Real estate is a tangible asset that can serve as a safe way to diversify a retirement portfolio while establishing passive income and building long-term wealth. The real estate market changes constantly, but there is never a "wrong" time to start looking for the right rental opportunity and become a landlord. With the right systems and tools in place, you can become a successful landlord, but you won't master the role overnight.
1. Have a landlord's mindset
As a landlord, you run a business, so you have to be organized, diligent, and proactive. Some people describe rental property income as passive income, but there’s nothing passive about being a landlord. Rental issues can arise at any time. Learning to be a good communicator, keeping your cool during times of crisis, and always being prepared to deal with difficult situations is essential.
There are tools available to help you set the proper rent rates, screen tenants, approve applications, and accept online payments to streamline your management process. If you can handle responsibility, you can be a landlord.
2. Find the best location for a rental property
Before you start to search for properties to buy, attend a meeting of your local apartment association and talk to other landlords. Ask them about their properties – which ones are performing well for them and what locations around town offer good rental prospects. A rent estimate report will help you see what other landlords are charging for rent on comparable properties in your area. You can use those numbers to decide how much to spend on a property.
3. Get your financing in order
Local banks love to work with real estate investors; they often have better rates or mortgage options than larger institutional banks. Rental property often requires a larger down payment than a personal residence. Due to the increased risk of defaulting on the mortgage loan, banks often like to have a 15, 20, or 25% down payment to purchase the rental property. Talk with local banks to see what their down payment requirements are for purchasing a rental property.
With financing information in hand, you’ll know if you can swing the purchase on your own or whether you’ll need a partner. Many first-time rental property buyers team up with a friend or family member to finance the purchase. You can then save for the downpayment or ask a friend or family member to partner with you on the purchase. They could be the financing side while you handle the management of the property.
You could consider a loan from a local private money company known as a hard money lender. You may pay a slightly higher interest rate, but these lenders are more flexible with downpayment and loan to value requirements than a bank, credit union, or mortgage broker.
4. Buy a rental property
With financing secured, do the math to see how much you'd be willing to spend to generate reliable monthly cash flow. Work with an experienced real estate agent to make an offer on a rental property and negotiate with the seller; you want a deal that makes financial sense for you and a contract that addresses all possible contingencies related to the condition of the property and your financing. If you purchase a property without a real estate agent, hire an attorney to review the purchase contract and ensure your interests are protected.
When the seller accepts your contract, the following steps include inspection of the property, assessment for financing, and closing maintenance. When all contingencies are met, and the home has passed inspection and financing assessment, you can set a closing date to finalize the purchase.
5. Make necessary improvements
As a landlord, you have an obligation to ensure that your property is safe and functional for your tenants. The property inspection should have identified any issues with electrical outlets, lighting fixtures, and wiring to the breaker box. The plumbing and fixtures, roof, heating, and cooling systems must also be in good condition. All doors and windows should close and lock for safety.
6. Find potential tenants
Finding good tenants is just as important as purchasing the right property. When you place an ad, stick to the facts about the property and its amenities. As a landlord, you need to follow the Fair Housing Act regarding advertising and screening tenants. You can't discriminate based on race, color, national origin, religion, sex (including gender identity and sexual orientation), familial status, or disability. When you create an ad, take high-quality photos of the interior and exterior and include information highlighting features and upgrades, amenities, and policies about pets.
7. Screen the applicants
Establish a standard set of criteria to screen rental applicants. Online tenant screening tools can help manage the process. In most states, you'll get the renter's history, a credit check, and a criminal background check.
Be sure that your applicants have:
8. Approve the tenant and sign the lease
Once you approve a tenant’s application, be sure to review the lease with them to understand their responsibilities to you and your responsibilities as a landlord. Have them initial each page to indicate they have read and understood the document. Collect any deposits, like security or pet deposits, and the first month's rent when they sign the lease. You can use online payment systems to send reminders and process rent payments each month to make payments more manageable. Some landlords collect last month's rent at this time as well. This is optional and, in some states, may not be legal – be sure to check all applicable local laws before collecting deposits and rent.
You may request that your tenants purchase renter’s insurance when they sign the lease. This insurance will cover their property if there is a fire or flood and give both of you peace of mind.
9. Ensure a smooth move-in process
Review a detailed move-in checklist with your new tenant to document the state of the property at the time of move-in. That way, you can agree about any existing damage that the tenant should not be held accountable for when moving out. Be sure to carefully inspect every room and take photos or videos of the current condition. It’s also an opportunity to make notes about other items that may need maintenance in the future. A comprehensive move-in checklist can support any legal action you take in the future to recover damages caused by the tenant.
10. Manage and maintain the rental property
Good property maintenance keeps your tenants happy and ensures you'll be able to bring in future tenants without too much downtime to complete significant upgrades or repairs. When tenants call because a system or fixture doesn’t work correctly, it’s your responsibility to fix the problem in a timely fashion. You will also have monthly and yearly tasks, such as spraying for pests, cleaning gutters, servicing the HVAC, and seasonal clean-ups around the property. Keep in mind that you need to provide your tenant with 24-hour notice if you plan to enter their premises for non-emergency maintenance.
With your new tenants in place, continue to build good relations by communicating well and responding promptly to their needs and concerns. Every landlord situation has its unique challenges, but once you’ve found a suitable property, determined how to finance it, and put the tools and procedures in place to manage it effectively, you’ll build a solid portfolio.