Guide to becoming a landlord in 2018
Owning rental homes: path to wealth
Becoming a landlord can be a great choice, if you want to generate wealth. Investment home purchases rose 4.5 percent from the previous year’s 1.09 million to 1.14 million in 2016, according to the National Association of Realtors’ 2017 Investment and Vacation Home Buyers Survey.
The majority of individual buyers purchased rental property to generate income because of increasing demand for local rental homes.Verify your new rate (Aug 18th, 2018)
How to become a landlord?
Being a landlord can take many forms. You can be almost entirely hands-off, letting others do nearly all the work for you. Or you could be your own boss. And substantially build your net worth. Indeed, it might even make you rich, over time.
But it’s not for everyone…
Do you have what it takes?
Few newbies find being a landlord easy. For many, it can be hard work. And some encounter real stress, especially when markets and economies are bad. That’s when tenants tend to fall behind on their rent. And when periods between tenancies can grow scarily long.
How to become a landlord? Let us count the ways: If you’ve rented in the past, you may never have met your landlord. That’s probably because he chose to employ people to manage and maintain the property.
At the other end of the scale, your landlord may have lived in one of the units in your building. So you may have seen her every day. And she might have done everything from collecting your rent to fixing your leaky faucet.
Main tasks of a landlord
Whether landlords choose to take everything on themselves or leave them to others, they all have ultimate responsibility for a long list of tasks. And you’ll find more information about many of the following below.
Finding the right tenants
1. Advertising for new tenants — You’ll soon find how to reach your target market (prospective tenants). But today’s online platforms that offer local classified advertising, such as Craigslist, often prove cost-effective
2. Showing a home to prospective tenants — This is primarily a sales opportunity that can help shorten the dead time between tenancies. But it’s also a way to weed out prospective tenants who are obviously unsuitable
3. Completing legal agreements — You must have a signed, watertight lease or rental agreement (they mean the same thing, at least in legal terminology) for each rental. You may have your attorney draft one or you could base yours on a template from a reputable publisher or website. More on this below
4. Vetting renters to avoid deadbeats and vandals — Various companies, some on the web, offer credit and background checks to landlords
Managing your building and business
5. Collecting deposits and rent — Don’t forget!
6. Setting and enforcing rules — Most successful landlords find it’s better to rigidly apply the rules. And tenants like the certainty that comes with knowing all tenants have to abide by the same regulations
7. Avoiding equal housing problems — You weren’t planning on discriminating illegally anyway, but some actions can make it appear as though you are
8. Dealing with insurance and liability issues — such as swimming pools, icy paths and keeping the home up to code.
9. Keeping books and tracking tax write-offs — Make sure you can and do claim all the deductions available to you.
10. Taking care of repairs — There’s always something. Well, nearly always
11. Understanding and observing local landlord-tenant laws — The only thing worse than being in court is losing in court
12. Keeping proper records for tax and legal purposes — Unless you think the courts and IRS won’t mind …
Of course, it’s sensible to undertake yourself only those tasks for which you have adequate skills and time. But every task you outsource will cost you. And will reduce the profitability of your venture.
Accidental rental or professional aspiration?
To mangle Shakespeare: Some are born to landlordship, some achieve landlordship, and some have landlordship thrust upon them. In other words, some inherit their rental property, some go out and buy it and others become landlords almost by chance.
Those who have found themselves becoming a landlord by accident are often homeowners who had to move, perhaps for work or family reasons, but could not sell their houses.
Maybe they had “negative equity” (they owed more on their mortgage than the home was worth). Or perhaps the local property market was in a slump and nobody was buying. So, to keep afloat, they rented out the original home.
This is often great for the renter. Because they get to live in a homeowner’s pride and joy. But, if the tenant cares less for the home than the owners used to, that can soon change. In worst-case scenarios, the pride and joy quickly becomes a pig sty.
To combat that risk, some landlords “renter-proof” their properties. That may mean covering easily damaged hardwood flooring with lino and inexpensive carpets. And it might involve removing some vulnerable features that could be abused, such as a wood stove.
