Learn how to be a successful landlord if you decide to purchase rental property.
Should I become a landlord?
There’s a reason that many people likely ask themselves this question: Becoming a landlord is an appealing prospect and there are many pros:
- Growth potential: In most cases, property is a “good investment” and sees long-term increases in value
- Rental Income: Any positive difference between the rental price of a property and the monthly cost in the property is money in your pocket
Yet, before you dive in, it’s important to consider the potential downsides as well. Some cons of landlording are:
- Asset Concentration: Rental properties aren’t liquid assets, and therefore can’t be moved quickly in the case of necessity
- Tenant Issues: While the “nightmare tenant” is on everyone’s mind, there’s also more common tenant issues like getting late payments or not having tenants at all
- Managing the property: A landlord needs to make sure the property is taken care of, whether that means fixing repairs or managing evictions
- Showings: In order to fill a unit, expect to spend a lot of time showing the property to different potential tenants. This process can be not only time-consuming, but potentially uncomfortable or risky depending on your market.
This guide will lay out all the steps and considerations so that you can decide if you’re ready to take the plunge - and how to get started.
JUMP TO SECTION
While it may seem silly, the first step to becoming a landlord is getting a rental property. At first glance, this may seem like a no-brainer, but there are many different types of rental properties, and all have their benefits and drawbacks. However, unless you’re in a situation where you have a house that you want to rent out instead of sell (in which case, make sure you read this great article for tips on that), it’s important to consider all the different types of rentals, and what would work best for you.
(Note: I’ll only be talking about residential rental properties because, while getting into commercial real estate can be incredibly lucrative, the barrier to entry is higher, and most people start with residential real estate.)
Renting out a Single Family Home: Pros and Cons
The majority of independent landlords (aka people choosing to become landlords rather than rental companies) have single-family homes as rental properties (source). There's a good reason why this is the case. Single family homes tend to attract families who want to stay in the area for a longer amount of time. In fact, one out of four renters of single family homes will stay in the rental for five years or more (source). The longer tenants stay means the less often you will need to search for new tenants, and the less likely your house will be unoccupied.
Yet, it’s not all good. Renting out a single family house will likely mean that your tenants have children or pets, both of which can cause a lot of damage to a house, but only one of which you can limit. Any guesses which one? (The answer is pets. While choosing to limit pets might be legal, it’s illegal to not allow tenants with children!) In addition, since these types of rentals can be expensive, you’re more likely to have less units, which opens you up to more risk because there is a lack of payment diversification.
Renting out a Multi-Family Home: Pros and Cons
While single family homes are where most people start, it’s not to say that it’s the only way to go. In fact, renting out a multi-family unit has some definite advantages. One of the largest is that you can live in one unit of a multi-family rental, and use the other units to pay off the mortgage. This is often called “house hacking” and is often regarded as a great investment. If you’d like to read more on this specifically, make sure you start here. In addition, multi-family units can offer a higher overall income due to the number of units that you can have on one property(source).
However, know that multi-family units are more likely to attract shorter term renters, which means that you will likely be spending more time finding and selecting new tenants. In addition, more units mean more things likely to break. For example, if you own a triplex, there’s a guaranteed minimum of three toilets that could go bad.
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Short Term Rentals
Planning to buy a property and turn it into a short term rental like an Airbnb can be tempting because typically these types of rentals bring in more money per night than a traditional rental. However, there is significantly more risk, work, and regulation in short term rentals than traditional situations.
Having many people in and out of your property means that there is more chance of property damage or legal issues. In addition, since short-term rentals have a higher turnover, expect to spend more time advertising and preparing for multiple guests. Finally, your area may have hoops to jump through or changing ideas of what is required to run a short-term rental. Given this, these type of rentals are not for everyone.
The Bottom Line on choosing a type of rental
At the end of the say, there isn’t one “perfect” type of rental that works all over. In fact, I would be nervous about someone that said that one rental was better than the other 100% of the time. Instead, there is a best rental for your location and your situation.
Spend some solid time researching your market before you commit to a type of rental. Which rentals are getting snapped up and which tend to stay open? Do you prefer to rent to many people or develop relationships with one family over time? How much time do you have to devote to the rental? (Generally the nicer a property is and the more it rents for, the less work you’ll have to put in to maintain it.)
But, whatever property you choose, make sure that you spend your time researching it. For example, if you choose to buy a property that is already rented, make sure you verify leases and rental information. It’s better to spend more time doing your homework upfront and save yourself the trouble down the line.
