A common starting place for those new to real estate investing is buying rental property. If you dream of owning rental property, learn how to become a landlord with these 10 steps.
Why become a landlord?
Becoming a landlord has a number of advantages including tax incentives, the ability to earn passive income or cash flow, and the benefit of owning real estate that appreciates and can be leveraged. While being a landlord and owning rental property requires significant work and is not for everyone, for many investors the pros of being a landlord outweigh the cons. If you're focused on becoming a landlord, use these 10 steps to get started.
10 steps to becoming a landlord
- Get educated.
- Determine your investment criteria.
- Search for an investment property.
- Run your numbers (calculate cash flow).
- Complete due diligence.
- Fund the property.
- Get the property rent ready.
- Market the property and screen potential tenants.
- Rent the property.
- Manage the property.
1. Get educated
The construction of a home starts with the foundation, just as your rental business should. Start investing in a rental property with a solid foundation and understanding of the business including how to be an effective landlord, what goes into owning rental real estate, and the ins and outs of this business. Learn how to research markets, analyze investment properties, and manage tenants and properties. Don't buy a rental property blind -- learn the business before you buy.
2. Determine your investment criteria
Once you understand what becoming a landlord entails and how to invest in rental property, you'll want to narrow down your investment criteria by identifying the types of properties you want to invest in. Investment criteria can entail:
- Property type, such as single-family, vacation rental, duplex, triplex, or fourplex.
- The location, which could be narrowed down by neighborhood, zip code, city, or county.
- Property characteristics, such as the number of bedrooms and bathrooms, square footage, construction type, or the age of the property.
- Minimum cash flow per door -- for example, a minimum $150 net cash flow per unit or a minimum return, such as a 12% cash on cash return.
3. Search for an investment property
Developing strict investment criteria is helpful as you search for an investment property, as it narrows down which properties are actually opportunities to conduct further due diligence on. You can search for investment properties online using industry websites like Zillow (NASDAQ: Z) (NASDAQ: ZG)or Realtor.com (NASDAQ: NWSA), meet other investors or wholesalers in the area at your local real estate association, buy at an auction, or do direct marketing.
4. Run your numbers (calculate cash flow)
Once you've identified a potential investment property, it's time to run your numbers and calculate cash flow.
Landlords make money in rental real estate by earning cash flow, which is money that is earned or lost in relation to the property's income and expenses. Ideally, landlords should make money with each rental property they purchase, having the income from the rental property exceed the expenses and keeping the remaining money as profit.
It's important to analyze each investment opportunity by completing a cash flow analysis to determine the property's actual rental income and expenses and net cash flow. Knowing the net cash flow of a property will help you calculate your return or cap rate or determine the ideal buy price to yield your desired net cash flow per door or return.
5. Complete due diligence
Due diligence is one of the most important aspects of being a landlord. Once you've identified a worthwhile investment opportunity, you will need to conduct due diligence on the property. Verify the property's current and projected expenses, have an inspection completed and get actual quotes for repairs or improvements that need to be made to the property, and confirm that the projected rental rate (if it's vacant or will be increased) can actually be obtained.
6. Fund the property
If all checks out, you'll need to fund the property. There are several options for funding a rental property including:
It's a good idea to develop relationships with potential lenders or financing partners prior to identifying an asset. That way you know their financing requirements and can close quickly once you find a property.
7. Get the property rent ready
If the property is vacant or in need of repair, the next step will be to begin making improvements. This could include minor or major repairs like painting, landscaping, or replacing the roof, furnace, or HVAC system. There is no need to conduct a full renovation just to rent a property out, but homes that are in good, updated, clean condition will typically rent faster and for a higher rate than properties that are outdated, dirty, or in substandard conditions.
8. Market the property and screen potential tenants
The next step is to market the property for rent and begin tenant screening. If you've priced the rental well in relation to the going market rent in the area and your property is in good condition, it's likely you'll receive a lot of interest and applications from potential tenants. Read up on fair housing laws, screen your tenants thoroughly, and establish requirements tenants must meet in order to qualify.
9. Rent the property
Renting the property includes executing a lease, receiving and safely protecting the tenant's security deposit, moving the tenant in, and completing a walk-through or move-in inspection. Make sure you have a well written and thorough lease that follows federal and local housing laws for your state.
10. Manage the property
The bulk of the work involved with being a landlord resides in property management. Initially, you may choose to manage your rental properties yourself to gain experience, or you can hire a property manager from a property management company. The job of the property manager is to oversee the day-to-day operations of the rental property including collecting rent, moving tenants in or out, coordinating repairs or work orders, and handling evictions. It does eat into your net cash flow and operating expenses, but for some landlords, the cost is well worth the service.
Being a landlord is not for everyone. Owning rental real estate can be a great wealth builder, but it's not the only way to gain tax benefits or invest in real estate. Make sure you're comfortable with and confident about the steps it takes to become a landlord and are willing to do the work.