The latter may be a good idea, given that young children could burn themselves on those. And that could raise liability issues for the landlord. Oh, and the tenant could misuse it and accidentally burn down the home!
But renter-proofing has to be considered in the context of your marketing. If you plan to attract high-end renters who will pay a premium, they’ll expect touches of luxury. And they’ll run a mile from lino.
If people in your target market just want a roof over their heads, your priority should be to protect the value of your asset.
On becoming a landlord, many people kid themselves they can do all 12 tasks on the above list. Of course, some succeed. But others just can’t find enough hours in the day, especially if they still have another job. Or perhaps they lack the skills or the inclination to carry out all the necessary repairs and maintenance work.
So they get in professionals to do some or all of it. Indeed, some choose to get in full-service property management companies that will do all 12 tasks. The extent of property management costs depend on your local market, the tasks you want to avoid, and whether you rent short-term or long-term.
In the US, long-term rental management ranges from about 8 percent to 15 percent. But short-term properties in resort areas can cost as much as 50 percent to manage! Every week (or even more often), the place will have to be cleaned, linens replaced, reservations taken and rent collected. In addition to the maintenance tasks required of a long-term rental.
Choose from the menu
That can make the full-service provision simply too expensive for many landlords. So they view the task list as a menu. And they choose the things they personally can do well and outsource the others.
Those who are handy around the house take on any routine repair jobs. And those with genuine construction experience might be able to provide virtually all the labor a home will ever need.
Meanwhile, others may be strong on admin. Or have great people skills. The important thing is to play to your strengths when selecting the tasks you’re going to do.
Don’t take chances
And the golden rule is not to pretend to yourself that you’re good at things when you’re not. Don’t feel bad about your limitations. Because we all have them.
Some people are hopeless at wielding any sort of tool, let alone one you plug in. Others find their eyes glaze over before the end of the first sentence of a legal document. Some are natural accountants and others aren’t. Some can charm a sociopath while others stand no chance of facing down a troublesome tenant who’s late with his rent or in breach of his lease.
So remember the old saying: “Don’t trip over dollars to pick up pennies.” In other words, don’t crash your business to save a few bucks. In particular, if you’ve any doubts at all about legal issues, hire an attorney.
Becoming a landlord … anonymously
If you occupy one of the units in a building you own, you might enjoy some real advantages. Nobody could keep a closer eye on her biggest asset than you will. And your commute will be unbeatably short.
But being on the premises has decided drawbacks. To start with, you need to keep some emotional distance from your tenants. Become friends with them, and it can be difficult to resist their pleas to pay the rent late. And they may pressure you to let other rules slide.
Meanwhile, your proximity can be a double-edged sword. Do you really want people knocking at your door at all hours to complain about minor problems?
One way around this is simply not to tell anyone that you own the building. Use a property manager to run the place. And make the business into a limited liability company (or some similar vehicle) so your name doesn’t appear on leases.
Some common legal issues
Becoming a landlord brings a plethora of legal issues and risks. So, if that scares you, you should find a good real estate attorney. And have her on speed dial.
As time goes by, you’ll likely grow increasingly familiar with the laws you must adhere to. And the scariness will recede, as will your need to consult that lawyer.
Twenty-one states have adopted the Uniform Residential Landlord and Tenant Act as the basis for their local laws. If your rental property is in one of them, you may find it easier to research legal issues yourself online.
Here are some of the more common legal questions you may face:
The Fair Housing Act of 1968 and the Fair Housing Act Amendments Act of 1988 are the two key federal laws. These bar landlords from discriminating on the grounds of “race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents of legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability).”
And you can’t discriminate against any of those protected groups when you’re:
- Advertising for tenants — Take care with wording. Legal website Nolo says that even describing a home as within a “safe Christian community” could be construed as discouraging applicants with other faiths and none
- Selecting tenants — That includes falsely claiming that a vacant home has been rented
- Setting rents or deposits — Of course, those may vary over time. But you mustn’t create a pattern of favoring some tenants over others in a protected group
- Setting and applying rules — The same rules must govern all tenants and be enforced with equal strictness
- Terminating tenancies — Again, you must be even-handed. And be able to prove you are
Although these federal laws establish a nationwide baseline, many states, cities and counties have other anti-discrimination legislation that applies to landlords. For example, at least 15 states bar discrimination on the grounds of sexual orientation and gender identity.
