For many people, being a landlord is a rewarding and profitable experience, but if you are new to the rental real estate business, you might have discovered that managing a rental property is not a simple endeavor. Taking the time to gain a basic understanding of some key landlord responsibilities, property marketing tactics and areas of the law will go a long way in helping you find (and keep) a tenant, effectively manage your rental and avoid the most common landlord mistakes.
In this guide, we’ve compiled several tips for new landlords to help you succeed and get the most out of your real estate investment.
Getting started: Landlord basics
First things first. Are you ready to be a landlord? If you’re reading this guide, the answer is most likely yes! You don’t need to be a management pro, real estate expert or professional contractor to be a good landlord. You do, however, need to be able to dedicate time to learn the business and keep up with tenant requests and rental property maintenance issues.
Create a work schedule
Whether you manage one property or a portfolio of several units, establish a work schedule and try to stick to it. While you can’t predict problems — and need to be comfortable with the possibility of handling tenant issues at any time of day or night — setting aside time for the business of landlording, such as tracking your expenses and staying on top of general maintenance, will help you get into a productive routine; if you don’t have a schedule, managing even one small property can feel like a full-time job. Speaking about the business of landlording, be sure to treat it as such. Consider setting up a Limited Liability Company (LLC) for ownership of the property. This can help protect you personally from legal actions.
Take stock of the skills you already have
A number of skills from other professions and experiences are easily transferable to landlording, including customer service and sales — you need to have a strong professional relationship with your tenants — marketing, accounting, maintenance, time management and delegating — because sometimes the best business decision is knowing when to call a professional.
Understanding your real estate investment
Perhaps you are an “accidental landlord” who inherited a property or chose to rent your home after a move. Or maybe you are looking to actively invest in one or more properties. Either way, a rental property is best viewed as a long-term investment, whether your goal is supplementing your income today or creating wealth over time.
Find the right property
When you start looking for a rental property (or you’re trying to determine the value of a property you’ve acquired), some factors to consider are the neighborhood, access to transportation, grocery stores, area features and businesses. The price of the property may be attractive, but you’ll want to be sure the location is as well. If you wouldn’t want to live there, then potential tenants will likely feel the same way. In addition, if you’re purchasing a property with tenants in place, don’t assume there’s a built-in stream of income; find out if the tenants have been making reliable rent payments.
Determine your cash flow
Before purchasing a property, you’ll want to figure out if it has the potential to produce positive cash flow given current market conditions. A positive cash flow means there is more money coming into the property (through rent and any auxiliary income streams like parking) than going out of the property (through mortgage payments, taxes and maintenance costs). For example, if you collect $1,600 in monthly rent, and pay out $1,100 in monthly expenses, you’ll have $500 to put in the bank each month.
You will need to decide what your budget can bear and how much you want to earn to make the investment property worth your time and effort. Be sure to take a conservative approach to any financial projections for the property and prepare for surprise expenses and missed rental payments — you are still responsible for the mortgage even if your tenant hasn’t paid or your property remains vacant.
Set your rent
After you have your rental property, it’s time to understand the dynamics of the local real estate and rental market and set your rent price. Look at other rentals in your neighborhood that are similar in size, quality and proximity to transportation and commerce. Get a feel for the local job market — are people gainfully employed? — and take into account amenities, parking and other property features. Several online resources can help with your research, including the Rent Zestimate® or the U.S. Department of Housing’s Fair Market Rent tool. Each neighborhood and property is different, so these are just estimates to get you started. You’ll need to stay on top of changing market conditions, so consider becoming involved in local economic clubs and pay attention to the news in your area.
Using online accounting software or a simple spreadsheet can help you estimate your income and expenses so you know how much to charge in rent. You also need to decide if (and how) tenants will pay for utilities. There are some legal considerations around this that vary by state, so check with a professional.
When you’re starting out as a landlord, you can expect some negative cash flow and bumpy times, just as you might experience in any other new business. However, planning for a rainy day and staying informed about your local market can help improve the overall return of your property.
Managing your rental
You’ve researched the market, found the perfect investment property, completed your due diligence and are eager to get a tenant in place and start earning income. Over the lifetime of your rental, you’ll likely need to repeat the process of finding a tenant many times; while this is key to a successful rental business, it doesn’t have to be daunting. The following steps provide a basic roadmap to finding, onboarding and retaining good tenants — the foundation of rental property management.
Find a great tenant
The vast majority of renters search the Internet for their next home, so you need to be where they are looking. You can start the process by marketing your property online with a free listing service like Zillow Rental Manager. Share your listing with friends and family and across your social media outlets. A referral from someone you know is a great way to find a tenant!
Your rental listing should be clearly written and include the basics like the number of bedrooms and bathrooms, square footage and any fees and deposits required at move in. In addition, you’ll want to highlight the amenities and proximity to transportation and local stores. You should also invest in high-quality photos of your rental — and the more, the better. It’s worth the expense to have professional photos taken during the spring and summer months so your property looks its best.
