One of the recent trends coming out of the pandemic has been entrepreneurs buying properties on cheap loans and turning them into profitable rental properties. You may know some ambitious people in your circles who have managed to start a profitable business by buying and renting various properties. With rising rent prices, you might be considering how profitable becoming a landlord might be. In fact, you might be interested in the process involved in becoming a landlord and if this business opportunity is right for you.
You have come to the right place! In this post, we will walk you through the step-by-step process of becoming a landlord, including understanding how to interpret the laws surrounding your potential obligations, your financial and logistical commitments, choosing real estate and an ideal rental property, improving your property, pricing and marketing your apartments, onboarding tenants, and hiring property managers. In short, this post contains all you need to know to get started on your journey to becoming a landlord. We’ll cover the following topics in depth in this article:
Understand Relevant Landlord Laws
Certainly, the prospect of passive income from real estate investing is appealing. The rent payments amount to quite a lot of money which could allow you to make a lot of money. Unfortunately, becoming and being a landlord is not all smooth sailing. Sometimes you will need to deal with lots of maintenance problems, bad tenants, or even evictions.
In addition, the rental market is highly regulated. There are many landlord-tenant laws that you need to be aware of before you decide to move forward on getting into the rental market. Understanding these regulations can help protect you from lawsuits or legal disputes down the road should something happen between you and your tenants. You will want to be sure that your conduct is compliant with the restrictions placed upon you by landlord-tenant laws.
There are three legal bodies that create landlord-tenant laws that you need to be aware of. The federal, state, and local governments in the place where your rental property is located will regulate the landlord-tenant terms of interaction and agreements such as the rental agreement. If you are thinking of being a landlord in a specific area, you should research what regulations will apply to you.
You will likely find the most information on federal laws governing the landlord-tenant relationship contained in the Fair Credit Reporting Act and the Fair Housing Act. These laws are designed to help protect tenants in the renting and rental application process. The Fair Credit Reporting Act is designed to protect tenants in how a landlord can use a tenant’s credit score and credit history to determine their eligibility to rent with a credit check. The Fair Housing Act deals with fair housing laws, including stopping discrimination in the rental process. You should read through the relevant aspect of these federal laws and other regulations governing you as a landlord.
State laws and local laws usually differ from federal laws in that they are more specifically geared to the interactions of landlords and tenants as it relates to the terms and conditions of a rental agreement, the termination of a lease, the use of evictions, and the restrictions placed on a security deposit.
It is important to follow the law when it comes to being a landlord. Doing so can help avoid extra hassle in the renting process or some lawsuits. You will not always deal with good tenants, so familiarizing yourself with the rules is a good first step in becoming a successful landlord.
As this process implies, the laws regarding landlord-tenant conduct will be different in different places around the country. You should consider reading the relevant laws in the place where you are considering buying an investment property. By familiarizing yourself with the laws of a location you are looking to buy in, you can be more certain of your desire to become a landlord in that area.
You should finally understand in this step that ultimately, becoming a property owner will expose you to additional liability, including for the wellbeing of tenants. As a real estate investor and soon-to-be new landlord, you need to be prepared to accept this liability and risk and factor this into your calculation of profitability. In becoming a first-time landlord, you should be familiar and comfortable with the risk that you are exposing yourself to.
Consider Your Finances
Becoming a landlord can be quite expensive. When you think about the purchase price of a rental property, this can be quite high. Even if you buy a rental property on a loan from a lender, the down payment can be substantial and the risk you are exposing yourself to can be quite large. You will need to have accumulated some amount of capital to be able to purchase your rental property. However, this is not the only cost that you need to be prepared for as a prospective landlord.
First, you will likely need enough money to cover any mortgage payments, operating costs, or taxes in the first few months of operation. Finding potential tenants might require some time, so you need to be prepared to cover this cost. At the same time, you will need to get insurance such as landlord insurance to be able to protect yourself in the event of liability problems. You may need to conduct renovations, build new units, clean up the property, or maintain and repair your current facilities. This can increase the cost of becoming a landlord, even from the outset.
As you set up your property, you may need to have inspections conducted to get and maintain your rental license and register your property with the proper authorities.
You may also need to financially prepare yourself for the first few months of ongoing costs including utilities, marketing programs, software for property management, a property management company, and money for legal fees and operating expenses.
The extent of money that you need to have on hand in the event of these ongoing costs depends on the situation. You may be able to purchase a property with tenants already renting apartments. However, this may not necessarily be the case. You may need to get your own tenants, and this process can be time-consuming to fill your vacancies. Additionally, empty apartments can still cost you money.
The location of your investment property will also affect how much capital you need to be prepared to devote to becoming a landlord. The size of your property will be as well. In any case, these calculations will depend on your situation and you should consider them in the context of your prospective landlord role. If you are comfortable with the capital requirements of becoming a landlord, then you can easily continue.
