Being a landlord isn’t always easy, especially if you’ve never owned an investment property before. These tips for first-time landlords can help you start off on the right foot.
Remember, the habits you form at the start of a new venture can establish how much time, money, and frustration you’re spared throughout your career as a landlord. Invest early in creating a tried-and-true system for managing your real estate so you can reach your financial goals faster and be a great landlord. Here are some ideas to get you started.
1. Get the right insurance
Protecting your investment property shouldn’t be an afterthought. If you rent out your second home, a regular homeowners insurance policy simply won't cut it. You need landlord insurance for this situation. It protects the property’s structure, other structures on the premises (like sheds and fences), and lost rental income.
Notably, it doesn’t cover all the belongings inside the property – that’s a job for your tenant’s renters policy. Your tenant’s policy may also cover their liability for medical payments if their guests are injured. That said, you may want to look into liability insurance of your own.
Landlord insurance policies can vary by insurer and location. If you live in one of the states below, get a quote for a policy specific to your state:
Need a quote now? Apply online and see how much we can help you save.
2. Create a bookkeeping process
Being a landlord is a business, and you need to treat it that way. That means tracking your income and your expenses so you don’t have a mess on your hands during tax season. Creating good bookkeeping habits now can be a huge help.
Your process can be as simple or as complicated as you want – there’s plenty of accounting software to choose from. The important thing is to keep a good record of your deposits, rents, and expenses, like your:
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Mortgage.
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Property taxes.
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Maintenance expenses.
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Materials used on the property.
For example,the supplies you buy to clean the property before your next tenant moves in could be a deductible expense. You want to make sure you have receipts when it’s time to file your taxes.
3. Get everything in writing
You know how important a lease is – you can’t do business on a handshake alone! But don’t assume that a boilerplate lease accounts for everything. Make sure your lease clearly outlines your policies about anything that’s important to you, like:
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Late rent.
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Subletting.
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Pets.
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Noise complaints.
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Number of occupants allowed.
Every communication you have with tenants about the property should be in writing, too. This includes giving tenants notice when maintenance workers need to stop by or when you’d like to show the property. If there’s ever a dispute, you can rely on these records to show you complied with your state’s notice requirements.
4. Plan for taxes
If you only own one property, it can be easy to forget that you’re technically running a business. But you are, and you need to plan for taxes accordingly. Remember that rent payments are considered income, and what you spend to maintain the property and your property insurance may be considered deductible expenses.
It’s smart to talk with a tax advisor before you become a landlord so you know exactly what to expect on your taxes. For example, you may need to start paying estimated self-employment taxes on a quarterly basis. This covers your Social Security and Medicare tax obligations, similar to what your employer would withhold from your paychecks. You’re often required to pay these at the federal, state, and city level.
5. Know the housing laws in your area
You probably need to apply for a Certificate of Occupancy (COO) in the county where your property is before you can rent out the space. Doing so can be a crash course on the housing laws and tenant rights in your area.
Even if you don’t need a COO, make sure you understand your responsibilities to your tenants. At the end of the day, ignorance isn’t a defense if there’s a problem with the property and it doesn’t pass a city housing inspection.
6. Consider hiring a property manager
Emergencies can – and will! – crop up, and often take a lot of time to deal with when they arise. If you don’t live near your property or prefer to be hands-off when it comes to management, consider hiring a local manager.
The right manager can help you:
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Advertise your property.
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Vet tenants.
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Execute leases.
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Collect rent.
More importantly, they often field late night phone calls and address other problems as they come up. Otherwise, you’ll find yourself working around the clock, and that can make any business harder to run.
7. Don’t rent to family and friends
It might seem like a win-win situation to rent to someone you already know. But the truth is it’s harder to say no to friends and family, and renting out your property is all about maintaining boundaries.
For example, let’s say a friend falls on hard times and can’t pay the rent. That friend might expect a favor that you wouldn’t give other tenants. The easiest way to treat tenants like clients is to rent to folks you don’t have a personal relationship with.
8. Screen your tenants
A typical tenant screening usually costs about $50 and checks a potential tenant’s:
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Credit.
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Work history.
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Criminal history.
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Eviction history.
Though it’s a little investment, screening can help make sure you’re renting to tenants who are financially prepared for their ongoing rent obligations. Calling references can also give you a better sense of who your applicants are.
9. Don’t expect profits immediately
If you still have a mortgage on your property, chances are most of your rent payments will go toward the mortgage. Any extra usually goes toward maintenance and upkeep and whatever’s left over is your profit. But even without a lot of profit, your rental property is still valuable. All those rental payments help you build equity, which pays off over time.
10. Be clear about lease violations
Your lease should clearly state what happens when its terms are violated, including late rent, policy violations, and other lease agreements. Clearly outline the process for resolving these violations, such as a written warning, fines, or eviction.
11. Take before and after photos
Take before and after photos of the property when tenants leave. While normal wear and tear is to be expected, you want to document damages that the deposit needs to cover. Photos are your best evidence.
12. Find a great maintenance person
Your tenants are entitled to livable space and timely repairs. Even if that weren’t the case, you need to maintain the property to keep up its value. That’s easiest when you have a reliable maintenance person you can call for maintenance work. They can take care of the little things like leaky faucets or installing a new ceiling fan.
Not sure where to start? Check out this guide for hiring contractors you can trust.
13. Refresh flooring
New carpet or flooring can be a big selling point for tenants – it looks better in listing photos and is easier to clean than flooring that’s been worn by previous tenants. Plus, that renovation can increase your property’s value.
Note that carpet may need to be replaced every few years. Hardwood floors may require less frequent maintenance, but can be more expensive when it comes time to refinish or replace.
14. Make a call on pets
Every animal lover knows that pets can damage a home, so you need to decide whether you’ll allow tenants to have pets in your property. This might be a no-pet policy or one limiting types of breeds or animals. (Or you might allow any kind of pet – your property, your call!) Whatever you decide, outline those rules clearly in your lease.
At the end of the day, you’ll need to decide if a pet deposit or pet rent is enough to clean and repair the home after the tenant leaves. The problem is that you really won’t know until after the fact, so it’s something to consider in advance.
15. Prepare for vacancies
If you go years without a vacancy, consider yourself lucky. Most of the time, you have to prepare for months where you’ll have to cover the mortgage without rental income to offset it. Develop a contingency plan or savings fund for these lean periods.
