Owning a rental property can be a great way to earn money. Perhaps you want to create a new stream of income. Maybe you stumbled upon a great deal and want to take advantage of an attractive investment opportunity. Whatever your motivation, becoming a landlord can potentially be a smart financial move.
But there’s risk involved with becoming a landlord as well. If you’re interested in becoming a landlord for the first time, it’s essential to take your time and learn how the process works. A little research upfront can go a long way toward helping you avoid rookie mistakes.
11 Steps to Becoming a Landlord
- Purchase an Investment Property
- Budgeting for Landlord Costs
- Understanding Landlord-Tenant Laws
- Acquiring Landlord Insurance
- Preparing Your Rental Property
- Determining How Much Rent to Charge
- Marketing the Property
- Screening Prospective Tenants
- Signing Tenants to a Lease Agreement
- Maintaining the Property
- Staying Organized
How to Become a Landlord: An In-Depth Breakdown
Deciding to become a landlord involves more than many people realize. Follow this in-depth breakdown for a behind-the-scenes look at the process.
1. Purchase an Investment Property
The first step to becoming a successful landlord is finding the right rental property. If you’re new to the world of real estate investing, it’s best to begin with some research. You might, for example, benefit from studying real estate investment books and resources from successful, reputable investors.
Finding the right investment property is an art. As a new landlord, you may want to start with a rental property that’s near where you live. If you buy an investment property that’s in the same city, it will probably be easier to meet with tenants and deal with emergencies or repairs when they arise.
Of course, it’s also crucial to select an investment property in a healthy real estate market. Ideally, you want to find an area where real estate values are on the rise and there’s a high demand for rental properties.
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Once you find the perfect investment property, you’ll need to secure financing to purchase it unless you’re paying with cash. Although this process can be similar to obtaining a traditional mortgage, there are key differences you need to be aware of as well. For example, rental property loans generally cost more. Lenders may also have stricter qualification guidelines you’ll need to meet to qualify for financing.
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2. Budgeting for Landlord Costs
After you close on your investment property loan, you’ll need to get a handle on your rental property budget. Naturally, you should plan for monthly loan payments, taxes, and insurance premiums. Yet there may also be some unexpected landlords costs you haven’t considered.
Ideally, you should build up a savings account with reserves and emergency funds to help you cover any of the following expenses:
- Repair and Maintenance Fees (Including big-ticket issues, pest control, flooring replacement, painting, appliance repair, and much more)
- HOA Fees
- Legal Fees (To draft rental agreements, help with eviction, etc.)
- Marketing Costs
- Tenant Screening Costs (Depending on your state)
- Utility Costs (When property is vacant and, perhaps, as part of your lease agreement)
- Regulation-Related Expenses (Licenses, inspections, registration fees, etc.)
- Lost Income (Due to vacancy or tenants who don’t pay)
3. Understanding Landlord-Tenant Laws
Being a successful landlord also requires educating yourself about the parts of the process you don’t understand. One area you can’t afford to skip is the laws that surround landlord-tenant relationships.
On the federal side, you’ll need to learn and comply with fair housing laws. The Fair Housing Act, for example, makes it illegal to discriminate against tenants (or potential tenants) due to race, religion, family status, gender, disability, and a host of other reasons.
In addition to the federal laws you need to be familiar with, you should also research landlord-tenant laws for your state and city. Pay special attention to laws about security deposits, late fees, lease agreements, and your responsibilities when the property needs repair. Don’t forget to learn about your rights as a landlord if a tenant stops paying rent. (Unfortunately, it happens.)
4. Acquiring Landlord Insurance
When you buy a rental property, you’ll need to take out specialized insurance to protect your investment. Your lender will likely require you to have a standard homeowner’s insurance policy. But you should strongly consider taking out landlord insurance as well.
Landlord insurance combines several valuable forms of protection into a single policy. The coverage may protect you in the event of any of the following:
- Property Damage
- Theft (Tenants need renters insurance policies to cover their personal belongings.)
- Rent Payment Default
- Loss of Rental Income
Of course, every policy is different. If you’re considering a new landlord insurance policy, review it carefully to see what it does and does not cover.
Not sure where to find the coverage you need? Here’s a guide comparing some of the best rental property insurance companies to help you start your search.
5. Preparing Your Rental Property
Before you can start showing your rental to prospective tenants, you’ll need to get your property ready. Of course, you want to make your rental look as appealing as possible. But your preparations shouldn’t stop at curb appeal.
Rental Preparation Checklist
- Clean or replace the carpets.
- Paint or clean the walls.
- Inspect and clean storage areas, cabinets, and closets thoroughly.
