Why Become a Landlord?
As the demand for housing continues to grow, most of the world’s need for living spaces has been supplied by rental properties. As of 2016, investment home purchases have risen from 1.09 million to 1.14 million. This marks a 4.5% increase, and a trend that’s set to continue over the next few years.
Best of all, this presents a great opportunity for those looking to get into rental property investment.
Investing in property for rental capitalizes on the current flow of the housing market. If you already have property, it can be a good way to pay off its expenses while its value appreciates over time.
However, becoming a landlord requires a significant investment --both in terms of finances and in terms of your time and effort. It isn’t for everybody, but if you find yourself in the position of a landlord by choice or by chance, it’s best not to go in blind.
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To guarantee that you make the most out of your investment, we’ve prepared this guide to walk you through the details of acquiring, preparing, and managing a property for rent.
Take the First Steps
A considerable amount of preparation is needed before you could put a property up for rental. Depending on whether you’re taking the hands on approach or hiring people to manage your business, there’s a certain list of things you’ll want accomplished.
Assess the property’s condition and get any repairs or renovations out of the way. If the property was recently occupied, there may be fewer things that need work --but it’s still advisable that you look through the general list of fixtures and utilities.
Once you have the property functional and presentable, scope out the flow of tenants in the area. Checking on what properties are already hosting at your location, which are particularly popular, and for what reasons, will allow you to prepare and market your property in a competitive manner.
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There are different kinds of tenancies and understanding each one will help you better decide which you want to cater to. Fixed-term tenancy has a definite duration and last only until the agreed upon date, usually lasting a month or a year. Periodic tenancy allows for more flexibility as it is renewable after an agreed duration, such as weekly, monthly, or yearly. Tenancy at Will is the most lenient as it lasts until terminated by either the landlord or the tenant.
The last kind of tenancy is more of a special case. A holdover tenancy results from continued tenancy despite the end of an agreement (either because the agreement expired, or was terminated). In any case, the tenant must satisfy the conditions of rental or risk being evicted.
Once you’ve chosen a type of tenancy to aim for, you can set visitors’ policies early on. These are your positions towards things like pet ownership and smoking on the premises. Being lenient will definitely attract more prospective renters, but keep your property and finances in mind. It might be easier to enforce rules than to pursue disputes in case of any damage or accidents.
The next step would be to sort out the paperwork. From here, you will be interacting with professionals and experienced individuals. If you lack the skills or the desire to be a full-time landlord, consider hiring a property manager or signing up with a listing site. A property manager could sort things out on your behalf at the cost of some of the profit, whereas a listing site such as 2nd Address does most of the work for you, guaranteeing a smoother operation in the long run and at no additional cost.
Know Your Initial Costs
Preparation is the key to efficiency. Knowing how much you need to put down to get this business off the ground will help you avoid spending any more than absolutely necessary. Some things to take note of would be:
Acquiring property involves seeing to its mortgage. Be aware that your rate may be higher than if the property was for ownership. Understand that this is because as a business it is considered riskier and the investors need to look out for themselves. This is why you should keep an eye on your expenses and see to it that your finances are sorted. The less you spend, the easier it’ll be to make your money back.
Additional costs may vary depending on your business model and the renovations needed to set the space up accordingly. There will also be the occasional need for repairs, so keep a budget on hand for these exact moments. Fortunately, repairs will come up most often before and after a tenancy. Remember to keep the receipts for any repairs as they could be tax deductible.
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Opting to furnish your property will allow you to demand a higher price and attract tenants who are only looking for an extended stay. Keep in mind that furniture carries with it additional costs, ranging from repairing them to replacing them when they get damaged or faulty.
Legal matters should be taken up with a local lawyer, and insurance for the property should be secured as well. Most landlords rely on rental income to cover for all other ongoing costs, but it would be smart to consider the possibility of having no tenants for months at a time. Extending your budget to cover for those times can save you a lot of concern.
A lot of these management decisions could be taken care of by hiring a property manager. This remains an optional step but it does allow you to distance yourself from the responsibilities of being a landlord. Hosting through an online listing at a site like 2nd Address will also allow you to earn your passive income while minding even less of the risks and problems. Since the site has no listing cost or commitment, you are attracting your desired guests at no additional cost.
Know your Obligations
As a landlord, you should have a good understanding of the responsibilities that come with your position. The foremost obligations would be those of a financial nature with the monthly mortgage and insurance as top priorities. There are also legal obligations which vary from region to region and state to state, so always guarantee that you are operating in compliance to the rules specific to your area.
