How To Become a Landlord: 8 Steps to Owning a Rental Property
While becoming a landlord is not a quick way to make money, it is a good way to ensure medium to long-term returns on investment. Being a landlord is perceived as a passive way of generating income, but it’s a little more complicated than that.
Owning rental property, like any other business, can be time and effort consuming. However, the process can be smooth for those who make the effort to collect necessary information on becoming a landlord before they get into it.
So what do you need to become a landlord? Here are the key steps involved.
Steps to Become a Landlord
- Figure out Your Finances
Crunching the numbers is a big part of what you need to do to become a landlord. Are you buying your property in cash, or will you be using financing? Banks have tightened lending standards significantly over the last decade, requiring a down payment of at least 20 percent for most properties.Even if you do have the money to pay for the house, there are costs involved before you can start earning from rent. You’ll need to factor in mortgage payments and interest fees in the case of financing; there are multiple taxes and fees involved, and you’re unlikely to buy a property in perfect condition—which means repairs and renovations. These costs are in no way trivial and anyone wondering how to become a landlord should give their budget a good amount of consideration.
- Buy the Property
You’ll search real estate for sale, discover new homes, attend an open house or schedule a walk through and close the deal right there: Many real estate shows will have you believe it’s as easy as that, but a lot of work goes on behind the scenes.
- Choosing a location
Researching a location is the first step. Because this is an investment property, the criteria for your search will be different than if you were buying your own family home. Choosing a house that’s close to you is simpler for the familiarity with the area and simplicity of management, but that’s as far as the similarities to purchasing for personal occupation go.
The best investment area for rental income is one with amenities close by such as schools and malls. Many tenants view the quality of the school district as an important predictor of neighborhood quality. The safety of the area also goes hand-in-hand with amenities and is highly valued. A general rule of thumb is to look for areas that have a high lifestyle quality.
- Independent Verification
Once you’ve settled on a location and get into finding properties for sale, do your due diligence on all viable options before deciding. This includes verifying any information the agent gives you such as return on investment and expenses.
- House Inspection
If you’ve found a house you like and all checks out, it’s time to make an offer. This should be based on the repairs and/or renovations you will need to make. A home inspection will give you a good idea of what needs to be done, and you can either negotiate a lower price or ask the seller to fix some of the issues you discover.
- Choosing a location
- Repairs and Improvements
Now that the house is yours, it’s time to get into those repairs you identified. Making renovations and improvements will raise the market value of the home. However, doing too much could put you in a position where the returns don’t match the investment.
The most important improvements are those that make the house habitable and safe. From there you can consider upgrading features such as fixtures and countertops. There’s a fine line between improving and remodeling and landlords should be stringent on carrying out purely necessary fixes.As a general principle, the home should be at the general standard of others in the area.
Some landlords “renter-proof” their properties by removing or covering vulnerable features like wood stoves and hardwood flooring. Be mindful of the type of market your house is in if you choose this route.
Remember that maintenance is also expected of the landlord during the tenancy.
- Know the Laws
This is likely one of your biggest concerns if you’re searching, “what do I need to do to become a landlord?” Becoming a landlord brings a plethora of legal issues and risks, so you’ll need to become an expert on landlord-tenant law in your state, including any federal or local legislation that applies.There are legal provisions related to habitability and anti-discrimination, security deposits, level of access to the property, notice you need to give the tenants before you want them to leave, and many more.Plenty of resources are available online for familiarizing yourself with these regulations. The American Apartment Owners Association (AAOA) website provides access to landlord-tenant laws and resources to help guide you on how to become a private landlord free of charge. However, it’s good business practice to retain local counsel.
- Tenant Screening
Pre-screening tenants is mainly about who you want to occupy your property and whether they can afford the rent. Finding high-quality tenants is not just about the impression they give you when you meet them. You should perform a background and credit check in addition to in-person interviews. You can do the checks yourself or have an online service to do it for you. A good service is better equipped to research all the necessary information.AAOA’s tenant screening gives you instant results on tenant credit checks, day or night. It also provides you an in-depth look at a renter’s background, including:
- Prior criminal convictions nationwide.
- Past evictions nationwide, based on public records.
- Previous address tenant history.
- TeleCheck verification.
Take the time to check with references provided, particularly employers and past landlords. You should also verify employment. Remember the law requires you to have a signed consent form from the applicant before you carry out a background check.
- Write a Lease
A lease is a legal contract that sets the rights and duties of both you and the person who is renting your property. This is why it is a top item on the “how to be a landlord” list. Not only does it outline everything, it also gives you the power to sue if your tenant does not pay rent, damages the property, or fails to meet the terms in the contract in any way.
Be as specific and clear as possible when drafting it. Important items to include are rent payment terms, landlord duties and tenant responsibilities, pet policy, dispute resolution, and lease duration among others.There are standard lease agreement forms available online that you can customize according to your situation and preferences such as AAOA’s state-specific forms created by legal professionals.
- Manage the Tenant
What do you need to be a landlord who keeps their best tenants? You don’t have to preempt this, a simple conversation during your screening interview will give you an idea of what your tenant prefers. Good tenant management involves taking a proactive approach to bookkeeping and handling complaints.Tenants are most comfortable where they have a good relationship with their landlord and all their requests are acted on promptly. However, be careful not to be too nice as they may take advantage of camaraderie to flout lease guidelines. One way to ensure everything is observed is by performing move-in and move-out rental inspections with the tenant present.
- Manage the Property
Doing a routine rental inspection every three to six months will help you keep an eye on your house and stay on top of any maintenance issues before they become a big problem. Be clear on how often you will need to carry out these inspections with your tenant before they move in. The lease and move-in checklist will come in handy at this point, where you can note what repairs need to be done and who is responsible for the task.Staying organized with proper bookkeeping will provide documentary evidence in this case of this and with other disputes that may arise. Keep accurate records of all income and expenses so that you have definite figures when the time comes to pay back the security deposit.
These documents are also necessary for preparing financial statements and providing evidence in case of an IRS audit.If these tasks seem too demanding for you, you might be better off hiring a property manager to take them off your hands. While it may be an extra cost, the time and effort saved usually makes it worth it. The right property management software can also make your job easier and greatly reduce the time spent on accounting and maintenance requests.
- Figure out Your Finances
Get Started With AAOA
What do you need to do to become a landlord? This guide has provided a good outline of all the steps. It may seem overwhelming, but if you plan carefully and do your research before taking the leap, you have a good chance of success without much hassle.
If you’d like to learn more about how to become a landlord, AAOA’s website is a one-stop-shop for all the resources you may need. We provide more than 120,000 members nationwide an online network of resources and benefits for landlords and property managers. Call 866.579.2262 toll-free to learn more or apply to join today!