How to set rental rules
Once you have purchased the perfect property and have the keys in hand, you may think that the next step would be going out and finding the next available person to rent to. After all, it’s high time to start collecting rental checks. But, before you rush to have someone move in, you need to do some thinking on one crucial thing: the rules.
Why it’s important to have house rules for renters
In my experience as a landlord, setting realistic rules and communicating those clearly to tenants is one of the best ways to guarantee a successful rental. While it may seem silly, setting rules will make your tenants want to live there longer. Why? Let’s consider this:
You have a tenant who had a light fixture stop working. They tried to change the lightbulb, but it’s still not coming on.
|Without Rules: ||With Rules:|
|Your tenant contacts you on a Friday afternoon. You see their message, but decide that it’s non-essential, and that you’ll be coming out on Monday. Not a big deal. But your tenant is upset by you not coming out and decides that it’s frustrating to wait for the fix.There’s many ways this situation could play out, but most of them have an uncomfortable scenario where either your tenant or you could be unhappy.||Your tenant contacts you on a Friday night. You see their message, and ask them if it’s an essential issue. It isn’t, so you come out on Monday. The light fixture is fixed, and the tenant is happy they have such a caring landlord who takes pride in the property.|
In those scenarios, essentially nothing is different, besides the expectations that both tenant and landlord have about the situation. Having good rental rules is essential if you want to make sure that your tenants stay for as long as possible and that you are happy with your tenants.
What makes a good house rental agreement?
The type of rules that you make will largely depend on what type of property you manage. Here are some common things that you will want to have rules for, and what I suggest:
|How do you want your tenants to contact you?||Is calling or texting easier? Is it better to email?||Texting (if both parties are comfortable with it) is a great way to stay in contact so that there’s a record of the conversation for clarification and future reference.|
|When do you want your tenants to contact you?||Are you okay with your tenants reaching out late at night? Early in the morning? Will you have a difference for major vs. minor issues? Is it ever okay to contact a professional directly?||Communication should be done between 8am and 8pm if at all possible. The Landlord should always be contacted first, unless there is a risk to health or safety.|
|In what timeline should they expect a response?||Will you be around on weekends to make fixes? What about if they’re non-essential? What will you do if you go out of town or are otherwise unreachable?||Look up rules for your state on what a landlord’s legal response timeline is! Often, major repairs need to be completed within the week and minor fixes can wait up to 30 days.However, I’d recommend choosing a shorter timeline, because a more responsive landlord leads to a happier tenant.|
|Who is responsible for what?||Who will pay what bills?Are you in charge of the yard or are they? How will common space be used?||Pay for the “essentials” such as water, sewer, and trash. In addition, paying for yard maintenance like tree trimming will avoid having to do a lot of work when tenants move out. Common space shouldn’t have personal items stored.|
|Who can be there?||Do you have a guest policy? What if other people want to move in with them?||Guests shouldn’t stay more than 2 weeks in a six-month period. If additional people want to move in, they need to fill out a rental application and get approved.|
|How will you deal with finances?||Will you have a deposit? When is rent due? What are the consequences of being late?||You should have a security deposit, but make sure that your deposit is legal in your state. Rent should be due on the same day each month, with a late fee for rent more than a week late.|
Choosing whether or not to allow pets in your rental is one of the hardest rental decisions to make, because there often isn’t a “right” answer.
On one hand, pets can cause a tremendous amount of damage to your rental, and it’s not always easy to predict what will happen. (For example, we’ve known dogs who have literally chewed into walls...) But, on the other hand, allowing pets means you open yourself up to a large amount of the rental market that you might not otherwise be able to rent to. (Our best tenants moved in largely because it was the only place they could find that would allow a large dog.)
Personally, I feel that allowing pets in rental is usually a good idea. The benefit of being able to rent to all parts of the market, tenants with pets and without, means that you are likely to have less time your rental is unoccupied. However, if you have a multi-family rental, make sure that your walls are thick enough so that barking or other pet noises are minimized. If you’re aware that your unit has very thin walls, or many overlapping outdoor common spaces, pets might become more of a nuisance than they’re worth.
If you choose to include pets in your rental, it’s important to make sure that your rental is as pet-proof as possible, and use these strategies to reduce risk:
- Pet Rent: This is an additional monthly payment that many landlords use to reduce pet risk. It’s generally a small amount each month (maybe $50-$100), and can be used to mitigate the small ways that pets depreciate property
- Pet Deposits: This can be thought of as a security deposit for your pet. It’s taken when tenants move in and then returned if the pet doesn’t destroy the house. (This would be very helpful in the case of the wall-eating dog.)