- Clean the windows.
- Make sure the rest of the home is tidy, clean, and in good repair (inside and out).
- Replace air conditioning and heating filters.
- Inspect the home for major problems (e.g., leaking roof, broken or leaking faucets, electrical issues, etc.).
- Be sure all appliances work properly.
- Make sure the home has the proper fire safety equipment (e.g., working smoke detectors and a fire extinguisher).
- Spray for pests.
6. Determining How Much Rent to Charge
As a landlord, another crucial decision you need to make is how much to charge for rent. Start by searching for similar rentals in the surrounding area. Then, compare the prices other landlords are charging for rent. Zillow provides a rental estimator tool that may be useful here.
Will you be providing certain utilities as part of your lease agreement (e.g., water, sewer, trash pick up, natural gas, electricity, cable, internet, etc.)? If so, don’t forget to add these extra costs into your monthly asking price.
You’ll also need to decide how much you want a new tenant to put down as a security deposit. Depending upon the city and state where your rental property is located, security deposits may be capped at a maximum amount. You can find a list of security deposit limits by state on Nolo.com.
7. Marketing the Property
Once your property is ready to rent and you’ve set the price, it’s time to try to attract potential tenants. If you’re like most landlords, you’ll probably start by hammering a “For Rent” sign in the front yard of your property. You’ll most likely generate some interest that way. However, it may also be necessary to widen your net and try some different marketing approaches.
The right marketing strategy will help you attract well-qualified tenants with as little money out of your pocket as possible. Here are a few marketing methods that have worked well for many landlords in the past:
- Online Advertisement: Be sure to include high-quality photos of the property’s interior and exterior. It may also be wise to advertise on multiple websites, like Zillow, Trulia, Facebook Marketplace, and Craigslist.
- Newspaper Ads: Although it’s old-fashioned, running an ad in the local paper may be an inexpensive way to drum up some interest in your property.
It’s a good idea to be upfront and transparent in your ads about the price of your rental. You might also include details that matter to prospective tenants. For example, are pets allowed? Do you require a background check? Is there a fee for rental screening?
Once your phone starts ringing with calls, be prepared to show the home to interested renters. If you continue to grow your real estate investment portfolio in the future, you can outsource showings to a property manager down the road.
8. Screening Prospective Tenants
As a new landlord (or even a veteran landlord), making sure your rental property doesn’t sit empty is probably high on your priority list. After all, if you don’t have a tenant, your property won’t generate monthly income.
But you shouldn’t rush and accept a tenant without completing a proper screening process. No matter how nice a person seems, you need to accurately assess the financial risk of allowing him or her to rent your property.
To protect yourself and your investment, you should thoroughly vet all rental applicants upfront. Prospective renters should fill out an application and agree to a full tenant screening — including background, criminal history, employment, and credit check.
You can find sample rental applications at your local real estate association or have a reputable attorney create one for you. You may also use a tenant screening service to assess the risk of renting to a specific applicant. (Depending upon your state law, you may be able to pass the cost of credit checks and screenings services along to applicants.)
Below is a list of several tenant screening services you may want to check out.
Tenant Screening Checklist
- Have you verified that the applicant has stable employment?
- Have you verified the applicant’s income from his/her employer and tax return?
- Does the applicant earn at least three times the amount of the property’s rent?
- Is the applicant’s credit score sufficient to qualify (usually 620 or higher)?
- Has the applicant been evicted from a prior rental property?
- Does the applicant have a criminal record?
Renting to the wrong person can cause you severe financial harm. If you allow an unreliable person to rent your property, getting that tenant out (with your property still intact) can be a challenge. According to TransUnion SmartMove, eviction costs average around $3,500. Plus, the eviction process itself can take as long as three to four weeks.
9. Signing Tenants to a Lease Agreement
After you’ve vetted prospective tenants and found someone you’re comfortable renting to, it’s time to put everything in writing. It’s essential to have a signed lease agreement (also known as a rental agreement) before you allow a tenant to move into your investment property.
Your lease agreement should include the names of all tenants and occupants who will be living in the home. It should also address the term of tenancy (aka how long the lease will last). It’s wise to include your pet policy too.
Reference any money to be paid by the tenant (rent, deposits, fees, etc.) in the lease agreement, along with your repair and maintenance policies. You should also assert your right to enter the rental property (with notice if required by law). Finally, be sure to include any disclosures required by the state or city.
Although you can purchase templates online, it’s usually best to have an attorney draw up your lease agreement. An experienced local real estate attorney should be familiar with state and local laws that pertain to lease agreements. This can protect you from accidentally leaving something important out of the agreement (or accidentally including something that shouldn’t be there).
