In this post, we have identified the first 8 steps you should take as a landlord in order to ensure that purchasing your rental property is an investment success. Making the choice to purchase real estate is a great step towards taking charge of your financial future. But, it can be tricky to know where to start. However, it is vital to be prepared, as mistakes can be costly. The role of a landlord requires you to keep multiple balls in the air, and knowing the right place to start can be the difference between profit and loss in your venture.
1. Stay Within the Law
The first thing we must mention are the legal implications of renting a property. There are federal and state laws you must be aware of and these must govern your actions if you are looking to become a landlord.
These laws cover numerous aspects of buying to rent that you may not be aware of, including discrimination rules when it comes to choosing the tenants occupying your property. State laws may dictate eviction terms and even late fees as well so it is important to be aware of these before you begin drafting your tenancy agreement.
“Rental Property Law involves all law surrounding landlords and tenants, leases of immovable property, rental collection, evictions and advice on general disputes arising between all stakeholders in the rental property arena. It involves the dynamic relationship between a rental agent, a landlord and a tenant and is an intrinsic and often underestimated aspect of general property law and sales.”
Even in the event that you are expanding your own property to include rental space, you must check the legal stipulations, as permits may be required. Your insurance terms will also need to be amended, and you should check that the electrical circuitry and plumbing supplies are safe and able to take an additional load. Doing so will prevent potential negligence claims.
2. Calculate Rent Amount Carefully
Collecting rent is an essential component of being a landlord, and it can be tempting to look only at existing properties to calculate your rental amount. While it is true that setting your rent at slightly below the current average for your location should ensure that you are not left with a vacant property, this shouldn’t be the only factor in the decision.
Look closely at your costs, including the loan repayment amount, tax deductions, maintenance savings and insurance. You should also take account of the capitalization rate, which calculates the rate of return on an investment property using the expected annual rental income divided by the purchasing price. It is explained in more detail below by Property Metrics.
“The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.”
Once you have your figures in hand, you can make an informed decision about the rental rate which should prevent nasty surprises further down the line.
3. Screen Tenants Thoroughly
Hopefully, this is not news to you! It is absolutely crucial to screen every potential tenant, as bad tenants can prove to be far costlier than a vacant property! Check out the post we wrote on this topic here for additional details.
While renters are looking for the right property to rent, as a landlord and property manager, you are looking for the right tenant for your property.
You must treat every single potential tenant the same way, using the same checks and making your choice without discrimination. We recommend you conduct an initial screening over the phone, enabling you to state your base requirements such as no criminal records or bankruptcy. From there, an application form can be filled out by each potential tenant, allowing you to conduct more thorough checks on their background, criminal and credit checks as well as references.
It may feel like a hassle, but will save you a fortune in the long run!
4. Create a Robust Lease Agreement
Your rental agreement should be strong with no loopholes. This document is your protection against damage to your property, it is what gives you the power to enforce your landlord rules, and it should be created with care. Customizable templates can be a good place to start but be sure you are covered, and you are abiding by the laws in your state. We would advise an attorney familiar with your local laws review your document before you sign.
5. Make Sure Your Property Is Attractive
When choosing a rental property, you probably have a long list of requirements in your mind. The location, the basic condition, the number of bedrooms, etc., but you are unlikely to consider the finer details as someone living there.
As a landlord, it is easy to overlook the points that make a property attractive to tenants when you are in the mindset of making an investment. But, being aware of aspects such as privacy, space and sound proofing can mean far fewer complaints over the years.
6. Inspect Your Property Regularly
Once you have chosen a great tenant for your property and you have documented the property condition and inventory on their arrival, don’t think you can sit back and enjoy the rent rolling in. Landlords should protect their investment by regularly inspecting the rental property in order to ensure it is being kept in a good condition and to keep on top of any required maintenance. Include these regular inspections as a term of the lease so that the tenant is aware that this will be happening. Usually, every three months is enough to check on the condition.
These inspections will give you the opportunity to catch any issues before they become big problems, hopefully saving you money. And just in case you are wondering if routine repairs are really your problem, take a look at this Q&A from NOLO.com.
If a landlord doesn’t make required repairs, what are the consequences?
If a tenant requests repairs and the landlord or property manager doesn’t meet the habitability requirements, a tenant usually has several options, depending on the state. These options include:
•Making the necessary repairs and deducting the costs from the next month’s rent
•Withholding the entire rent until the problem is fixed
•Paying less rent while the rental remains substandard
•Calling the local building inspector, who can usually order the landlord to make repairs
•Moving out without responsibility for future rent, even in the middle of a lease.
7. Do Your Filing!
One secret to being a successful landlord is organization! You have legal and tax responsibilities, so do yourself a favor and keep everything straight and retain records of everything. As the following quote from Investopedia shows, rental income is classed as a common income source.
“Money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.
For example, suppose you rent out a house for $1,000 per month and you require that new tenants pay first and last month’s rent when they sign a lease. In this case, you’ll have to declare the $2,000 you received as income, even though a $1,000 of that $2,000 covers a period that might be several years in the future.”
Some people find it useful to set up a separate bank account for rent and hire an accountant to do the books, plan for taxes, etc. Often, landlords even go as far as using a separate phone line and P.O. Box number for any correspondence relating to their rental property in order to keep this part of their business separate from anything else.
8. Hire a Property Manager
When you are armed with the knowledge of these first steps, you should, hopefully, feel clear headed and empowered to move forward with your goals of becoming a landlord. But, if this has left you feeling more concerned than before you started reading, fear not. There is another option. A property manager can take care of all of your needs once you have purchased a property, from advertising for tenants, to sourcing and screening tenants, to the lease agreement, inspections and maintenance of your property.
They can handle rental collection, late payment and even eviction if necessary. The huge benefit of hiring a property manager is that your time will not be tied up in the administration of your investment. Take a look at the opening line of Ray White Management’s “Owner” page which shows they understand the goals of a landlord and know what is required to make that happen.
“Here at Ray White we recognize that your rental property is a significant investment and as such, you expect appropriate returns. In order to achieve this, you need to minimize your vacancies and maximize your rental yield.”
These 8 steps should provide you with a real insight into exactly what is required of you as a new landlord. Following the guidelines will keep you and your investment protected while avoiding costly and time-consuming mistakes. So, whether you decide to go it alone or hire a property manager, you should find that your rental property venture is a success.