Owning investment properties and renting them out can be a great additional stream of income. If you want to plan for retirement or even retire a little earlier, then having an investment property or two can help you build equity (real estate is great for that) and live off incoming rent until you decide to sell your property and enjoy that appreciated property value.
But being a landlord can be a difficult job, and it requires a lot more time than most first-time landlords realize. Before you become a landlord, it’s important to consider the work as a second job. You may need to work weekends sometimes, and if there’s an unexpected problem, then you might have to drop everything and head over to your property to take care of a leak or other home repair.
From finding a property to finding tenants, there’s a lot that goes into being a landlord. If you’re thinking about investing in property, here’s the ultimate landlord’s guide to renting out an apartment.
Where to Start
Before you can become a landlord, you first need a property. So your first step is to find a great property in an in-demand area that has great potential and needs mostly cosmetic work.
As you search for a property, look in an area that is:
In high demand: This is a neighborhood or city where the population is growing. There should be plenty of amenities, such as grocery stores, banks, restaurants and other stores.
Balancing the rent-to-own ratio: You want to find an area where more people own than rent. If more people own, then home prices are reasonable enough in the area where people skip renting and go straight to buying. You might think that an area with more owners would mean a smaller, hotter market for landlords, but it probably means that fewer people want to rent in the area at all. They either buy or rent elsewhere.
Appreciating value: Real estate is usually considered a safe investment because values almost always go up, but if you want to see a good return on your investment, then you need to find properties in neighborhoods or cities that are considered “up and coming” or have an exciting project coming to it, such as a museum, a well-known company or a university extension.
Includes a built-in renter population: Major cities and college towns are often favorite places for first-time landlords to cut their teeth on the experience. That’s because there’s a strong chance your property will find tenants without too much trouble. While you still need to screen and interview potential candidates, you’ll be more likely to find a good fit and quickly, if you need it.
One of the most important things to keep in mind is your personal timeline. How old are you now? When do you plan to retire? How many repair and renovation projects can you actually take on? In what year do you envision selling your rental property? No one can ever answer all of these questions with absolute certainty, but when you think about your overall plan for life, that will help you navigate which properties would be a good fit for you.
Property takes time and upkeep to appreciate. If you only want to do this for less than 10 years, then a fixer-upper in a not-quite-hot-yet neighborhood probably won’t be a good fit for you.
Preparing Your Property
Once you’ve chosen your property, lined up the capital, and closed on it, it’s time to start preparing your property for your eventual tenants. Very few investment properties can be rented out almost immediately after the closing date, and even though you had a home inspection, you should go through the property once again and make any repairs.
Before finding a tenant, here are a few cosmetic updates all landlords should do to a new investment property.
Paint the walls white
White is the safest color for a rental property because it goes with pretty much every decor style and it’s easy to manage. Choose a simple shade of white and use it for all the walls in this and any other investment properties. You’ll never have to worry about which color went with which property because everything will be the same. Buy a large bucket of paint and use it for whole walls and touch ups.
Check/Repair the HVAC system
In many states, judges will allow tenants to break the lease if a home is considered to be unlivable — and having a house that has no working heat during winter is a good reason for tenants to leave without having to legally pay the rest of their rent.
No matter the temperature outside, use this time to check your HVAC system so that you know the air conditioner and heater are in good working condition. You can call a professional out to inspect your system, and if anything needs a tune-up, now would be the time to get it done.
Ensure all locks work
Go around your probably and check all of the door and window locks. If you find any that are broken, repair them immediately. This will help protect against potential burglaries.
To easily check out all the appliances in your new property, cook yourself a meal there, take a shower and do a load of laundry (if applicable). If everything works great, then you’ll have nothing to replace. If you find any problems, take care of them right away.
Call in an exterminator
Even if you don’t see any pests, it’s never a bad idea to spray a new investment property for pests such as bed bugs or roaches. An exterminator can also inspect the property and look for any potential weaknesses where mice or insects may decide to move in. You can then take his or her advice to prevent a potential and expensive termination later one.
Clean the carpets
If your new property has carpets, get them cleaned by a professional. Doing so will help extend the carpet’s lifespan, and it looks great when potential tenants stop by for a showing.
While you may like the layout of your new investment property as is, you also need to consider whether some renovation work could net you a higher monthly rent rate. By maximizing your space, you could improve the quality of life in the space and expand the number of people who can comfortably live on your property. Anything that makes your property more attractive to renters will almost always lead to finding tenants quicker or charging slightly more for rent.
Here are just a few scenarios that can improve your property’s potential:
Splitting one bedroom into two: Think you have a property with two bedrooms? Why not try to split one large bedroom into two smaller bedrooms? This will increase the number of people who can live on your property, which will then allow you to increase your rent. Though the renovations may be expensive, they will almost certainly pay for themselves within the first few years.
