You’re noticing them everywhere: real estate signs on single-family homes, duplexes, and even larger properties. You’ve been considering diversifying your portfolio and you’re wondering how to take the next step. You’ve been wondering how to become a landlord. Becoming a landlord is a lot more than simply purchasing a property. You will need to wear many hats, from businessperson to manager to accountant, and more. Here, we walk you through the steps of acquiring the right property, preparing the property for renters, finding tenants, and maintaining the property.
The right property for you
Purchasing a home to rent out is far different than buying your own residence. When you begin your search for a rental property, it’s important to remember that distinction. As a homeowner, you would look at countertops, wood floors, open concept plans, and other items on your checklist. As a landlord, the most crucial factor will be the numbers—the bottom line, to be exact. You will want to purchase a property that will appeal to many people in the area and you’ll have to look for specific things. You will need to price your rental competitively while also making a profit.
Another essential choice for you to make is the type of rental property you wish to purchase. Do you want a single-family home? A duplex? A larger building with multiple rental apartments? There are pros and cons to each choice:
Single-family home: You are renting to one family at a time. This makes the property management end of things much more manageable. However, you will only have one property. If a tenant leaves and you are unable to find another tenant, there is the possibility it may sit vacantly.
Duplex: Working with two properties is still very manageable. Even if one tenant vacates, you still have the other as income. You’ll have double the appliances to maintain, as well as any other standard maintenance issues that may arise. You’ll also have double the tenants to find, run credit checks on, and collect rent from each month. Your ongoing workload will increase a bit with the purchase of a duplex.
Triplex and up: Your workload will increase substantially with each additional rental unit. You may want to consider hiring a property management company to help you with the ongoing workload associated with multiple rental units. It’s essential to factor the cost of a property management company when you purchase the property so you know you will still be making a profit with the additional help.
Preparing the property for renters
You have two choices when purchasing your rental property: buy an already renovated property or choose one that will need repairs to be rentable. Walking into a fully restored, and sometimes already rented property is a sweet deal, but you will likely pay the price for that level of comfort. Choosing a property that needs improvement can give you options in how you want the property to present. It can allow you to build equity instantly by upgrading to market standards. Consider two scenarios:
1. You purchase a recently renovated duplex. New flooring, paint, and appliances already installed, and one side of the duplex has a six-month contracted tenant. This is a very comfortable position to start your rental investments. The duplexes have been updated, and you will only need to find one tenant initially. However, in a hot real estate market, this type of property will go for top dollar.
2. You purchase a duplex that needs the flooring, paint, and appliances updated. You hire a contractor to take care of things for you. The renovations will take time and money, and with a fixer-upper, there is always the risk of uncovering more issues as you go. Neither side of the duplex is rentable until the updates have been completed. There will be a significant amount of time without renters, and you will need to fill both sides of the duplex. You likely will have purchased this duplex for far less money than the first one, accounting for the dated interior.
These are just a few of the many scenarios you will come across as you look for the property that is right for you. Knowing how much risk you are willing to take will help you to decide how to proceed. And remember, at the end of the day, always make sure the numbers still turn a profit for you.
The property management
We mentioned briefly above some of the ongoing property management roles you’ll need to play as a landlord. It’s not as simple as purchasing a property and finding a tenant to inhabit it. Here are a few roles a landlord must play:
1. Find a tenant
2. Run a credit check and collect first and last month’s rent
3. Collect monthly rent
4. Renew monthly/yearly contracts as needed
5. Be available to fix maintenance issues
There are many more than the above five roles that will be necessary for you to take on. Make sure you are willing to be a good landlord in the long run, not just at the signing table. For those interested in managing their first couple rental properties themselves, there are now a few online companies that offer services for free and some for a small fee, that can make advertising, collecting applications and the rent, a more automated and streamline process. One of those that our Loan Officers personally used and recommend is Cozy. If you would like to focus on merely purchasing properties, and not managing them, hire a property management company you can trust to keep your properties running smoothly.
When you are ready to take your knowledge of how to become a landlord to reality, give us a call. Strategic Mortgage professionals can help you find the financing you need for the property you want. We’ll make sure that the first step of your landlord journey is taken with an understanding of your financial goals to set you up for success.