What to consider before becoming a landlord
The Benefits of Investing in a Rental Property
Investing in a rental property is one of the smartest ways to generate stable, long-term income.
It also offers several other benefits, including:
Tax perks: Rental property isn’t subject to self-employment tax like other home businesses unless you’ve formed a corporation, in which case you would file corporate taxes.
Rental properties also benefit from depreciation, which can be deducted from your taxable income from the rental property each year to account for wear and tear to the property. Depreciation reduces the amount of tax you pay on rental income, but may increase your capital gains tax after selling the property.
Along with depreciation, landlords can also claim many deductions for their business, including property insurance, mortgage interest, advertising, property tax, maintenance fees, and much more.
Property appreciation: It’s generally safe to say that the value of real estate increases over time, meaning that it appreciates. When it comes time to sell, sellers pay taxes on the appreciation, also called capital gains. Although property value depends on supply and demand, real estate purchased in the right location can sell for a decent profit.
Cash flow: Renting a property provides regular cash flow for as long as there is a tenant paying rent. Each month you receive a rental payment, the money you make after paying your mortgage, utilities, and other bills is yours. The income you generate from a rental property is also more predictable than other investments, such as a traditional business, because a rental payment provides consistent cash flow that is higher than a typical dividend.
As you can see, owning a rental property has a high potential for profitability and long-term success. While you won’t get rich overnight, it’s a wise way to invest in your future.
The Downsides of Owning an Investment Property
Nothing is without its downsides, and that goes for renting out a property as well. When you purchase an investment property, the initial cost of purchasing the property is high, even without any additional costs to fix up the space for tenants. Because you may be paying a mortgage with rental income, unexpected changes, such as low rental demand or unreliable tenants, could affect your ability to make monthly mortgage payments.
Other potential downsides of investing in, and managing, rental property may be:
Liquidity: Depending on the market, your rental property can take a long time to sell.
Lack of diversity: As an investment, real estate is a concentrated asset, which means if something happens to it, your money is tied up in that one investment, as opposed to several small investments.
Unpredictable tenants: As mentioned above, if a tenant suddenly stops paying rent, damages the property, or moves out without notice, you may experience a temporary income loss.
Time and management: Managing tenants, learning landlord-tenant laws, communicating with contractors, handling maintenance—this all takes time and energy. While owning rental property may be considered a passive investment, it’s a hands-on job for a landlord.
Expenses: Owning property costs more than the purchase price. When you factor in property taxes, insurance, and other fees, such as a Homeowner’s Association (HOA) fee or repair costs, your expenses can add up.
Owning an investment property is not much different than owning your own home. The main difference is that you are a landlord and managing tenants requires patience, time and attention, and legal knowledge on top of your usual homeowner responsibilities.
Understanding Zoning Laws
Zoning laws can have a significant impact on a landlord and their rental property. In a nutshell, zoning laws keep residential and commercial areas separate from each other, so residents aren’t living in the middle of a noisy industrial area.
Before purchasing a property, it’s important to investigate your local zoning laws to see whether or not they will affect your rental property. An area zoned for one type of land use may later be changed, so be aware of future developments that could affect your property. For example, property in a residential area might be changed from one zone class to another, due to factors such as sprawling, which could impact your property value and your ability to find tenants.
Should I Rent Out My Property?
- Do I have the time to commit to managing a rental property?
- Am I comfortable dealing with potentially difficult tenants?
- Can I make repairs myself or do I need to hire a professional?
- Am I organized?
- Do I understand my tax obligations?
- Am I familiar with my state’s landlord-tenant laws?
Getting insurance for the rental property
- Property damage: Covers damage caused by tenants as well as fire, storms, vandalism, and theft.
- Liability: Pays legal costs and medical payments if tenants or visitors who get injured on your property.
- Loss of income: Compensates you for lost rent if your tenants have to leave your property because of damage.
- Repair or replace property damaged by fire, vandalism, or theft (computers, electronics, clothes, furniture, bikes, and more)
- Cover injuries or damages caused to their guests or visitors (they can pay legal costs as well as make medical payments)
Preparing your rental property
Preparing Your Rental for Tenants
- Check all appliances to make sure they work, including the oven, dishwasher, and washer or dryer
- Test smoke detectors and CO2 detectors
- Repair any problems, such as holes, water leaks, pests, etc.
- Give the walls a facelift with a fresh coat of paint
- Replace or clean flooring
- Upgrade fixtures and/or window treatments
- Clean each room thoroughly, including hard-to-reach spaces, such as cabinets and other storage areas
- If you have steps or stairs in the unit, ensure they are strong and safe to use
- Hire a professional to check that all electricity, heating, and plumbing are working properly
- Ensure that doors, gates, and windows have working locks
- Eliminate any bad odors
- Landscape front and back yards, gardens, etc.
Should I Hire a Property Manager?