Remove unnecessary furniture: Some properties come with furniture built into the living or bedrooms, such as bookshelves, banquets or china cabinets. While they look nice, they might be taking up valuable space. If you think you can maximize the space by taking out some of this furniture, do it.
Adding a half bath: Every property investor should know that the way to add value to a property is always to add bathrooms and bedrooms. Adding a full bathroom may not be an option, but even installing a half bathroom can make your property more attractive to renters.
Renting out a separate garage: If your property had a garage, pole barn or carriage house, then you could renovate the space and create a second income property on your existing property. This would double your rental income stream, but make sure it’s legal first. Some cities allow accessory dwelling units (also called ADUs) while others do not.
States, cities, towns and villages all have their own local tenant laws designed to protect tenants from bad landlords and good landlords from unruly tenants. Before becoming a landlord, you need to familiarize yourself with these local laws so that you can be sure that you are complying and that you understand your own rights.
Most local governments issue permits to properties that will be rented. This helps the city keep track of where rental properties are located and who owns them. In most places, you simply have to pay a fee in order to get a permit or a license (the correct term varies from location to location).
Some city governments will also require you to pass a building inspection before you receive your permit or license. So long as your property has exits that are easily accessible, working smoke detectors and no problems with the structure or foundation of the building, then you should pass without a problem.
You will also need to insure your property. Each city and state has their own rules for how much insurance coverage you need, but even if you’re required to get just the bare minimum, consider going for a little more. You hope to have good tenants — but you can never guarantee if they have good friends. Having a better insurance policy will help you sleep better at night.
How to Find Tenants
Finding tenants may look easy, but it’s not always easy to find good, trustworthy tenants who pay rent on time and take good care of your property.
Here are the four steps to find good tenants.
Step 1. Write your listing: Whether you publish a listing in the paper or a real estate website (preferable), you will need to write out a short description of your property, including its size, bedroom and bathroom number and any amenities. You should also include at least 10 photos of the unit to give prospective tenants a good idea of what the space looks like.
Step 2. Market your property: Once the space has been listed, it’s up to you to market it to potential renters. You can share your property’s listing on social media or even advertise it through the real estate website.
Step 3. Schedule viewings: After prospective tenants send in rental applications, it will be up to you to schedule showings of your property. Few tenants will want to move without seeing the place for themselves. This is also a good time to get to know more about your prospective tenants and look for any red flags. You can also answer all of their questions in real time.
Step 4. Screen tenants: Before you can choose a tenant, you need to go over their rental applications and check their references. You should always ask for at least three references: one from a past landlord (if applicable), one from a job and one from a personal relationship, such as a parent or friend. Some of these references may be less applicable than others (18-year-old college students, for example, probably won’t have a past landlord to call), but if you have a tenant who lists out these references, you need to call them.
Step 5. Sign the lease: When both parties are ready, you need to sit down with your new tenant and go over the lease before he or she signs it. This is a great time to set expectations, point out any important information in the lease and answer any questions. Once everything’s been discussed, you can both sign the lease and move forward.
Feeling overwhelmed by all of that? If you hire a property management company to find tenants and take over care of your property, then the experts there will be in charge of finding and screening tenants as well as moving them in and out, when needed. Property management companies like Atlas Lane also manage repairs, handle tax documents and communicate directly with tenants for all questions and concerns.
How Much You Can Make on Your Property
Ah, the question of the ages. How much money you can make on your rental property very much depends on your location, the size of your property, the demand in the area and the general cost of living in the city or town.
In general, you should charge enough rent to cover the cost of your mortgage plus a little extra that should go to your savings account specifically for your property. This fund will be your reinvestment money. When you need to have a leak pipe repaired or the gutters cleaned, the money to pay for those services will come from that account. Eventually, the account should grow and you should be able to pay yourself while still leaving enough to cover repairs.
The best way to gauge how much you will likely be able to charge for rent is to look at the current comps in the area, basically how much are similar properties charging for rent.
It’s no joke when thinking about owning an investment property as a second job. Just like with the home you own, there’s always something to be done around the property, something to be repaired or something to be renovated. When you own an investment property, you are beholden to your tenants to provide a clean, stable environment where repairs are made quickly and all phone calls and emails are returned.
If all of this seems like too much, consider hiring a property management company like Atlas Lane. Our boutique firm handles all the work of owning the property, leaving tenants happy in their new homes and investors satisfied with their free time and new income stream.
Contact Atlas Lane today in Washington, DC, and see how our professionals can make all the difference in your rental property.