a rental property, it’s time for the most important bit: finding someone to live there. An ideal tenant is willing and able to pay rent in full and on time each month, follow the policies in the rental agreement, and not cause serious damage to the property. One of the best tips for becoming a successful landlord is to find a good long-term tenant who’ll occupy the property for an extended period of time. To find such tenants, it’s worth the time to carefully screen applicants. Most importantly, you need to:
- Do a background check on the applicant’s credit history and credit score
- Do a background check on the applicant’s criminal and public records
- Contact the applicant’s previous landlords and references
- Conduct an interview with potential renters
- Collect financial information like how much they earn and if they have savings
And watch out for these Red Flags Landlords Should Not Ignore.
Get Landlord Insurance
No matter how careful you are about background checks, things can still go wrong. So, next on the steps to becoming a landlord is getting adequate insurance before renting out your property. As a landlord, it’s your responsibility to insure the investment property against damage. While you could get a standard homeowner’s insurance policy, it may not cover you while a tenant occupies the property. This is why you need a landlord insurance policy as it’s more tailored to your needs.
You should expect to pay a bit more for landlord insurance because tenants are viewed as higher risk. That’s because a typical homeowner takes better care of his/her home than a tenant will. However, you will get extra protection with landlord insurance including:
- Liability cover: in case a tenant becomes injured while on your investment property and tries to sue you
- Alternative accommodation cover: if the property is damaged, the insurance will pay for tenants’ accommodation while repairs are carried out
- Standard home insurance aspects: like buildings insurance, cable, and underground pipe cover
- Loss of rental income: in some cases, you can claim back the income you’ve lost as a result of your tenants no longer paying rent if your property can’t be lived in due to a fire or flood.
What’s more, landlord insurance policies are tax deductible. Meaning, it won’t eat into your profits as a real estate investor!
Get Professional Help When Needed
One of the mistakes landlords make is not realizing the type of work that is involved in owning a rental business. Some may assume it’s the same as owning their own home and then get overwhelmed by the work necessary to be successful. The best thing to do in order to not fall into this mistake is simply asking for help from professionals. You should consult with a real estate agent, lawyer, or property management company as needed. Think of them as resources to help you along the way.
Property management, specifically, can be of great help to beginners. They perform duties like marketing your investment property, selecting tenants, maintaining the property, creating budgets and collecting rents. Hiring property management is a good way to delegate these tasks to someone else and, therefore, limit your day-to-day responsibilities as a landlord. Keep in mind, however, that you’ll still be responsible for supervising the property manager.
The Bottom Line
Now you know how to become a landlord and start a rental property business. You can think of this guide as a checklist of what you need before getting into the real estate investing business. This should also help you weigh the pros and cons and determine whether or not being a landlord is right for you before making any decisions. If you think you’re ready for this type of real estate career and want to start looking for rental properties for sale, Mashvisor is here to help. Start out your 14-day free trial with Mashvisor now and get access to our advanced investment tools to find and analyze investment properties in minutes!