Buying a rental property and becoming a landlord can be an effective way to generate an additional stream of revenue. If you find a tenant right away and collect more in monthly rent than you pay in expenses, you’ll draw a decent profit every month.
The downside is that being a landlord is a lot of work—and it’s more complex than most first-time property investors realize. Not only will you have significant legal responsibilities, you’ll also need to manage the property well if you want to continue generating positive cash flow.
Tips for First-Time Landlords
If you’re buying or managing a rental property for the first time, these tips can help you maximize your results:
1. Create an LLC. While it’s possible to invest in rental properties as an individual, or in the context of a partnership, it’s a good idea to create a limited liability company (LLC), or multiple LLCs. LLCs are considered separate legal entities, so they can take on responsibilities and debts of their own. This is useful in protecting your own personal assets, securing financing for new properties, and shielding yourself from liability in case of a legal issue.
2. Understand your goals. There are many good reasons to become a landlord, most of which are financial motivations, but even so, it’s important to understand your big-picture goals. For example, is it more important to generate a positive cash return every month, or more important to build a large portfolio of different properties? Do you intend to sell your property for a profit eventually, or hold it indefinitely?
3. Be patient for the right property. Many first-time real estate investors are eager to get a property right away; after all, the sooner you get a property, the sooner you can start making money. However, it’s usually better to wait for the right deal. Be patient, and evaluate all your potential purchases thoroughly. It’s much better to wait a few weeks, or even a few months, for the right opportunity to come along.
4. Screen your tenants. Screening tenants is one of the most important keys to succeeding as a landlord. Without discriminating, you’ll need to choose tenants who have good credit scores, a stable line of income, and a good background; if you do, you’ll be much more likely to collect rent consistently, and avoid the possibility of a messy eviction.
5. Get to know your market. Understand your neighborhood. Get to know the demographics, types of houses, rent prices, amenities, and other features of the area. Why do people like to live here? What are they willing to pay for? What do they need in a property? This information will help you set a reasonable rent price, market to the right people, and alter your property in a way that appeals to new tenants.
6. Be smart about pets. Generally speaking, pets are a problem for landlords. Pets have the capacity to do heavy damage to your property, so most landlords prohibit most kinds of pet ownership. However, if you decide to allow pets, it’s important for you to collect a separate pet-related security deposit from your tenants.
7. Get a good lawyer. As a landlord, you’ll be required to adhere to a number of local laws, including anti-discrimination laws, and laws that require you to maintain the safety and stability of the property. Because these laws vary, and because they can be complex, it’s important to consult with a good lawyer in your area.
8. Know which renovations are worth it. Many home renovations will make your property more appealing, and some will actively increase the value of your property. However, not all renovations are worth the money. Learn the ROI of various improvement projects, and only execute the ones that make fiscal sense.
9. Budget conservatively. When drawing up your budgets, always plan conservatively. Develop an emergency fund, and a buffer to protect yourself. Always plan for less rent than you truly expect, and estimate your expenses to be higher than average. It will help you avoid the negative impact of unanticipated fluctuations.
10. Market aggressively. Vacancies can crush your cash flow, and the best way to combat them is to market your property aggressively. Advertise the property everywhere you can, and make sure to get in front of the people most likely to move in.
Learning From Experience
As with most things in life, the best way to learn is through experience. Pay attention to the approaches that are working and failing in your rental property strategy, and make adjustments as you gather more information. If possible, talk to mentors and other real estate investors in your area; relying on the experience of others is a suitable substitute for novices with little experience of their own.