10. Maintaining the Property
Being a good landlord requires you to stay on top of maintenance and reasonable repairs to your rental property. In general, this means you need to make sure the property remains habitable — safe, healthy, and clean.
Your responsibilities may vary depending upon local and state laws. In general, you should expect to take care of the following:
- Plumbing Repairs
- Electrical Repairs
- Gas Repairs
- Structural Repairs
- Appliance Repairs (If you supplied them)
- Pest Control
- Mold Remediation
- Repairs and Maintenance of Common Areas (In multi-unit properties)
You should also pay attention to building codes. If the property isn’t up to code at any point, it will be up to you — the landlord — to fix the issue.
Not only should you respond to your tenant’s legitimate requests for maintenance, but it’s also wise to perform routine checks of the property yourself.
11. Staying Organized
Becoming a landlord doesn’t just mean more potential money in your pocket. It means more paperwork as well.
When you own a rental property, there are numerous documents you need to complete and save. From leases and tax documents to receipts and email correspondence, you should create a habit of keeping information that pertains to your property or your tenants.
Landlord Organization Checklist
- Create a new folder for every tenant. A digital file (with backup) should work fine in many cases. Each tenant’s folder should include a signed copy of the application and lease, photos of the property before the move-in date, written correspondence (email or otherwise), and walk-through inspection reports.
- Know when to hang onto original documents. Although digital storage works fine most of the time, there are some original documents you should save. For example, you should keep original copies of property deeds, insurance policies, tax information, safety inspections, licenses, and other important information.
- Save information about income and expenses. You should have a separate file detailing the income you earned and the expenses you incurred from your rental property each year. Consider logging this information into a spreadsheet for good measure. For example, you’ll want to save receipts or invoices for advertising costs, repairs, maintenance, property improvements, and more. Having these expenses in one easy-to-access location can make things much easier when tax time rolls around.
- Consider opening a separate bank account. This can help you separate personal and rental income and may be helpful when it’s time to file your taxes.
Additional Things to Consider After Becoming a Landlord
The 11 steps above can guide you through the process of becoming a successful landlord. Yet once you become a landlord, there are other responsibilities you’ll need to handle.
When and How to Increase Rents
Your rental property is an investment that will hopefully grow more valuable over time. For this reason, it’s crucial to continue monitoring your local rental market, even once a tenant has moved into your property.
If rent prices in your area increase, you may be able to ask for a higher monthly payment as well (with ample legal notice). But if you do opt to raise the rent, be prepared. There’s a chance your current tenant might walk away from the property. According to Zillow, around 50% of renters move when their landlords raise the cost of rent.
Tax Benefits Available to Landlords
Owning an investment property gives you the potential to generate additional monthly income and, hopefully, build more equity in your property over time. Yet there’s another possible upside you may enjoy as a landlord — tax benefits.
Below are five of the best tax deductions you may be able to claim as a landlord.
- Mortgage Interest: If you owe a mortgage on your investment property, you may be able to deduct the interest paid on the loan when you file your tax return.
- Property Tax: You can generally deduct the state and local real estate taxes you pay on a rental property, per the IRS. However, you can only deduct up to $10,000 in property taxes ($5,000 if married filing separately).
- Depreciation: The theory behind depreciation is that buildings lose value as they grow older. So, the IRS will let you write off that hypothetical reduction in value slowly — calculated as the property’s value divided over 27.5 years.
- Insurance: Do you have liability or landlord insurance for your rental property? If so, you may be able to deduct the cost of your annual premiums from your tax return.
- Repairs and Maintenance: When you spend money to maintain or repair your rental property, you can generally deduct those expenses from your taxes.
Tax deductions and laws are complex and often difficult to navigate (especially in light of recent changes). An experienced CPA can help you to make sure you’re filing your tax returns correctly and discover any potential write-offs you may have missed.
When and How to Evict Tenants
As a landlord, you hope to find trustworthy tenants who will take care of your property and pay their rent on time. Unfortunately, things aren’t guaranteed to work out this way. You might take on a tenant who breaks the terms of his or her lease. If this happens, you may be forced to start the eviction process.
Final Word: Becoming a Landlord
Purchasing a rental property can often be a sound investment. If things go well, you may be able to diversify your investments, build a steady passive income source, and have an asset that increases in value over time.
But it’s important to remember that investing in real estate involves risk, just like any other business or investment opportunity. When you take the time to educate yourself and prepare in advance, you’ll improve your odds of being a successful landlord. You might even grow to love the experience (and the extra income it provides) and decide to purchase more investment properties in the future.