Know fair housing laws
Before you start advertising your property, you’ll need a basic understanding of fair housing and discrimination laws. Fair housing laws are federal statutes that ensure equal access to housing for everyone. It is illegal to discriminate against anyone on the basis of race, color, religion, national origin, sex, familial status or disability. Many local and state governments have additional protections that you’ll want to become familiar with. A general rule of thumb is to focus on the property and amenities in your advertising and conversations — not on a group of people or features geared toward a specific group.
Show your property
To show your property, you can either set up individual appointments or host a rental open house (which can save you time and create a sense of urgency among interested renters). In either case, if the property is vacant, make sure it’s clean — a spotless property goes a long way in helping you secure a tenant. If the property is occupied, be sure to give the current tenant fair warning that you are coming by and consider offering incentives for them to clean. Give each prospective renter a well-designed flier with high-quality photos that lists the amenities and facts about the property. This communicates that you value your property and helps your rental stand out.
Once you have an interested renter, it is time to have them fill out a rental application. This helps you review their qualifications, and it is an important part of documenting your rental process. Using the same criteria and application form for each and every applicant allows you to evaluate candidates objectively and helps ensure your compliance with fair housing rules. You can decide whether to charge an application fee, but regulations vary by state, so consult a professional to determine what is permitted in your area. Confirm that the information on the application matches what the renter told you either in person, via email or over the phone. Document every interaction you have with a prospect or tenant by taking a few simple notes about the topic you discussed or any questions that were asked.
Once you verify the application, you’ll want to run a credit check and background check, verify income sources and follow up with at least two previous landlord references. There are several online services, such as TransUnion’s SmartMove, that offer credit and background checks together. You can request a pay stub or call the employer to verify income. A general recommendation is that a renter should not spend more than 30 percent of their monthly income on rent, but the norm varies — especially if it’s a hot market. Be sure to follow the same process for each application you review.
Accept or reject an applicant
Once you determine that an applicant is qualified, congratulations! You’ve found your tenant. Be sure to remove or update your online listings to reflect this. If you decide that an applicant is unqualified (based on the facts you uncover in their application or credit check), you should call to let them know immediately. You also need to send a written notification (via email or postal mail) stating the reason for your decision.
Collect a security deposit
Ahead of signing the lease, you’ll need to collect the security deposit, which is like insurance in case something goes sideways with the tenant at any point during their residency, and it can help cover the cost of property damage beyond normal wear and tear. Security deposits are permitted in all 50 states but laws governing the maximum amount and return of a deposit vary, so check with a legal professional in your area. Similar caution needs to be taken with how you hold the funds, because each state has different rules regarding account types and refunding interest.
Sign the lease
The lease agreement is a binding, legal agreement between you and the tenant. As such, you’ll want to make sure it thoroughly addresses the rules, policies and conflict resolution procedures for living on your property, and clearly defines tenant and landlord responsibilities. You can find many generic leases online, but be sure to include any local requirements. Have a legal professional review your lease, use the same lease agreement for all of your tenants and keep it up to date with new laws or ordinances. Also, give tenants the option to sign the lease online. It makes your job easier and provides copies of the necessary paperwork to both you and the tenant automatically.
Do a final walk-through
Before handing over the keys, perform a walk-through to assess the condition of the apartment or house and make notes of any issues or damage. It can be helpful to do this with the tenant to reduce the chance of a dispute down the road. Use a move-in/move-out checklist to keep track of anything you find or want to document.
Maintain your rental
Now that all the paperwork is in place and your tenant has moved in, managing your rental property should be more of a passive endeavor. However, you still need to meet your landlord responsibilities which include ensuring the property is safe, performing regular rental property maintenance and responding quickly to tenant requests. If you are handy, you can complete many maintenance tasks yourself, but some states have laws dictating that electrical and plumbing work must be handled by a professional. Check your local statutes and set up a process to get requests handled in a timely fashion.
Collect the rent
There are several ways to collect the rent, but many tenants expect and prefer to pay online. There are a number of online options, some of which are free or low-cost, and offering this convenience to your renters can help ensure that rent is paid on time. If rent is paid late, remind your tenants of the terms of your lease, including any late fees, to encourage timely payments. While you want to maintain a friendly relationship with your renters and be considerate of extenuating circumstances, this is your business, so be clear — and firm — about your expectations.
Renew the lease
A few months before the lease is up, check in with your tenant to learn if they are planning to renew. This is also the time to do another market analysis to determine if you should increase the rent and if so, by how much. Give your tenant sufficient notice so they can decide if they want to stay at your property.
Whether you plan to be a full-time landlord or just want to pick up some extra income on the side, when done correctly, owning and managing an investment property can pay long-term dividends. Educating yourself about landlord/tenant laws, establishing rental screening procedures and creating a schedule for managing your business will help you be a more efficient, compliant and profitable landlord.