What to know before becoming a landlord

Becoming a landlord can be a great choice if you want to generate wealth.

Owning investment properties creates passive income through rent payments. You can even use that money to pay your mortgage, so in a sense the rental home can pay for itself.

And since about a third of American households rent rather than own, the rental market is already significant.

But before you go all-in on a rental home purchase, it’s important to understand what being a landlord entails. For starters:

• Make sure you’re ready for the work involved. From advertising for new tenants and completing legal agreements, to collecting deposits and taking care of utilities, it’s important to know what you’re signing up for
• If you have a property you’d like to rent out but don’t want to handle the day-to-day tasks, you might consider hiring a property management company
• As a landlord, you should find a real estate attorney to help you navigate the potential legal issues you may encounter. There are a variety of federal and state laws involved with renting, including issues like discrimination, security deposits, late rent, lease agreements, and repairs
• You’ll have to work to find good tenants — and if your tenants aren’t so great, you’ll need to be prepared to evict bad tenants

In short, becoming a landlord is not as simple as buying a home and collecting rent every month. There’s some serious work and consideration that goes into managing a rental property.

If you think you’re cut out for the job, here’s how you can get started.

How to become a landlord

Being a landlord can take many forms.

As a property owner you can be almost entirely hands-off, letting others do nearly all the work for you. Or you could be your own boss and substantially build your net worth. Indeed, you may even get rich over time.

To succeed, you’ll need to:

1. Finance your new rental property
2. Work hard (or pay someone else to)
3. Plan ahead, even if you didn’t intend to become a landlord
4. Ask for help when you need it
5. Learn and follow the laws around rental agreements
6. Market your properties to tenants
7. Evict bad tenants when necessary

Let’s take a closer look at what you’ll need to do at each stage of the process.

1.  How to finance new rental properties

Unless you already own a second home or multifamily home, the first step to becoming a landlord is purchasing a rental property.

There are a number of ways to do this. If you’re flush with cash, you can buy the home outright. But most future landlords acquire their investment property using a mortgage.

Most landlords use one of the following investment property loan types:

• Conventional loans — Conventional loans work well when you’re buying residential properties to rent. You should expect higher down payment and credit score requirements — and higher mortgage rates — compared to loans you could get on your primary residence
• Second mortgages on existing homes — If you’ve paid off (or almost paid off) an existing mortgage, you can borrow against that home’s equity and use the funds to buy a new rental property. A lot of banks, credit unions, and mortgage lenders offer home equity loans and home equity lines of credit (HELOCs). So shop around for the best interest rate and terms
• Commercial investment property loans — If you’re investing in multiple homes simultaneously or buying an entire apartment complex, you’ll likely need a commercial lender. You’ll need to share details about your business plan with your lender

Some real estate developers use short-term financing to buy properties, but these work best for buyers who plan to “flip” the home by fixing it up and selling it quickly.

Buying a rental property with an FHA or VA loan

Government-insured loan programs such as FHA and VA loans exist to help people buy primary residences — not investment properties or vacation homes.

However, it is possible to buy a multifamily building with a government-backed loan as long as you live in one of the units you’re financing. You could buy a duplex, for example, and live in one of the units while renting out the other.

With an FHA or VA loan you could even buy a property with up to four units. Again, you’d have to live on-site in one of the units.

FHA loans can make borrowing more affordable by lowering the credit and down payment requirements to buy a home.

Only military service members, veterans, and surviving spouses can use the VA loan program. But for those who qualify, it’s possible to buy a home with up to four units with no down payment.

No matter what kind of loan you decide on, make sure you’re shopping around between several different lenders to find the lowest interest rate and best terms.

The less you pay in interest, the more net profit you’ll generate from your rental property. So it’s well worth your time to shop around for the best mortgage loan.

2. Hard work: What a landlord does

Very few newbies find being a landlord easy. It’s hard work.

Some first-time landlords encounter real stress, especially when markets and economies are bad. That’s when tenants tend to fall behind on their rent — and when periods between tenancies can grow scarily long.

If you’ve rented in the past, you may never have met your landlord. That’s probably because your landlord chose to employ people to manage and maintain the property.

At the other end of the spectrum, your landlord may have lived in one of the units in your building. So you may have seen them every day. And they might have done everything from collecting your rent to fixing your leaky faucet.

If you become a landlord yourself, you’ll have to decide which version of property management makes the most sense for you.

Main tasks of a landlord

Whether landlords choose to do the work themselves or hire others to do it, they all have responsibility for completing a long list of tasks.

