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Have you always dreamed of becoming a landlord?
Let’s face it; owning an investment property can feel like a pipe-dream. After all, you purchase a property, find suitable tenants and collect rent each month. Once you’ve realized your dream, you can sell the house and enjoy a sizable profit.
What could be better?
Of course, operating an investment property can prove to be an incredible investment. But, as it turns out, there’s more to becoming a landlord that kicking your feet up and collecting monthly checks.
8 Steps for Becoming a Landlord
In order to ensure that you’re making the right decision, it’s crucial to understand what’s involved in becoming a landlord. To help, here’s a simple eight-step guide on how to become a landlord.
1. Speak With a Mortgage Agent
First things first, you’re going to need to get approved for a mortgage.
With this, it’s important to note that purchasing an investment property can carry different rules and regulations than purchasing a primary residence. For example, you might be required to have a larger downpayment.
In general, 20-25% down is required for rental properties, which is substantially higher than the down payment required for a primary residence. In contrast, primary residence mortgages can sometimes be as low as 3.5% (FHA loans) or even require no money down (VA and USDA loans).
There are also different tax implications to understand.
Your mortgage professional will be able to guide you through the borrowing process and offer a mortgage.
2. Start House Shopping
Now that you’ve been approved for a mortgage, it’s officially time to start house shopping!
Whether you go after a freehold home or a condominium unit is up to you. While a home will often require significantly more maintenance than a condo, condos frequently come with high fees that can make it trickier to turn a profit.
In purchasing your property, be sure to work with a real estate agent who is familiar with investment properties. This is especially important if you’re looking to acquire your first investment property.
After all, buying an investment property is entirely different than purchasing a home that you intend to live in.
3. Do the Math
Sure, investing in real estate is still considered to be the most popular form of investing for Americans. But, you also want to ensure that this type of investment makes sense financially.
If you visit a property of interest, be sure to perform the math before signing on the dotted line. With this, it’s important to note that the math associated with an investment property is very different than that of a primary residence.
For example, investment properties require the purchaser to determine the net operating income (NOI) produced by the property. The NOI measures the amount of cash flow that an investment property will produce (before debt).
You will also want to pay attention to the capitalization rate (“cap rate” for short). The formula for the cap rate is equal to the net operating income divided by the market value of the property.
This is why working with a real estate professional that is familiar with investment properties is key. These professionals understand which properties will benefit from a strong cap rate and make for a beneficial investment.
4. Consult With a Real Estate Lawyer
Once you’ve finally made a purchase, you’re going to want to arrange a meeting with a real estate lawyer. If you’ve been working with a realtor, you’ll automatically be connected with one to complete your closing paperwork and receive the keys.
Whether you elect to work with this attorney or a new one, you should have a lawyer explain to you the legalities associated with owning a rental property and becoming a landlord.
For example, the lawyer can educate you on what your responsibilities and boundaries are as a landlord. This will be anything from learning anti-discrimination laws and selecting tenants to rules associated with accessing the unit and ending a tenancy.
Understanding these rules is incredibly important and will ensure that you’re acting in good faith and following the laws.
5. Draw up A Lease
Next, it’s time to draw up a lease.
If you work with a real estate representative, they will take care of this for you. However, if you’re acting independently, you’ll find numerous lease templates online. Before moving forward with a template, speak with your real estate lawyer to ensure that it’s lawful and fairly representative of both parties.
This lease will act as the official representation between yourself and your tenants. It will outline all of the terms of the lease as well as the duration of the lease.
6. Advertise Your Listing
A simple way to find the best tenant is to advertise your listing as much as possible.
Fortunately, this can be done relatively easily online. With this, landlords can advertise anywhere from social media platforms to buy and sell websites. You can also opt for placing a “for rent” sign on the property.
Personally, I like to list my rental properties on Zillow, because it’s free for your first listing and drives a massive number of leads (sometimes several hundred). Zillow also makes it extremely easy to organize your inquiries, applications, background checks and credit reports.
Even if you have to pay Zillow a listing fee, it’s inexpensive and well-worth it, because organizing your rental leads can get tough as your volume scales.
I also like to use Craigslist and have had surprising luck with yard signs as well.
If you’re working with a real estate professional, they will advertise your listing for you. With this, you can also ensure that all of your advertising is both lawful and socially responsible.
7. Meet With Your Tenants
When it comes to accepting a lease, you’ll usually want to meet with your tenants face-to-face.
Oftentimes, this will mean meeting in-person with any prospective tenants. However, you can also opt for virtual meetings for tenants who are situated remotely or feel unsafe coming in person.
The purpose of this meeting is to familiarize yourself with your prospective tenants. Remember, these tenants will be living in your property. You’ll want to ensure that it’s a good match from the very beginning of the tenancy.
8. Perform Routine Maintenance
Once your tenant has moved in, you’ll have to be prepared to perform routine maintenance.
This maintenance will vary depending on what type of structure the home is. For example, a freehold home equipped with a yard will call for very different maintenance than a condominium unit.
If you’re unsure as to what you’re legally obliged to maintain, be sure to speak with your real estate lawyer. In general, you’ll have to ensure that all appliances and utilities are functioning correctly.
You can also opt to inspect the unit or perform routine maintenance. However, the terms of your entry must be lawful and outlined clearly in the lease. Even in performing routine maintenance, you must provide adequate notice to your tenant.
The Art of Becoming a Landlord
Did you know that more people are renting than at any other point in the last fifty years?
In fact, statistics reveal that 36.6% of households rent their own as opposed to own. When we consider this fact, it’s simple to understand why becoming a landlord is so enticing.
Before you get caught up in the excitement of purchasing an investment property, it’s critical to understand what it means to become a landlord. In doing so, you can ensure that you’re acting both lawfully and responsibly as a landlord.