A landlord must always be prepared to remedy a situation. Although the burden of making sure that the space is livabile prior to any agreements falls on the tenant, most current jurisdictions infer what is called an “implied covenant of habitability”. This is when hiring a property manager could prove to be a great decision. If you aren’t available to guarantee the safety and habitability of the property, then you should at least have someone look after it for you.
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Further repairs are not usually the landlord’s concern unless otherwise negotiated upon. Modern rules, however, do hold the landlord liable for any casualties or injuries incurred from failures to assure the property’s safety and livability. To this end, guarantee that the property is maintained and that concerns are attended to in a timely manner.
If being a landlord feels like too much of a full-time job, getting someone to manage it could be better for the long-term. Listing sites such as 2nd Address also simplify the process by screening through prospective tenants for you, guaranteeing the rent is always paid on time, and assuring that your property is protected. Take advantage of these resources to make sure being a landlord is never harder than it has to be.
Settle the Paperwork
As the landlord, keep track of all the necessary records. File taxes, report income and expenses, and stick to the laws and regulations of your area. Acquire insurance and avail of legal services when necessary. As much as you should keep costs to a minimum, you should also spend to guarantee your business is a success.
Keeping accurate records will help you chart out the course of your business. For ease and efficiency employ computer programs such as Microsoft Excel or other more specialized software. Due to how complicated tax laws can be, it will definitely pay to have an accountant see to your records. Finally, knowing where you stand in terms of money going out and money coming in (a.k.a. your cash flow) will help you decide on where to go with with your investment.
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A lease grants tenants the right to use the property while maintaining the landlord as its owner. Take the time to set up an ironclad lease agreement, since it serves as the binding contract between you (the landlord) and your tenants. Naturally, this should be aligned with local laws while also specifying the conditions of the arrangement as agreed upon by both parties. Given how important your lease agreements are, always be sure to iron out the details with a lawyer to avoid any future concerns.
Set up Rent
Determining your rent will make or break your finances. The long and short of it is that the rent should be able to cover for the costs of operation and earn you some profit, while still appearing attractive enough when compared against other options on the market. Scoping out the rates for similar spaces will help you pin down a good maximum, and looking over your mortgage, property taxes, maintenance, and insurance will help you set a good minimum.
The strengths and selling points of your property and your area should also help you settle on a rental price. If there are more tenants than spaces, you could raise the price. But likewise if there aren’t many tenants, lowering the price to stay competitive could be the better option. Always be aware that prospective tenants will likely to look up more than one space, so it’s better to have your space on their shortlists.
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Raising the rent is a whole other ballgame. Once you already have a tenant and they have signed a lease, you cannot normally raise the rent until the lease expires. This is why it would be a good idea to include a provision in the lease that allows you to raise rent. Certain local laws may still have a say in the matter, so be sure to align yourself with local policies and give your tenants advance notice if you’re ever pushed to raise their rent.
On the matter of collecting rent, make sure that the lease covers the details of payment and non-payment in full. Be very clear about the expected amount to be paid, the frequency of payments, the method (ex. in cash? Through bank deposits?), and the consequences of failure to deliver. Though a lease is largely up to the landlord and the tenant to agree upon, always take the time to run the specifics of the document with the laws and regulations of your area.
Interact with Tenants
The key to your business’s success will be your tenants. Acquiring your first tenants is an important step towards becoming a successful landlord. Keeping your business model in mind and the sort of tenants you are looking to cater to will help you present your space better. Going for a catchall space may also work out if you’re trying to cast a wider net.
Be honest when it comes to presenting the space, especially with the advertisements you put out. Stick to the property’s selling points, of course, but try not to send anyone the wrong idea. If a space will be unfurnished, remove any furniture in any of the images. This will help you get in touch with the tenants who will be willing to commit to your terms all the sooner.
Keep up to date with where rental properties of your business model post their advertisements. Local press and social media are good platforms, but consider other sites that may provide your space with more visibility. 2nd Address provides a wonderful platform that allows you to fill in the details so that the website could best present your space for you. The website even has options that allow you to narrow down prospective tenants so that you attract the kind clients you want.
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Once you have acquired prospective tenants, it’s time to sort through them to find the right ones. Always be thorough with your background checks to avoid getting problem tenants. Credit history, criminal records, and any evictions are just some of the things you should strongly consider when deciding on a tenant. This is your property, and your income, on the line after all.
