What You Need To Know When Getting Started As A New Landlord
Real estate investing is one of the most profitable and rewarding endeavors in today’s market.
Rental properties produce passive income, a critical component of achieving financial freedom. Whether your goal is to quit your day job, travel the world, or spend more time with your family, real estate investing can help you achieve it.
However, becoming a landlord isn’t effortless. In fact, the most successful landlords dedicate much time, energy, and assets to their investments.
With hard work and a robust depository of knowledge, you can become a successful landlord and real estate investor, too. This article outlines everything you need to know as a new landlord, from buying your first property to moving in your first tenant.
Buying a Rental Property
The first step to real estate investing is buying a rental property. This means choosing a property type and location, as well as evaluating the local market to determine the potential return on investment (ROI) for your new property.
Property Types
Residential properties are those rented by tenants as principal homes. There are six main types of residential properties:
- Single-family homes (SFH)
- Multi-family homes (MFH)
- Apartment complexes
- Townhouses
- Condominiums
- Vacation homes/short-term rentals
Each property type requires a slightly different lease structure and tax procedures. Many first-time landlords begin with a single-family home or duplex to get their feet wet in residential real estate. Some start out as condo owners or townhouse owners and later expand to investing in apartment buildings. As you acquire multi-unit buildings or complexes, your management needs and responsibilities will grow.
Commercial properties are rented to business owners for their commercial activities. They include retail, office, and industrial spaces.
Several of these property types are similar, but not exactly the same. Here are some quick definitions if you aren’t sure what the differences are:
Townhouse vs. House
Townhouses give the impression of a traditional house but are rental units attached to one another adjacently by shared vertical walls within townhouse communities. (Single-family) houses are free-standing homes typically situated on a plot of land owned by the homeowner. They may or may not be part of a homeowners association.
Townhouse vs. Apartment
A townhouse community and an apartment complex differ with regards to organization and structure. A townhouse is a multi-story housing unit with no other units above or below it and is only connected to neighboring units by vertical walls. An apartment is a unit within a larger apartment building that consists of a rental community within its walls in which a single entity typically manages all the tenants in the apartment living community.
Condo vs. Apartment
A condo is a property comprised of individual, separately-owned units, where each condo owner owns and maintains only the living space within the walls of their unit. An apartment is a rental unit within a larger complex owned and operated by the same owner.
Condo vs. Townhouse
Condos and townhouses are similar in that both are comprised of individual, separately owned units within a larger complex. However, townhomes are multi-floored and share walls with an adjacent property, with each unit having its own entrance.
Analyzing the Local Market
There are many factors to consider when choosing a location: the city’s cost of living, average income, average monthly rent, crime rates, safety, school districts, and local tax rates.
Once you’ve narrowed down a few neighborhoods, keep a spreadsheet to track the rates, addresses, square footage, number of bedrooms, and availability of other properties in the area. Look at trends and determine whether there’s high demand for rentals.
Choosing a Property
Choose the property with the highest cash flow potential and return on investment (ROI).
ROI measures the profitability and efficiency of your investment. Calculate ROI by dividing your total investment by your annual return or expected yearly profit. Generally, 10% ROI is a reasonable goal.
You may also be buying rental property with existing tenants. In this case, the current tenants add value to your purchase as well.
By comparing ROI with the possible risks of your investment (vacancies, market fluctuations, etc.) and the value added by any existing tenants, you can make a final decision.
Financing Your Rental Property
Next, you’ll need to finance your new property. This means finding a mortgage lender, making a down payment, and evaluating interest rates. You’ll also need to consider the cost of homeowner’s insurance, property taxes, and any HOA fees.
Mortgage Types
Most investors start by applying for a mortgage from a lender. There are a variety of types.
The most common include fixed-rate mortgages and adjustable-rate mortgages (ARMs). Fixed-rate mortgages are standard loans with fixed interest rates. ARMS have initially fixed interest rates that change periodically over time. You can apply for a 15- or 30-year mortgage of either type.
Shorter mortgages are less risky for lenders because you pay off your debt sooner. The requirements (credit score and down payment minimums) to obtain 15-year mortgages are likely to be more lenient. However, the loan and down payment amounts also play a role.
Interest Rates and Down Payments
Interest is the percentage of your initial loan added to your debt annually. The total interest charged over the course of a year is the annual percentage rate (APR). Lower interest rates are highly desirable, especially if fixed.
Interest rates have an inverse relationship with your down payment, or the amount you pay up front. The higher your down payment, the lower your interest rates. This is because a large down payment (20% or more) communicates that you’re a trustworthy borrower. You’ve covered more up front, so your total debt is less, and your lender takes on less risk.
Inversely, smaller down payments result in high interest rates because your lender assumes more risk.
Refinancing
Refinancing is the process of replacing your current mortgage with a new, better one. Your new mortgage may be a different type, have a shorter duration, or have a lower interest.
