How to Become a Landlord: A Guide

Apr 22

Some investors choose to become a landlord simply because it can provide passive income. Others do it with the firm goal of being able to turn the resulting rental income cash flow into their primary source of income.

No matter what your motivation, the choice to become a landlord for the first time is a solid one, and as long as you know what you’re getting into, it can be lucrative and fulfilling. Here’s what you need to know before buying your first rental property, as well as what to do once you have one and need a tenant.

Before You Get Started as a Landlord

Owning a piece of investment property that you use to generate passive income is a proven way to build wealth, however, it does come with some caveats.

First of all, the work can be challenging, and there’s a lot of it. You may be able to hire out your property management company or agent later on, but very few landlords can afford that from day 1. Starting with a reliable realtor or real estate agent is a great first start.

Second, get a real estate attorney. You can do a lot of what you need with standard boilerplate lease agreements, but you’ll want to make sure you have protection in the event of legal disputes. They will also be a priceless source of information on landlord-tenant laws.

Third, finding and subsequently keeping good tenants can be difficult. You’ll also need to be ready to follow through with eviction if needed.

Financing Your First Rental Property

If you feel you’re ready to get started but don’t already have a property to rent out, you’ll need to buy one. Since this is your first property, you probably aren’t coming to the table with cash in hand, so you’ll need to finance the purchase. There are a few different options to get that done.

Conventional mortgages are what you would get for your main home. You’ll qualify in the same way, and the process will be largely unchanged from buying the home you currently live in. This means you’ll need a robust credit rating and down payment in most situations.

Getting a second mortgage may be an option if you have enough equity in your current home. Borrowing against this can get you the rental property with less strict requirements than a conventional mortgage, but it is highly dependent on your equity.

Property investment loans are available from commercial real estate lenders, and unless you’re looking to buy multiple properties or a larger building with many units, you’ll be better off with a traditional or second mortgage for a single-family rental.

If you’re a veteran, you may even be able to use a VA loan to start your real estate investing, with a few conditions. The property will need to have multiple units since you’re required to make one your primary residence. You’ll also need to buy a property that meets the minimum property requirements, so don’t plan on getting a fixer-upper.

When setting the rental price, be sure to cover all expenses relevant to your property, as well as charging enough to make a profit.

Your Duties As A Landlord

Being a landlord has a very wide scope of responsibility, and a lot of that entails some relatively hard work, both in the home as well as behind a computer. If you’re a new landlord, chances are good that you’ll be the sole person managing your tenant screening process, as well as all of the physical work needed as the property manager. Regardless of the state of the rental market, protecting yourself and your investment should be a successful landlord’s top priority.

Tenant Screening

New tenant screening is an important part of earning rental income from your investment property. You’ll need to conduct credit checks and pull their credit report to ensure that your potential tenant has the financial ability and credit score to uphold their end of the lease agreement.

Many landlords also require their tenants to carry renters insurance, since homeowners insurance will generally not cover renter’s losses. You may also be interested in securing landlord insurance. All of this needs to be secured upfront in a rental agreement before the move-in.

As part of your rental process, be sure to run background checks, which will keep you apprised of any criminal or civil case they may have been involved in. Some of the more prudent landlords will also ask a prospective tenant for a reference for their previous landlord, which can give invaluable insight into details of their property condition at the end of the lease. Your rental application should include a section permitting you to run these checks, as well as any information needed to do so.

The final selection of your renters will come down to your best judgment. While you may feel a friendly connection with a potential tenant, don’t forget that you’re selecting one intending to give you the best return on your investment. A nice tenant that is always late with rent payments can put your mortgage payment, property tax payments and even your entire investment property, in jeopardy. Be sure that your renter selection meets fair housing laws as well.

Property Management

One of your duties as a landlord is to keep the property in a legally habitable condition. The home will need to comply with local laws for property owners, generally requiring the home to be safe, vermin & pest-free, and that the electrical & plumbing systems are in good repair.

That said, it’s usually the small things that add up to big disputes with renters. While your lease may stipulate that the tenant is responsible for cosmetic repairs and things like lightbulbs, they may repeatedly request that you take care of it. Make sure that your apartment walk-throughs with tenants are thorough and critical.

You will likely have to complete a number of renovations and upgrades over the life of your property. Finding the right compromise will be key to staying on good terms with good tenants.

Common Legal Issues Landlords Face

As a landlord, you are going to be exposed to significant legal liability and potential civil or criminal cases. In addition to adhering to federal laws, state laws, and any local laws that may govern your real estate, you’ll need to be prepared to handle the following issues if they should pop up.

Late rent
Security deposit terms and withholding
Enforcement of lease terms, such as lawn maintenance, late fee collection, or interior cleanliness
Discrimination claims by potential tenants
Privacy concerns with renters, generally dealing with landlord access to the home for maintenance and repairs
Liability issues stemming from problems with the property, even if caused by the tenant

Is Becoming a Landlord for You?

Becoming a landlord isn’t right for everyone, but for those who have an aptitude for it, owning an investment property can be a significant source of rental income. While it’s not foolproof and there is significant work involved, knowing what you’re getting into can reduce the chance of failure by a large margin. If you have any questions about finding the right rental property to get started, reach out to your local real estate experts at Cambridge Sage.

Sage Jankowitz