Owning rental property can be a great way to generate some passive income. Whether you’re renting out entire units or just doing some house hacking, rental income can make it easier to make ends meet.
But lots of new and prospective landlords focus too much on the profits they hope to make and not enough on the drawbacks and responsibilities of being a landlord. Renting out property isn’t always profitable — you may lose money to tenants who pay rent late or to maintenance and upkeep costs associated with your property. You need to carefully balance your responsibility to find good tenants, keep your rental property safe and up to code, and treat your rental property like a business with your own financial needs and expectations. Here’s what you need to know before you sign your first lease agreement.
You Need to Perform Background Checks
Sure, you plan to interview your prospective tenants and call their references to get a feel for what kind of people they are. But people can be deceptively charming, and you can’t get a realistic picture of who someone is and, more importantly, how likely they are to pay rent, without performing a background check.
A background check should tell you if a prospective tenant has a criminal record or bad credit, both of which could indicate that a tenant may be financially irresponsible or just irresponsible in general. You may not want to rent to someone who has a criminal record, and a bad credit score, while not necessarily indicative of poor character, could indicate that a tenant isn’t financially capable of paying rent on time or at all.
You May Just Break Even — Or Lose Money
You shouldn’t get into landlording expecting to make a ton of money — at least not right away. Maybe someday, when you’re collecting rent on several properties, you’ll make a good living. But you shouldn’t expect your first rental property to be profitable. You might just break even. You could even lose money.
For example, sometimes tenants pay their rent late — and if you have a mortgage on your rental property, that could mean paying your mortgage late, and that could mean paying late fees and penalties that will put you in the red. Your own credit score could even take a hit. And that’s not even considering the maintenance and upkeep costs on your rental property, which could easily eat up your profits. So if you’re going to rent out a property, it’s best to have plenty of money in savings to cover your mortgage payments when rent is late, or to pay for repairs and maintenance.
A Rental Property Is a Business
You should treat your rental property like a business, because it is. Start a limited liability corporation (LLC) to protect your personal assets from liability. You need to be professional with your tenants, and you need to know the state, federal, and local laws that dictate your responsibilities and rights as a landlord. Do that legal research before you start renting out a property. You may even want to consult a lawyer about your rights and responsibilities, and have that lawyer look over your lease agreement for any issues or common clauses that you’ve left out.
You may want to buy landlord insurance to cover some of the costs of renting out a property. You’ll need to be diligent about keeping the rental unit in good shape and up to code. Have a plan for handling emergency repairs — have a plumber, electrician, and handyman available to quickly fix burst pipes, gas leaks, and other emergency repairs. Be ready to handle non-emergency repairs in a timely fashion.
You Should Consider Using a Property Management Company
You can use a property management software like the one available at Netintegrity to manage your properties yourself, but many landlords find it’s much easier and less stressful to take a hands-off approach and contract with a property management company. A property management company can do much or all of the work of managing your property, and using one is a must if you live too far away from your rental unit to handle maintenance and repairs yourself, or if you simply don’t want to do the hands-on, day-to-day work of landlording yourself. A property management company can also handle background checks, facilitate lease agreements, and deal with evictions and taking tenants to court when necessary.
You Need to Be a Little Confrontational
If you’re going to be a landlord, you need to be comfortable with advocating for yourself. There will be times when tenants are late on rent, or withholding rent altogether, and you’re going to need to be able to talk to them about it straightforwardly and professionally. You may also need to confront tenants about damage done to the property, guests that have stayed too long, pets that you haven’t given permission for, and other issues.
Before you become a landlord, you need to know what you’re getting into. It’s not always easy to deal with tenants and manage the upkeep on a rental property, but with the right tools and attitude, being a landlord can be a fulfilling way to make some extra money and work your way higher up the property ladder.