What is legal in renting your house?
No matter what you do with rules, make sure that they’re legal.
Perhaps you want to involve a rental property management company in your decision or maybe you don’t, but make sure that you know the laws in your area about what you can and cannot do as a landlord. There are lots of resources on staying legal, like this renter/landlord information site put out by Los Angeles, so find one that works well for your area. If you’re stuck, a great real estate agent that is a local expert is probably a good resource to start with.
What is legal in a security deposit?
I would highly encourage you to request a security deposit from all your tenants. The amount of security deposit that is legal varies from state to state, so make sure you look at the rules for your state here.
Once you’ve selected a property, made rules, and made sure everything is legal, it’s time to select tenants. In my experience, this is the make or break of landlording. In addition, if you’ve set your rules well and made sure that everything is legal, it’s the last main hurdle to becoming a landlord.
This isn’t always necessary, in fact, if you choose to involve a property management company, you will likely not need to find and select tenants yourself. Therefore, this section is most useful for those that have decided to self-manage this aspect of their rental.
Your first step to finding tenants should be to list your property on a listing site such as Zillow, Trulia, or Apartments.com. From there, determine what your target market uses, and then cater to that. For example, my community has a local online rental listing that many people use to find a place to live. Try searching “apartments for rent in” or “houses for rent in” with your location to find things like these. It’s worth asking several people who have been tenants or landlords in the area how they’ve found renters, and starting there. If you have nothing else to go on, make sure you try out word of mouth advertising and yard signs, since many still find rentals this way.
Once you find tenants, you need to show them the property. There are many different ways to do this, from hosting an open house and inviting multiple interested parties to accepting individual tours on a pre-selected basis. Whatever way you choose to run your tours, make sure that you provide clear information about what the expectations of the property are.
One helpful hint in showing property is to show it as a property manager, rather than an owner. Some owners quickly realize that when they show properties as an owner, prospective tenants try to negotiate pricing, terms, or other lease agreements on the spot. However, when showing the property as a manager, you allow yourself time and space to take those answers and sit on them.
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There should always be some sort of background check for your potential tenant. What that background check looks like depends on personal preference, but some things that you may likely want to check include:
- Credit Report
- Proof of Income
- Previous Rental References
- Eviction History
- Criminal History
- Sex Offender Status
Most landlords also choose to have prospective tenants fill out a rental application, but you don’t need to start from scratch. There are many great free resources for inspiration or templates.
Make sure that you choose a background check to protect you and the property, but make sure you remember that all landlords must follow the Fair Housing Act, which prohibits any landlord discriminating against a tenant on the basis of race or color, religion, national origin, marital status, age, disability, gender, or pregnancy.
A good place to start is a site like cozy.co which helps you take care of background checks, collect rent, and stay organized. It’s worth paying a small fee to a site like this in order to save yourself loads of hassle down the line.
Should you rent to friends or family?
Most landlords will advise you never to rent to friends or family. There is a good reason for this advice, mostly because very few people are willing to not make exceptions for the people they care about. As a landlord, this could mean struggling with what to do if your relative trashes the house or isn’t making payments on time.
Personally, I’ve seen this work very well and very poorly. On the nightmare side, we have a property up the street that was rented out to a grandchild by an elderly grandmother. By the time he left the house, it was essentially destroyed.
How to manage your property as a landlord
Although it seems like we’ve spent a whole article talking about being a landlord without actually talking about being a landlord, I’m confident that if you set up your rental correctly by selecting the right property, choosing fair and reasonable rules, and selecting good tenants, you will be set up for success. The rest is the day-to-day:
- Keep track of rent and taxes: Come up with a system for collecting rent and make sure that you’re keeping good track of things. You should keep all applicable records, so using a rent collection software like Avail or Cozy are good ways to go.
- Provide repairs and maintenance: Make sure you’re honoring your side of the rental agreement. Provide repairs in the time-frame you agreed. Do regular maintenance on the property (such as changing air filters), or make sure that you have an agreement with your tenants for them to do so. It’s best to keep track of when you visited the property and what you did there.
- Stay legal: Get an attorney now, so that you are ready if issues arise. In your regular interactions, make sure you are following local rules and regulations such as giving 24 hour notice before entry if necessary. Deal with insurance and liability issues as they arise, but make sure to take note of what the issue was and how it was resolved.
While landlording is not for everyone, I’m happy that I took the plunge. It’s not only provided me with extra income, but also a chance to interact with people I might not otherwise meet. I’d encourage those considering it to give it a shot and see if being a landlord could be a good move for you.