Some legislation has loopholes for certain categories of landlord. But why chance it? You’re running a business. And a good tenant makes you the most money, regardless of his or her race, religion, sex, family status, sexual orientation or identification.
Restrictions on security deposits are mostly derived from state law. But your city, county or town may impose further regulation.
Because these state laws vary so much, it’s impossible to provide a useful guide here. For example, in Alabama security deposits are capped at one month’s rent, plus supplements to cover any special risks, such as pets. But, in Wyoming, there are no state-level caps. Fortunately, you can click through for a summary of your state’s law using NOLO’s list.
You’ll be lucky if as a landlord you don’t occasionally encounter problems with late rent. If you operate in the segment of the market where your tenants have financially precarious lives, you may find such lateness a continuing headache.
Many landlords recommend being strict about prompt payments. That doesn’t mean you can’t help people who have occasional, genuine and serious problems. But you may find yourself in real trouble if you get a reputation as a pushover.
Make sure your leases specify the date on which rent falls due. Chances are, when the due date is a weekend or legal holiday, it will be payable on the next business day. And you’ll want to be clear about acceptable payment methods: check, money order, cash, credit card or whatever.
Consider including penalties for late payments in your leases. Because they can provide you with leverage if a renter begins to give you continuing problems.
Collecting overdue rent can be time consuming. Most landlords start off with reminder phone calls and escalate to emails and letters.
You may need to prove you’ve taken reasonable steps to chase your money. So keep a log of calls (even unanswered ones) and voicemail messages left, notes of conversations and copies of emails and letters.
If none of that works , you’ll serve a termination notice. That provides the tenant with a fixed date in which the rent must be brought current or the premises vacated. Make it clear that you will apply to a court for an eviction order if that demand is not met.
Eviction and debt collection can be legal minefields. So you may want an attorney to hold your hand, at least the first few times. Alternatively, you could research the local (state, city, county or town) laws that apply where your rental property is located.
As a general principle, landlords have a duty to keep a home habitable. And that includes:
- Keeping the structure sound, watertight and hazard-free
- Making sure plumbing and electrical systems work and are safe
- Providing reasonable quantities of hot water in accordance with your lease
- Exterminating vermin — unless the tenant created the nuisance herself, perhaps through poor housekeeping
But smaller repairs and maintenance can be the subject of disputes. For instance, you probably aren’t obliged to carry out purely cosmetic work, such as repainting interiors or replacing stained carpets. And you may be able to clarify what is and isn’t your responsibility in your lease.
However, you may still be subject to local laws. And your tenant might report you to the local building or housing agency unless you keep the home up to code.
As importantly, if you’ve good tenants, you’ll want to keep them happy. The last thing you want is for them to move for the sake of a lick of paint. You’d probably have to paint anyway to attract a new tenant.
Again, this is something that is (or isn’t) covered by local laws. In most states, a landlord is not generally entitled to enter a home without giving the tenant prior notice.
So don’t expect to let yourself in with your key without prior permission. Do so where a law forbids it, and your tenant could report you to the state agency that enforces fair housing laws. That’s a lose-lose for you: You may require a lawyer to defend you while the tenant doesn’t need one because the state’s doing the enforcement job.
On becoming a landlord, you’ll acquire all sorts of new legal liabilities. And you’ll need insurance to protect you from them.
But, just as with your homeowner’s insurance, it’s easy to buy more coverage than you need. So take care you don’t pay too much for things you don’t need.
Get multiple quotes. And do a cost-benefit analysis to decide which risks you’re prepared to shoulder yourself and which you want your insurer to cover.
How to find good tenants
The best landlords are usually either trained or instinctive marketers. All that means is they optimize the profitability of their products (investment properties) by methodically analyzing their options. So here are some extracts from Marketing 101:
When professional marketers want to make plans they often start with the “marketing mix,” also known as the “Four Ps:”
- Product — Do I have a marketable product? And, if not, can I make it marketable? In other words, can I improve it in order to enhance its profitability?