Keep in mind that you do not necessarily have to have all the capital upfront to purchase your property. You can raise money or take out debt to purchase your property. Financing your rental property has never been easier and lenders are available to help. You can get a mortgage on a property and make the upfront cost of becoming a landlord substantially cheaper. Getting access to rental income sooner may help your individual situation, depending on the circumstances.
Commit to Becoming a Landlord
The next step in the process of becoming a landlord is to commit to being a landlord. The reason that this step is so important is that you need to be prepared for the commitment that comes with this decision.
Having read through the legal statutes that govern your landlord-tenant relationship and the regulations in the area in which you are considering purchasing your rental property, you are in a good position to decide on becoming a landlord. Being aware of the liability that you are exposing yourself to, or exposing a corporation to, when deciding to become a landlord is important. It can allow you a more complete picture of your responsibilities and how you can protect yourself legally.
Becoming a landlord can also be a costly decision because it involves a large upfront investment that needs to be well-protected with your work and care. You need to be sure that you can maintain your property’s tenancy, occupancy, monthly rent collection, property value, upkeep, do upgrades, and more. If you are willing to invest and become committed to the idea of becoming a landlord, then you are well on your way to harnessing the rewards of having a rental property.
Once you are committed to becoming a landlord, it is time to start the official process of becoming a landlord.
Locate Ideal Real Estate
The first step in the official process of becoming a landlord is to locate the ideal real estate for your investment property. Earlier in the process, you thought of an area or areas that you would consider becoming a landlord in. This allowed you to take a look at local rules and regulations governing the landlord-tenant relationship and the general costs that might be involved in becoming a landlord.
Since you have an idea of the areas you are looking to buy in, you can start to look at investment properties in your area. You may also consider enlisting a commercial real estate realtor. They may be able to help guide you through the process of buying a rental property and any of the nuances involved in the process. You should also consider at this time the size and type of your property. Think about how many units you want to have and whether you want your rental property to be single-family or multifamily.
At this time, make sure to make a budget. Determine what is in your price range. Before you go to a realtor, make sure you have pre-qualified for a mortgage if you are intending on getting financing. Once you have a few options, get ready to make an offer for your future investment property.
Purchase an Investment Property
Now comes the exciting stage of finally purchasing your first investment property. After you have found the ideal rental property for your needs, make an offer on the property.
As you make the offer, consider market conditions that might affect the consideration of your offer, especially in comparison with others. Make sure to also think about the relative profitability of your prospective property versus others in terms of potential cash flow and rental income that you can draw. Consider the costs involved and the type of property that you want to have.
If you are buying purely real estate, you need to be prepared to construct a rental property. This can entail a large number of construction costs and time that you need to prepare for before you can attract prospective tenants. If you are purchasing an existing property with tenants, you need to be sure of the requirements that come along with acquiring the property and any obligations that you might be beholden to.
Once your offer has been accepted, prepare to pay for the property. You will need to be in touch with your lender if you are going with the financing route. The next few steps will focus on preparing your property for your leadership as a new landlord.
Purchase Insurance for Your Rental Property
The next step in becoming a landlord is purchasing insurance for your rental property. As you set up your apartments to be rented out, you will want to make sure that you are protected during the process from unnecessary legal liability.
Your property will require different types of rental property and investment property insurance based on the characteristics of the property and the number of tenants. Having a well-insured property can help protect you from experiencing losses or operational challenges in the event of unforeseen events.
A good, comprehensive approach to getting landlord insurance should include policies of liability protection, lost rental income, and property damage. Liability protection is important in the event of a lawsuit targeting your or your company as a landlord. For example, if a tenant injures themself on your property that you are renting as a result of a problem related to maintenance or upkeep, you could be sued. Liability protection can help protect you from losses.
Lost rental income insurance is helpful to you as a landlord if some accident occurs on your property that makes you unable to get rental income from a unit that you might previously have been able to. Property damage insurance works to help your property similarly. If a natural disaster occurs or you experience theft or vandalism, property damage insurance can help compensate you for the material loss to your property to help you rebuild or repair your rental property.
As you get in contact with an insurance agency to acquire insurance for your rental property, you should listen to the advice of the insurance agents. They can help recommend to you different policies as a first-time landlord for your property which can include very helpful advice on exactly the policies you need given your situation.
As renters come to rent with you, make sure to inform your renters that their belongings may not be covered in the event of theft. As a result, you should recommend renters insurance to them so that they can be covered.
Make sure to acquire all of your policies before you start working with tenants to rent at your property. You will want to make sure that you are covered in the event of any accidents or mistakes.
Improve the Property and Get Ready to Rent It
Now that you have acquired your rental property, it is time to prepare it for tenants to move in. Assuming that your rental property does not already have tenants renting units, you may want to improve the property to be able to increase rent and the financial performance of your investment property.
