You’re all smiles as you plan to dip your toes into the lucrative real estate industry. Or maybe you’ve already built a property ready to usher in your first tenants.
Either way, as a first-time landlord, the things to do can quickly overwhelm you.
Don’t worry- we are here to hold your hands as you take those baby steps. Here are some of the things to tick off your checklist:
1. Take Cover- Obtain a Landlord Insurance
Before opening your property’s doors to tenants, ensure you’ve purchased landlord insurance. You don’t want to suffer from common issues when renters occupy your property.
You can choose from three types of landlord insurance policies:
It’s the least expensive and covers only stated risks. These perils can include:
- Fire and smoke
- Windstorms, hail, and lightning
- Vehicle-caused damages
But you’re not guaranteed compensation for damages from any of those issues.
A DP-2 protects you from more types of risks. The policy explicitly names covered risks, just like DP-1 policies.
Apart from covering what a typical DP-1 does, DP-2 policy may also include:
- Frozen pipe and electrical damage
- Falling objects
- Damage resulting from ice and snow weight
- Building collapse
This policy is an open peril cover that lists any specific risk not included in the above coverages.
2. Compile a Thorough Lease
The lease agreement is a binding contract that stipulates what you and the renters can and cannot do. The document also explains the steps to take if any party breaks the agreement.
Remember to cover all bases when writing a lease. Sure, a two-page document may cut it for some time. But what if something that wasn’t covered adequately in the document crops up?
Ensure you’ve included and described these items to safeguard your interest while adhering to legal obligations:
- Length of lease and provisions for automatic renewal
- Name and status of every person that will be residing on your property
- The period allowed for tenant’s “guests” to occupy the property
- Rent, when its due, and penalties for late payments
- General deposits and security deposits plus circumstances that will cause you to hold the deposit
- The party responsible for utility bills
- Rules regarding pests
- Property maintenance
The exact clauses, terms, and language may vary with states, so do your homework perfectly.
3. Befriend the Laws
You want to remain on the safe side of the law. After all, who wants to contend with lawsuits that can tarnish their images and waste resources?
The trick is to know and adhere to all fair-housing acts. This law protects tenants against discriminatory practices in housing based on seven factors:
- National origin
- Familial status
The Department of Housing and Urban Development (HUD) is responsible for enforcing this act.
Here’s a well-kept secret: A person from HUD can pose as a renter on your property to see if you follow their act. Don’t let them trap you.
Also, if a renter feels like you’ve discriminated against them, they can file a claim with HUD. The department will then conduct investigations to get to the bottom of the matter.
To avoid such accusations and comply with the fair housing act, assume every potential tenant works for HUD or is attempting to accuse you of breaking the laws.
- Treat every tenant with dignity and respect
- Screen tenants consistently and employ a uniform qualifying standard- request the same documents, fees, and details
- Check your federal, state and local fair housing laws to ensure you aren’t missing any mark. Be sure to stay abreast with all laws by researching in the right places for updates.
4. Screen Tenants and Their “Guests”
Although we mentioned this point above, it needs its own section. Yes, it’s that important.
Your renter might be a nice person who lets family and friends couch-surf while they look for their places. Or, due to a whirlwind of romance, their significant other might overstay at your property. Whatever the situation, complications may arise in the long run.
On the surface, unscreened guests staying beyond the reasonable time frame might not be the biggest deal. But here are some of the dangers they pose:
- Unknown Background: Screening helps uncover every occupant’s criminal and credit background. You want to ensure no one turns your property into a launch-pad of criminal activities.
- No security investment in the property: Unscreened guests don’t have a monetary investment that incentivizes them to maintain and clean the property.
- No consequence for disruptive activities: The unscreened occupants also aren’t the ones who stand to lose their space when they argue, play loud music, or ignore complaints from neighbors.
Let’s face it- it’s difficult to stop tenants from hosting unscreened occupants. Your best bet is to limit how long these guests can stay. Remember to include this policy in your lease to make enforcement a breeze.
5. Property Management Vs. Self-Management
Choosing between hiring a property manager and self-managing isn’t as easy as it sounds. A novice in the industry may view their property as a simple equation of rental revenue – (costs + mortgages) = profit.
But that’s just a basic mantra. It’s also recommendable to account for landlord duties, time, and energy. The duties include:
- Addressing vacancies
- Dealing with tenant relations
- Rent collections
- Lease enforcement
- Other duties – Think taxes, tenant turnover, evictions, insurance, rental law enforcement, inspections, and adjusting the rent.
Managing all these duties can be a stressful 24/7 job. But with a platform like LandlordStation, your task becomes painless. Our one-stop solution will cover everything from tenant screening to document management and online rent payments to renters insurance.
Hiring property managers come with perks of benefits. These professionals make it their duty to understand the rental industry’s fair housing laws and best practices.
Property managers also enjoy powerful links in the industry, thanks to professional groups and associations. So staying abreast with changes in rental laws is painless.
However, these professionals typically charge 7-10% of monthly rental income to handle all the above duties and issues. For instance, the monthly fee may be $100 for a property whose rental income is $10,000. Plus, getting a trustworthy manager can be challenging.
6. Require Renters Insurance
We see you asking, “But I have my property insurance.” That’s great.
However, a smart landlord requires all tenants to have their own insurance policy. These policies protect you against extra liabilities.
While your homeowner insurance covers the actual structure and dwelling, the renters’ insurance protects the tenants and their property from losses.
For instance, your landlord insurance policy will cover building damages caused by a burst pipe, fire, or electrical issue. But what if the fire, water leak, or power surge destroy your tenant’s personal belongings? That’s where the renters’ insurance policy comes in.
Most renters’ insurance policies also include additional living costs incurred from insured misfortunes. Consider a situation where you need more time fixing that pipe, repairing drywall, and replacing the flooring. Such a situation can force the tenant to look for a temporal place, for example, in a hotel. Fortunately, their renters’ insurance policy may pay for extra expenses above their normal living costs.
7. Get Loan To Purchase Your Property
Looking to finance your dream but don’t have ready cash? A loan may come through for you.
But while loans for rental property share some similarities with mortgages for residences, there exist significant differences. Be sure to do your homework and research the rental loan requirements, including:
- Credit scores: Ensure your credit score is attractive. Sure, Fannie Mae can give up to 10 loans. But the more the loans, the more the potential risks, leading to increased credit score requirements.
- Cash reserves: Lenders want to ensure they can get back their money and interest even if the first six or so months don’t see tenants on your property.
- Higher down-payment and income: You may have to put down at least 20%. Also, most investment loans tend to have more stringent limits on loan to value (70-80% LTV). And your W-2s or tax returns must show stable income.
- Find the right lender: Be sure the lender has experience handling loans for investors and landlords. You don’t want unnecessary delays or loss of your desired property.
- Rent loss insurance: If an unfortunate event leads to damaged property and loss of rental income, this policy will protect you. It’s usually included in your property insurance coverage.
You’ll choose between two types of loans depending on the number of units in your property:
- Residential loan: It’s suitable for properties with four units or less. This loan is more or less like the traditional mortgages but comes with more stringent requirements.
- Commercial loans: It’s designed for properties with five units or more. While the requirements are more stringent than residential mortgages, you can use them to finance any business (not just residential property).
Being a landlord can be a rewarding investment. And with the right strategies plus tools of work, your property management duties will be painless and you’ll be on your way!