- Price — What’s the most I can make from my product without deterring demand too much?
- Place — For most marketers, this is about where the product will be sold. But for landlords, it’s about the home’s neighborhood, city or county and state and the impact those will have on the tenants it will attract and the rent it can command
- Promotion — How much will I have to spend on marketing to generate optimum demand? And where (using which media) should I spend it?
Landlords can benefit by thinking about their rental properties in those terms. And, unlike most professional product managers, they can select the products they want to market by carefully choosing the homes they buy.
You won’t get far into thinking through your marketing mix before you begin to ponder the types of people who make up your “target market.” That’s just jargon for the group of people who will “buy” your product — or in your case who will be able, ready and willing to rent the particular home.
At its most basic, that’s recognizing who will want to occupy your property and can afford the rent. So there’s no point in hoping you’re going to attract affluent young professionals if you’re offering a basic, utilitarian, renter-proofed home next door to a crack den in a poor, high-crime area.
But, if you buy a rundown place in an up-and-coming neighborhood, you might want to invest in upgrades that will get you a better rent. That’s because you’ll be appealing to a different target market.
The more you research the demographics (the local population, broken down by age, sex, employment, income, household size and so on) of the area, the more accurately you’re likely to understand your target markets. And the more profitable your purchase may prove.
Marketers have something called the “promotional mix,” which is the range of ways they have to reach target audiences. But you’ll need fewer than the full range. After all, has anyone, on becoming a landlord, bought spots on TV stations to find renters for a single home?
So you’ll probably need just four:
- Digital — Online sites that provide local classified advertising may get you directly to tech-savvy renters
- Direct mail — As your reputation as a landlord grows, you might get inquiries at times when you have no homes available. Build an emailing list so you can contact prospective tenants later. And remember, you never know when a unit might become available
- Advertising — In some areas, local newspapers may remain the best way to attract renters, or fliers on local grocery stores, gyms and other bulletin boards. And on’t forget that yard sign
- Personal selling — You probably won’t be going door-to-door to drum up business. But, unless you employ a property manager, you’ll likely be showing homes to prospective tenants
And, with experience, you’ll get more comfortable selecting and employing your most effective media.
If you’re a product manager with Coca-Cola or Procter and Gamble, every customer is a good customer. But that sure isn’t true for landlords.
So you need to screen out prospective tenants who might fail to care for your property — or perhaps even actively vandalize it. And you need to steer clear of those who might not pay their rent on time — or perhaps not at all.
Even if you consider yourself a good judge of character, you shouldn’t rely wholly on an interview. You need much more information.
Separating the wheat from the chaff
But how do you get that? Well, while no guarantee, past behavior is often the best indicator of future behavior. So do background checks.
Of course, if you have a property manager, that will be her job. But you might want to review the information she collects.
If you don’t have a property manager, you’ll have to do the checks yourself. Or, rather, you can select an online service to do it for you.
Just do an online search for “tenant background checks” or “tenant screening.” But pick a service with plenty of positive reviews from landlords.
A good one should reveal an applicant’s:
- Prior criminal convictions
- Current credit report and score
- Past evictions, based on public records
- Previous addresses
You need a signed consent form from the applicant in order to carry out a background check.
Behind black marks
If you’ve plenty of other, better prospective tenants, you might eliminate an applicant for a single blot on any one of those records. But, especially if you’re short of alternatives, you may want to dig deeper.
Do you really want to punish someone for an eviction or a criminal offense that happened many years or even decades ago, absent more recent issues? Often, a poor credit score arose from a brief period of unemployment or sickness that is now well behind the applicant. Are you going to exclude her for something that’s not her fault?
Of course, you’re not in the business of giving second chances. But you’ll probably want to be reasonable. So you might want to talk to the applicant about anything that bothers you.
What you should focus on more is the applicant’s previous behavior as a tenant. Ask for references from previous landlords and call them for an off-the-record chat.
And match up information the applicant gives you about where he’s lived before with the previous addresses provided by the background check. Treat holes and inconsistencies with caution.