Still, be aware that a thorough process does not give you license to disregard certain applications in favor of others. Discriminating against a prospective tenant on the grounds of their race, color, gender, and disability among other things could have you on the wrong end of a lawsuit. Depending on the laws specific to your area, there may be other guidelines to the process. When you do have to reject an application, make sure you are in the right.
Comply with Regulations and Acquire Insurance
Hire a local lawyer to make sure you comply with local, state, and federal laws. Having a qualified attorney will also help you with clarifying and seeing to any permitting and licensing requirements. Legality is an important towards securing the future of your rental property so never hesitate to spend when it comes to this. A lot of other aspects of owning rental property require knowledge of the law so having a reliable consultant is an immense boon.
Housing codes will determine your renovation priorities, and local laws could affect a large amount of landlord-tenant interactions such as raising rent and evictions. Local government and libraries could have records of these regulations for you to educate yourself. There are also online sources for ease of access.
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State laws and Federal laws cover a large part of all other legal matters. Keep updated as laws change periodically and strive to be informed so that you could comply. Among these laws, one of the most important to note is the Civil Rights Act which specifically prohibits race-based discrimination. Landlords must also comply with the Fair Housing Act and the Fair Housing Amendments Act. These further prohibit discrimination based on race, color, gender, national origin, family status, disabilities or religion.
Acquiring legal services is certainly imperative to the start and continuation of your business. An attorney will not only be able to guarantee you remain in compliance to the laws of your area; they could also help you set up a lease. This is particularly important as a lease is the agreement between the landlord and the tenant. Making sure that it covers for your finances and your property while still seeing to the tenant’s best interests will guarantee the security of your arrangement in the eyes of the law.
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Having an attorney will also be extremely useful in the event of a dispute. Should the tenant file a lawsuit, you attorney can provide you with the assistance and advice you need to best handle that situation. And when it comes time for you to carry out an eviction, consulting with your attorney will make the process all the smoother as they walk you through the dos and don’ts.
On the matter of insurance, the first thing you should understand is that insurance for a rental property differs from the insurance you get for a residence. From a business perspective, it’s because tenants are seen as a higher risk than if the property was inhabited by an owner. You will need to get an insurance policy specific to rental properties which could cost more.
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Insurance specific to rental property covers for damage to property and finances in the event of a fire or a storm, as well as to any harm brought about by such an accident. This sort of insurance should be enough for your sake as the landlord, but does not really cover for your tenants’ property. Take the time to advise them accordingly, and recommend that they get their own renter’s insurance.
There may be a need for additional insurance depending on your area, such as if it is prone to storms and flooding. Even optional policies could be worth considering, if only to safeguard against potential losses. Take the time to check if the risk outweighs the cost of the policy and make your decisions accordingly. This will allow you to manage your resources while also establishing safety nets that could be worth it in the future.
Take Time for Your Taxes
Of all the obligations that come with being a landlord, there are some immediate gains. Among these are the tax benefits you can claim for your yearly income tax return. There are also tax benefits once it comes time for you to sell the property. Note down the expenses these benefits apply to and make the most of them to cut your expenses and conserve your income.
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Tax benefits will allow you to deduct the interest payments on your rental property mortgage. It will also apply for certain expenses such as depreciation, repairs and maintenance, and insurance premiums. For these tax deductions, the property must be geared towards long-term arrangements. Accumulate proof that the business operates as such to keep you in good terms with the IRS.
Possibly the hardest part of the job, evictions unfortunately come with the territory of rental property. You may find yourself faced with a tenant who is incapable of paying rent, or whose presence is a nuisance or a danger to other tenants. For your sake, your other tenants’ sakes, and the property’s sake, you will have to see to the problem tenant’s eviction.
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Always keep the law in mind when conducting an eviction. Consulting with an attorney will make sure you are not violating any rights. Remember that just because you own the property does not give you right to enter it at any given time. Send the tenant due notice of their eviction, and resort to a lawsuit if they do not take the proper steps to respond to the notice.
Laws regarding the process of eviction may vary, so never hesitate to acquire the aid of legal services. Though the process may prove costly, it will be worth it in the end when you have looked out for yourself and your property.
What Comes Next?
Once the property is set up and earning, where do you go from there? You can opt to make the most of your current property or, if you’ve got the resources and the will, you could acquire more property and expand on your operations. Acquiring new property means going through the entire process all over again, so this guide will always be a handy companion on your journey.