As a landlord, you should consider the type of renters you are trying to appeal to. You may want to offer affordable apartments, or, on the other hand, you might want to make your units very luxurious to appeal to high-end tenants. Either way, you should consider doing renovations to the rental property after you buy it to increase its property value.
By increasing the property value, you increase rent. You can, as a result, get more income from the same property and increase its value of it should you sell the property. A newer property that has just been renovated is likely to be more attractive than an older one under the same management.
If you are buying an investment property from someone else, you may need to do repairs and clean up the site. Not all buildings will be held up in great shape. As a result, you will need to make sure that your apartments are functional before being rented out to tenants. At the same time, you need to make them presentable to people who are going to visit the apartment as well as to be compliant with the agreement that your tenants will sign.
On the same note that it is important to fix up and clean the apartments that your prospective tenants will visit, you should make sure that you set up the ability for potential tenants to visit your property and see the units that they can rent. Having an organized system, such as an online booking portal for tours, can help you more efficiently manage your property and streamline your process for attracting tenants.
Price Your Apartments
As you are preparing your units for tenants, you need to price your apartments. Pricing your apartments is an important step in becoming a landlord as this will serve as the foundation of your rental property’s income. Pricing your apartments correctly might be difficult, but it can make all the difference when it comes to profitability.
To start pricing your apartments, you need to have an exact knowledge of what you, as a landlord, can offer to your tenants in terms of units as well as what they can find comparably in your local market. You can begin by considering the types of units you are offering and the characteristics of those units, such as the number of beds and baths in each unit and the amenities such as in-unit laundry or dishwashers. Then, consider the amount of square footage in each unit. Think about the amenities that your apartments offer, such as free parking, gyms, or pools. As you assemble the characteristics of your rental property, you are ready to start looking at comparable apartments in your area.
You can go on sites to look for apartments in your area and search by similar characteristics as your apartments at your rental property. Look at the prices and compare the amenities at each rental property, the characteristics of their units, and the reviews of their tenants. You can use this information to assemble a database of your comparable units to those of your competitors. By assembling this database, you can use this information to get more accurate pricing relative to your competitors.
The next step for you as a landlord would be to explore pricing strategies that best suit your rental property. You may consider pricing below the market in a move to make your pricing competitive. Alternatively, you may price higher than market prices to have your prices signal a better quality of unit than your competitors. In all, you should decide on the prices that you offer to tenants and the terms of the lease that you will offer correspondingly.
Market Your Apartments to Tenants
The next step in becoming a landlord is to take your pricing information and be prepared to start listing your apartments for rent on websites and other media to advertise your property and apartments in the local community. You should consider placing ads in your local newspaper, posting flyers in your community, or placing ads on social media.
Ads placed on social media and through sites that help prospective tenants find apartments may be particularly useful to your rental property. Make sure that your website or rental office is accommodating to tenants who want to come by and visit the property or units or inquire about the details of your rental property.
Overall, marketing and advertising are important parts of being a landlord and ensuring that you have a steady stream of tenants coming to rent units at your property. This skill will serve your business long after the grand opening of your rental property to renters.
Set Up a Property Management System
Managing a property can be a complex task. Even as a landlord, you may not have the perfect ability to manage all of the needs of your current tenants, prospective tenants, and property needs. You will have various tasks involved in managing your property. These include dealing with prospective tenants who want to visit your units or property, managing the leasing agreement process for tenants coming to rent units, keeping track of monthly rent payments and late fees, move-out processes, maintenance, tenant complaints, and legal compliance.
As you can see, landlords have a lot to manage. Doing this by themselves can be quite complicated. You might consider setting up a property management system to help you manage your property. This includes all of the processes related to getting rental income. By having software, you can be sure that you can keep more efficient track of your revenue and costs and deal with property tasks.
You may also look into hiring a property manager. A property manager can help run your property and manage a lot of the day-to-day tasks. This frees up your time as a landlord to be able to manage your property in bigger-picture terms and look toward acquiring your next rental property.
As you approach opening and get interested prospective tenants in your rental property, it will be time to onboard tenants. You need to be prepared to evaluate tenant applications, run background checks, check the credit of prospective tenants, and get them to sign a lease agreement. You should be ready to accept their security deposits and guide them through the process of signing their lease and getting them moved in. Inform your new tenants of the rules and policies of your rental property and how they might be able to get their mail forwarded, deal with trash, pay their utilities, and park their vehicles.
Open Your Rental Property
Congratulations! You are at the last stage of becoming a landlord with opening your rental property. Now that you have tenants, you are ready to fill your new or renovated apartment building and can start earning a lot of rental income. By using the strategies in this article and other powerful business management strategies, you can put your rental property on the road to success. One of the great things about becoming a landlord is being able to leverage your successes in one property to be able to fund and finance expansion to another. Your entrepreneurial journey has a lot of potential in the rental property industry!
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