- Screening tenants and negotiating lease terms
- Discussing leasing and property rules with a tenant
- Collecting rent or other fees
- Arranging for repairs, maintenance, and upkeep
- Paying bills, assisting with taxes, and managing a budget
- Enforcing rental rules and policies
- Setting rental rates and advertising the property
- Issuing notices
- Handling move-in and move-out inspections
- You live far away from your rental property.
- You’re not interested in managing a rental property.
- You don’t have enough experience to successfully manage the property. In that case, a property manager can help ensure you are renting legally.
Staging Your Rental Property
Advertising Your Rental Property
- Your rental price and if it includes utilities
- The square footage of your property
- What you are charging as a security deposit (usually equal to one month’s rent)
- Availability and length of the lease term
- Whether you will allow smoking or pets
- If there are any additional incentives, such as parking
- Information about the neighborhood and surrounding areas
- How you wish to be contacted
- Online classified ads
- University housing boards
- Word of mouth through family and friends
- Social media
- Renting bulletins or apartment listings
- Newspaper ads
- A rental sign on your property
- Community bulletins, such as at a grocery store or recreation center
- Listing the property with a real estate agent
Managing your tenants
Screening Applicants Using a Rental Application
- Their employment history and income
- Their rental history
- Credit information
- Clean the property
- Create a Lease Agreement, go through the terms, and sign the agreement
- Change the locks and cut an extra set of keys
- Provide your tenant with your contact information
- Collect the first month’s rent, security deposit, and pet deposit or fee, if required
- Conduct a rental inspection with the tenant and sign the report. Provide them with a copy
- Test lights, appliances, fans, locks, and smoke detectors with the tenant present
- Provide the tenant with bylaws or condo rules, if applicable
- Transfer any utilities to the tenant’s name, if applicable
- Determine the best method of communication for both parties
- Collecting the keys
- Signing the Rental Inspection Report
- Collecting a forwarding address for your tenant to deliver any future mail
- Asking for their feedback about their experience with the property, building, neighbors, and more so you can improve aspects of your business for the next tenant.
- Offering yourself as a reference for your tenant
Legal considerations for landlords
State Landlord-Tenant Laws
Your Residential Lease Agreement
- Protects you from liability
- Prevents confusion over terms, rules, or situations
- Prevents conflicts or issues that arise from misunderstandings
- Provides a written outline of the tenancy for recordkeeping purposes
- Offers a demonstrated understanding and agreement to the rental terms
- Sets out the procedures for notices and eviction
- Keeps expectations clear
- Protects a tenant’s rights
Types of Lease Terms
Permissions in a Lease Agreement
- Will you allow all kinds of pets, or only certain pets? Will you charge a pet deposit or fee?
- Will you allow the tenant to make improvements to the rental property, such as painting the walls?
- Will you allow smoking in the rental property?
- Are home businesses permitted in the rental property? (Often, home businesses are a zoning issue, and depending on the size and income of the business, it may or may not be permitted.)
- Will other occupants be allowed to stay in the rental property?
- Will the tenant be allowed to sublet or assign the Lease Agreement?
Determining Your Rental Price
- Do rentals in the building or surrounding neighborhood include utilities in their rent?
- Is your rental property in an attractive neighborhood where charging utilities would not affect demand?
- Would charging utilities deter tenants or does it offer them an opportunity to save?
- Would making tenants responsible for utilities change their usage?
- Does the building have a master meter or are utilities divided by suite?
- Would installing energy-efficient light bulbs, low-flow toilets, or sealed windows help lower the cost of utilities?
Landlord and Tenant Rights and Responsibilities
- Following the terms of the Lease Agreement
- Paying rent on time
- Taking reasonable care and maintaining cleanliness of the rental property
- Not disrupting neighbors
- Complying with building rules
- Properly disposing of trash
- Complying with building/housing codes
- Making sure the property is clean, safe, and sanitary, and conducting all repairs in a timely manner
- Following responsibilities laid out in the Lease Agreement, such as maintenance of the structure and the appliances
- Maintaining the infrastructure for plumbing, electrical, heat, water, etc. in the property
- Providing an area to dispose of trash
Signing Your Lease Agreement
Maintenance and Repairs
Collecting Rent Payments
Managing Your Rental Finances
Landlord and Tenant Notices
- Notice of Termination: provides a landlord with notice that a tenant is going to terminate a tenancy.
- Notice of Repair: notifies a landlord of any repairs that need to be made to the rental property.
- Intent to Vacate: informs a landlord of a tenant’s wish to vacate the rental property once the lease term is over.
- Notice to Pay or Quit: gives notice to a tenant to pay any outstanding rent payments with the option to evict a tenant if they don’t pay.
- Notice of Termination: notifies a tenant that they won’t be able to renew the tenancy.
- Notice of Lease Violation: warns a tenant of a lease violation. If they don’t remedy the situation, the landlord has the option to evict the tenant.
- Notice of Rent Increase: provides a tenant with notice that their rent will be increasing.
Evicting a Tenant
- Conduct illegal activity on the premises
- Pose a danger to you or to neighbors
- Breach the Lease Agreement
- Continue to make late rent payments, even after receiving written warnings
- Cause significant damage to the property