First-Time Landlord? Here’s What You Need to Know Before Renting Out Your Property
Are you thinking about being a landlord? Perhaps it’s your old home that you’ve grown out of, or perhaps you’ve bought an investment property. Letting it out can be great passive income, but before you put that “For Rent” sign in the window, there are some things you should know to help ensure that you’re set up for success.
Getting Your Property Ready
First, last, and always – your house needs to be in the best shape possible before anyone even gets to move in. This isn’t so much about making it look nicer (although that certainly does make it easier to find quality tenants). You’ll want to check to make sure everything really works. Check the plumbing, electrical, heating and air, and any appliances you’re including. A leaky faucet might be a minor annoyance to you, but it can be disastrous once tenants are in place.
Don’t forget safety either. Install working smoke detectors, carbon monoxide alarms, and locks on all doors and windows. Most states have specific regulations on rental properties, so find out what your area requires.
Know Your Numbers
Being a landlord is not just taking in rent checks. You should be aware of all the costs. Along with your mortgage, you will also pay property taxes, insurance, maintenance, and potential vacancy periods to consider. A general guideline is to budget 10% of your rent income for repairs and maintenance.
Speaking of money, this is where tax planning with effective tax strategies is useful for new landlords. Rental income is tax-deductible, but you can also claim many expenses like repairs, maintenance, management fees, and even depreciation. Keep accurate records of all – your accountant will thank you come tax time.
Setting the Right Rent Price
Pricing your rental isn’t always easy. Price it too high and you won’t have any tenants. Price it too low and you’re losing money. Compare other similar properties in your area to determine what price is fair in the area. Look at similar houses or apartments with similar bedroom, bathroom, and amenity numbers.
Remember, it’s generally more profitable to price competitively and hold good tenants long-term than to have constant turnover. Vacant apartments don’t generate income, and there is time and money involved in turning over units.
Screening Tenants Properly
This is probably the most important part of being a successful landlord. Good tenants will treat your unit with care and pay rent on time. Bad tenants will cost you thousands in damages and lost rent.
Always conduct credit checks, check employment and income, and check former landlord references. Seek renters whose monthly income is three times the amount of rent. Take your time with this – it’s worth it to find the right individuals.
Understanding Legal Requirements
Each state and most municipalities have their own landlord-tenant laws. You will need to be aware of such things as security deposit limits, how much notice it takes to enter the property, evictions, and fair housing laws. Ignorance is not bliss if you are breaking the law unknowingly.
Research becoming a member of a local landlord association or real estate investment club. These are great resources to find out about local regulations and get suggestions from seasoned landlords.
Managing the Property
Determine early on if you want to use a property management company or manage it yourself. Managing it yourself saves you money but takes your time and availability for maintenance requests, showing the property, and dealing with tenant issues. Property management companies charge 8-12% of rent received but do it all for you.
Building Emergency Funds
Things do fall apart, and they fall apart when you don’t want them to. Having a rainy-day fund for your rental property will prevent unnecessary stress and allow you to nip issues in the bud. Good renters who understand that you take action quickly regarding issues are likely to stay long term and be nicer to your house.
Being a landlord is both personally and financially rewarding, but it’s definitely not passive income initially. Good planning and honest expectations will be your path to establishing a successful rental property business.