Refinancing can help you save on interest, decrease your monthly mortgage payment, or build equity in your property faster.
If you decide to refinance your mortgage in the future, be sure to get your property reappraised. If you were cost-efficient while improving your property (i.e., your improvements added more value than they cost), you can borrow on the increased appraisal value instead of the original one.
Understanding Landlord-Tenant Laws
You have a property and a loan, but you can’t lease to tenants before fully understanding your obligations for renting an apartment or home out. Landlord-tenant laws govern how all landlords can manage their properties and tenants.
First, understand that the federal government leaves most rental laws up to the states. There are only a few landmark laws on the federal level. This means you’ll have to research your state’s law code to discover which laws apply in your state.
Fair Housing Laws
Fair housing laws ensure that everyone has equal opportunity and treatment in housing. The most important fair housing law is the federal Fair Housing Act (FHA), which prohibits discrimination in housing due to race, color, religion, sex, national origin, familial status, and disability.
State laws frequently add sexual orientation, gender identity, age, ancestry, marital status, military status, source of income, HIV/AIDS, and pregnancy to the list.
The FHA especially applies during tenant screening. However, it also requires nondiscriminatory language in rental advertisements, fair enforcement of rates and fees, and equal access to vacancies during showings.
The Americans with Disabilities Act (ADA) further requires landlords to make reasonable accommodations for renters with disabilities, including allowing assistance animals.
Required Disclosures
You are required to make certain disclosures to tenants in your rental agreements pertaining to tenants’ health, safety, resources, or rights. The only federally mandated disclosure is that for lead-based paint. However, the states require disclosures covering a range of information, including environmental hazards, rental policies, shared utilities, the landlord or agent’s identification, nonrefundable fees, and more.
Rent, Deposits, and Fee Restrictions
Rent rates, security deposits, late fees, and application fees are regulated in many states. Seek your state’s policy on rent control, deposit maximums, returning periods, withholding rules, and late fee caps.
Security deposit limits tend to fall between one- and two-months’ rent, if specified. Deposits typically must be returned within two weeks to two months of move-out. Late fee limits and mandatory grace periods vary widely, so consult your state’s statutes.
Entry and Eviction Laws
Although you own your properties, you cannot enter them whenever you like once you have tenants. Many states regulate the permitted times of entry and the amount of advanced notice required. A “reasonable” notice is typically interpreted as 24 hours, while reasonable hours are daytime or workday hours.
Likewise, there are mandatory waiting periods and procedures for eviction. Don’t assume you can enter just because you’re evicting a tenant.
Getting Insured
Every new landlord needs landlord insurance. Landlord insurance protects you and your rental business from casualty losses, property damage (from weather, fires, break-ins), lost rent, and liabilities.
The average cost of landlord insurance is around $1,200 per year. However, your cost will vary depending on the building’s age, construction details, and valuation. Your deductible amount and claim history also influence your insurance premium.
Typical coverage for landlords excludes tenants’ belongings. For this reason, we recommend requiring your tenants to purchase renter’s insurance, which covers their personal property, liabilities, and living expenses if a unit becomes temporarily uninhabitable. It averages around $15 per month.
Preparing Your Rental Property for Tenants
Before you welcome new tenants, your properties should be in top condition. This means physically preparing your rentals, from inspecting and repairing to landscaping and staging.
At a minimum, your property should meet legal standards of habitability: a clean and safe dwelling, hot and cold running water, heating, reasonable privacy, and functional appliances and utilities.
Inspections
Your first step is to hire a professional home inspector to perform a comprehensive review of your property, including all units and community amenities (e.g., swimming pools). At a minimum, the inspector will evaluate whether your property complies with local health and building codes. They may also check the water quality, sanitation, structural integrity, fire hazards, security, electrical wiring, or roofing.
Repairs, Improvements, and Renovations
Next, make the necessary repairs recommended by the inspection. All appliances and systems should be in ordinary working condition. You should also clean or hire someone to clean the entire property.
After basic repairs and cleanings are completed, consider adding a new coat of paint to refresh the unit.
Larger improvements and renovations are optional, but often profitable for landlords. Projects like hardwood floor installation, kitchen/bathroom remodels, or smart home technology installation will increase your property’s appraisal value. This will help you attract higher-paying tenants and refinance your mortgage, if desired.
Curb Appeal
Don’t neglect your property’s exterior. Enhance curb appeal by investing in landscaping services or doing simple tasks like raking, weeding, or mulching yourself.
Staging
Whether you work with an agent or handle staging yourself, be sure to style and place furnishings, accessorize rooms, eliminate clutter, and emphasize the unit’s best features. Simply rearranging furniture in a room can make it feel brighter and open up more space, enhancing its appeal.
Determining Your Rent Rate
Determining your rent rate is a critical decision for a first-time landlord.
Your rate should be high enough to cover your business’s operating expenses and make a profit but not so high it deters prospective renters and causes vacancies. Most of all, your rate should be appropriate to the local market, whether you rent apartments, single family homes, or a different property type.
