Renting out a property is a superb way to earn a little passive income. But how do you make the change from homeowner to landlord? In this guide, we’ll discuss the ten essential steps you need to make.
Find an Investment Property
If you already have an unoccupied house or apartment, this first step is the easiest. But if you have to buy the property, there are a few differences between buying an investment property and a home for yourself. Look for a low-cost property in an up-and-coming area, but avoid straining your budget with a fixer-upper. Also, keep in mind that lenders have stricter criteria for investment properties simply because they stand a higher risk of foreclosure.
Research the Local Market
Get to know your competitors by finding out what types of properties are most commonly rented nearby, how much the average rent is, what amenities are typically being offered. It’s also worth finding out what type of people are looking to rent in your area. For example, if your property is close to office buildings, it may attract young professionals. If it’s close to a school, it may attract families with kids or teachers. You can use this information to draw up an attractive rental ad later.
Crunch the Numbers
Decide how much rent you’re going to charge each month. Most landlords use the 1% rule, where the rent is calculated at around 1% of the property value. On top of this, you should also prepare a budget for unexpected expenses, such as late rent payments, repairs and maintenance, and even legal fees in case you have to deal with evictions.
Understand the Local Laws
Landlord-tenant laws vary from region to region, so make sure you are familiar with the local requirements. For example, some regions have limits on late fees or require that the late fees be written in the rental agreement. In addition, you may be required to have a rental license in some areas, or you may have to pay interest on the security deposit.
Get Your Property Ready
Ensure that your property is livable and ready for tenants as soon as possible. Provide all necessary amenities, from furniture and appliances to smoke alarms and carbon monoxide detectors. Make any repairs or renovations if needed, then give your property a good clean. When all this is done, take some photos of the space and prepare for the next step.
Advertise Your Rental
Post your property on several listing platforms to get as much exposure as possible. Your rental ad should include photos of all the rooms, list the location, square footage, number of bedrooms and bathrooms, amenities, rental price, security deposit and other lease terms, such as no-pet clauses and income requirements.
Screen Your Tenants
Finding the right tenant is one of the most important steps in becoming a landlord. Once you have a few applications sent in, take the time to screen your potential tenants. Run credit and background checks, ask for references and set up an interview. Also, make sure that your screening process is in accordance with the fair housing laws.
Draw Up a Lease Agreement
A lease agreement is a legal document outlining the terms under which the property will be rented. Ideally, it should be in writing and should stipulate the length of the lease, rent amount, security deposit, nonrefundable fees and which utilities are included. On top of this, it should also highlight circumstances under which you, as a landlord, are allowed entry on the property, any maintenance tasks that are the tenant’s responsibility, and any clauses you might find necessary, such as a no-smoking or quiet hours clause.
Prepare a Rental Inspection Checklist
Shortly before or as soon as the lease agreement is signed, you should also prepare an inventory checklist for your property. Each room should have a list of all items and their condition upon arrival, from the ceilings and floors to fixtures and furniture. Fill in the list in the presence of your tenant, and use it at the end of the lease to compare the condition the property is in upon their departure. This will help you assess any damage to the property and whether you will need to use the security deposit to cover the repairs.
Consider Hiring a Property Manager
If you have more than one rental, hiring a professional to handle property management can be of immense help. Not only can they handle advertising your rental and screening tenants, but they can also help with collecting rent, maintaining the property, communicating with the tenant, and allowing you to take a step back and simply enjoy generating a passive income.