Seriously, time invested in picking good tenants can be the difference between becoming a landlord who’s successful and becoming one who’s constantly stressed.
How to evict bad tenants
The state where the rental property is located will have its own laws governing eviction. And you must observe those to the letter.
Because even a minor quibble over wording or how a notice was served can allow a tenant to drag out the process for weeks or even months longer than normal.
Unless your investment property is in a rent-controlled city, you can normally serve a tenant who’s on a month-to-month lease with notice to vacate the home. You usually have to give either 30 or 60 days notice, depending on local laws.
This is called termination without cause. So you don’t need a reason. Maybe you think you can find a tenant who’ll pay a higher rent. Or you want the home for a friend or relation.
Of course, you will probably want to avoid evicting anyone. And most landlords try to resolve issues face to face with troublesome tenants.
But, if that fails, you may be able to evict a renter on the following grounds:
- Failure to pay rent
- Breach of local ordinances covering things like noise levels and health requirements
- Breach of lease — Perhaps the tenant has a pet, has sublet the home or is allowing too many people to live there. But your lease much ban those things unless they create other grounds for eviction
- Creation of safety or health hazards
- Causation of significant damage to the home beyond reasonable wear and tear
Don’t go to court relying solely on the credibility of your word. Because you’ll need comprehensive documentary, photographic or witness evidence to prove your allegations.
Don’t go it alone
A really bad tenant can tempt even the most placid landlord to cut corners. You may be tempted to hire some muscle and physically remove the renter without bothering with the niceties of due process. Resist! There’s a good chance you could still end up in court. But as the defendant.
Similarly, absent a court order, you must not cut off utilities, change locks, remove possessions or otherwise harass your tenant.
Executing the court order
Once you have a judge’s eviction order, your problems are nearly over. But not quite.
Because you have to take care executing it. And the safest way forward is to have a neutral law enforcement officer execute the order,
Merely the presence of such an officer often defuses tensions. And you will have a reliable witness that the tenant and her possessions were removed lawfully.
Forms for landlords
Few lawyers come cheap. So you may decide on becoming a landlord to become your own amateur lawyer, too.
But that will only work if you’re prepared to put in the hours to do your homework. You’ll need to become an expert on landlord-tenant law in your state, including any federal or local legislation that applies. And that means you need the sort of mind that is comfortable acquiring and using such knowledge.
If you search online for “best law books for landlords,” you’ll find plenty of choices. Just make sure the ones you choose are from reputable publishers and by expert lawyers. And that they cover your state.
Good ones include templates that you can customize for all sorts of legal forms you’re likely to need. Those might include:
- Receipt and Holding Deposit Agreement
- Landlord-Tenant Checklist
- Move-In Letter
- Month-to-Month Residential Rental Agreement
- Month-to-Month Residential Rental Agreement (Spanish Version)
- Fixed-Term Residential Lease
- Fixed-Term Residential Lease (Spanish Version)
- Cosigner Agreement
- Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards
That list came from a description of NOLO’s “Every Landlord’s Legal Guide.” But you’ll likely find similar standard forms in other books.
Of course, you can also download those sorts of forms from various websites. Some even offer them for free. Or for about $30-$50, you may purchase a comprehensive bundle that you can use repeatedly.
So, is it worth paying for something you may be able to find for free? That’s a judgment only you can make. The paid-for sites may be more credible. And the money you pay might mean the publisher owes you a duty of care that incentivizes it to ensure the reliability of its products. It’s up to you.
Becoming a landlord
Many find that becoming a landlord is the best move they ever made. But, depending on how hands-on you choose to be, it can involve a lot of work. And it can bring sleepless nights, especially in the early days when your business may be more vulnerable to external economic factors.
However, the financial and emotional rewards can make all that worthwhile — and then some. Your borrowing on each home reduces each month, while the rent you can collect may well go up most years. True, owning rental property only rarely makes people rich quickly. But getting rich slowly is a very attractive alternative.
What’s the first step to becoming a landlord? Buying a rental property. So be sure to read our complete guide to that.Verify your new rate (Aug 18th, 2018)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.