Here are a few tips for determining a suitable rent rate.
Research Similar Properties
The best way to find your neighborhood’s appropriate rent rate is to explore it yourself. Get a general idea of rates in the area by scrolling through local listing sites, networking with local landlords, or asking a realtor.
Organize your research in a spreadsheet with addresses, rates, and features that may impact the price, such as square footage or amenities. Use this information to determine the value each feature or amenity adds. What price increase corresponds with each feature or amenity?
Identify Rent Tiers
Another strategy is to identify rent tiers in your area. This means analyzing the price spread of properties and grouping them into tiers based on square footage. You can then use this data to place your property in a tier.
Choose a Competitive, But Reasonable Rate
Ultimately, the rate you land on should be comparable to your competitors but still reasonable for the features and amenities you’re offering.
Marketing Your Rental Property
Your property is ready to rent, but it’s up against a hundred other rentals in the area. How do you make yours stand out? By marketing your rentals.
Your rental listing is the first thing a prospective renter will use to evaluate your property.
A great listing has a headline with key information like price, number of bedrooms, and location. It also includes high-quality photographs and a description with details about amenities, measurements, and policies.
Post your listing on popular listing sites like Zillow and Apartments.com, as well as social media platforms like Facebook Marketplace. You can also use a listing syndication tool to quickly spread the word about your rental. Observing listings on these sites over time will help you quickly learn how to advertise a rental property.
Applications and Tenant Screening
When you do receive applicants from prospective renters, don’t neglect a thorough tenant screening process. This means reviewing rental applications, proof of income, credit reports, criminal histories, and eviction records.
A rental application is your opportunity to gather basic contact information, rental history, employment history, tenant references, and answers to questions relevant to your policies (“Do you own pets?” or “Do you smoke?”). Applicants should also attach proof of income—such as a pay stub or bank statement—to their application.
Credit reports help you assess an applicant’s trustworthiness and determine whether they’re likely to pay rent on time. You should also run background checks (criminal and eviction histories) as a precaution against liabilities.
Equality and Tenant Scoring
Practicing fairness in screening isn’t only a matter of attitude. It’s often difficult to be objective during screening, especially when there are several factors to weigh and multiple good applicants.
For this reason, we recommend using a tenant scoring system, or a weighted point system for quantifying prospective tenants’ eligibility. A tenant scoring system reminds you to screen tenants the same way each time. It also gives you a numerical comparison between applicants with various strengths and weaknesses.
Setting Policies and Managing Your Rental Property
Your newly accepted applicants will want to know your rental policies before signing a lease. A typical rental agreement has dozens of policy points.
Policies for rent and fees (such as rent increases, security deposits, late fees, grace periods, and application fees) are regulated by state laws. Review your state’s statutes for restrictions on amounts, collection procedures, or permitted withholdings.
Other policies are largely unregulated. These include policies on pets and pet fees, utilities, smoking, subleasing, renter’s insurance, and tenant modifications.
In general, the more lenient your policies, the more risk you’ll take on. For example, allowing pets or smoking comes with the risk of property damage. Likewise, permitting subleasing opens the possibility that a subtenant will default on rent, and allowing tenant modifications could backfire if a tenant does a poor job painting or remodeling.
Before finalizing your rental policies in a lease agreement, decide how much risk (and what kinds) you’re willing to take on.
Property Management Options
How will you enforce your new policies and manage your property in general?
You have three options. They are:
- Hire an individual resident manager
- Hire a property management company
- Use property management software to manage your properties yourself
A resident manager is an employee who lives locally and manages your units. This person is dedicated exclusively to your properties and can therefore be highly responsive to you and your tenants’ needs. However, they may lack expertise in more specialized tasks, such as accounting or legal matters.
Rental property management companies differ in that they work as independent contractors. The company’s employees (and their contractors) manage your properties with professional expertise, but often at high costs.
Your last option is to use property management software. These are cloud-based applications with a range of digital tools for landlords: rent collection, tenant screening, rental accounting, maintenance management, etc. Property management software helps you cut costs while staying involved with your properties and tenants.
Selling Your Property
Eventually, you will sell your investment property. This requires preparing your property to sell – using many of the same marketing and advertising strategies as mentioned earlier, except this time you’re looking for a buyer. Then, you’ll need to transfer the property title to the new owner and calculate depreciation recapture, or how your profits from the sale will be taxed.
The most ideal circumstance is that you sell your rental to another investor who will take over your existing leases. Units that are already filled with reliable tenants are a great asset to a buyer, so you can leverage your tenancies to increase the sales price.
Conclusion
Starting a rental business is an exciting prospect. As a new landlord, your property will require some time to set up and will need regular management and maintenance. However, the results are well worth the attention you devote up front. By the time you collect your first rent payment, you’ll feel well equipped to tackle your new landlord challenges.