Here’s a quick overview of the landlord’s workload:

Finding the right tenants

• Advertising for potential tenants — There are many ways to advertise for and find new tenants. But today’s online platforms that offer local classified advertising, such as Craigslist, often prove cost-effective
• Showing a home to prospective tenants — This is primarily a sales opportunity that can help shorten the dead time between tenancies. But it’s also a way to weed out prospective tenants who are obviously unsuitable
• Completing legal agreements — You must have a signed, watertight lease or rental agreement (they mean the same thing) for each rental. You may have your attorney draft one or you could base yours on a template from a reputable publisher or website
• Vetting renters — Various companies, some on the web, offer credit checks and background checks to landlords

Managing your building and business

• Collecting deposits and rent — It’s your responsibility to make sure tenants pay their rent on time and in full. Remember, this is the source of your cash flow
• Setting and enforcing rules — Most successful landlords find it’s better to rigidly apply the rules. And tenants like the certainty that comes with knowing all tenants have to abide by the same regulations
• Avoiding equal housing problems — These can crop up when advertising to and selecting prospective tenants, and when enforcing house rules. Make sure you understand how discrimination laws apply to you as a landlord
• Dealing with insurance and liability issues — Such as swimming pools, icy paths, and keeping the home up to code
• Keeping books and tracking tax write-offs — Make sure you can and do claim all the deductions available to you
• Taking care of repairs — There’s always something. Well, nearly always, since you want to keep your properties in good condition
• Understanding and observing local landlord-tenant laws — The only thing worse than being in court is losing in court
• Keeping proper records for tax and legal purposes — Yes, there are property taxes, mortgage payments, and insurance premiums to pay, but your income taxes will also be tricky. You’ll either become really good at bookkeeping or hire an accountant

Of course, it’s sensible to undertake only those tasks for which you have adequate skills and time. But every task you outsource will cost you. And will reduce the profitability of your venture.

3. Planning ahead

There are plenty of different ways to acquire a rental property. Some landlords inherit their property, some go out and buy it, and others become landlords almost by chance.

Those who have found themselves becoming a landlord by accident are often homeowners who had to move, perhaps for work or family reasons, but could not sell their houses.

Maybe they had “negative equity” (they owed more on their mortgage than the home was worth). Or perhaps the local property market was in a slump and nobody was buying. So, to keep afloat, they rented out the original home.

No matter what inspired your journey into landlording, you’ll have to plan proactively to succeed.

Tenant-proofing

To protect their investment, some landlords “renter-proof” their properties. That may mean covering easily damaged hardwood flooring with linoleum and inexpensive carpets. And it might involve removing some vulnerable features that could be abused, such as a wood stove.

But renter-proofing has to be considered in the context of your marketing. If you plan to attract high-end renters who will pay a premium, they’ll expect touches of luxury. And they’ll run a mile from lino.

If people in your target market just want a roof over their heads, your priority should be to protect the value of your asset.

4. Ask for professional help when you need it

A lot of new landlords think they can do all 12 tasks on the above list. Of course, some succeed. But others just can’t find enough hours in the day, especially if they still have another job.

Many landlords hire professionals to help with property management instead of going it alone.

Indeed, some choose to call in full-service property management companies that will handle everything. The extent of property management costs depend on your local market, the tasks you want to avoid, and whether you rent short-term or long-term.

In the U.S., long-term rental management ranges from about 8% to 15%. But short-term properties in resort areas can cost as much as 50% to manage!

Every week (or even more often), the place will have to be cleaned, linens replaced, reservations taken, and rent collected. And you’ll face the same maintenance tasks required of a long-term rental.

Choose from the menu

Full-service property managers are simply too expensive for many landlords. So they view the task list as a menu. And they choose the things they personally can do well and outsource the others.

Those who are handy around the house take on any routine repair jobs. And those with genuine construction experience might be able to provide virtually all the labor a home will ever need.

Meanwhile, others may be good at administrative tasks, have great people skills, or a flare for marketing rental properties. The important thing is to play to your strengths when selecting the tasks you’re going to do.

Don’t take chances

The golden rule is not to pretend you’re good at things when you’re not. Don’t feel bad about your limitations. Because we all have them.

Some people are hopeless at maintenance tasks; others could never bring themselves to read or write a legal document. Some are natural accountants and others aren’t. Some can charm anyone while others stand no chance of facing down a troublesome tenant who’s late with rent or breaching a lease.

So remember the old saying: “Don’t trip over dollars to pick up pennies.” In other words, don’t crash your business to save a few bucks. In particular, if you’ve any doubts at all about legal issues, hire an attorney.

Being a landlord on-site vs. remotely

If you occupy one of the units in a building you own, you might enjoy some real advantages. Nobody could keep a closer eye on their biggest asset than you will. Your commute will be unbeatably short. And living on site could offer you more financing options as well.

But being on the premises has decided drawbacks. To start with, you need to keep some emotional distance from your tenants. Become friends with them, and it can be difficult to resist their pleas to pay the rent late or ignore late fees. And they may pressure you to let other rules slide.

Meanwhile, your proximity can be a double-edged sword. Do you really want people knocking at your door at all hours to complain about minor problems?

One way around this is simply not to tell anyone that you own the building. Use a property manager to run the place. And make the business into a limited liability company (or some similar vehicle) so your name doesn’t appear on leases.

5. Common legal issues for landlords

Becoming a landlord brings a plethora of legal issues and risks. So it’s important to have a good real estate attorney

As time goes by, you’ll likely grow increasingly familiar with the laws you must adhere to. And your anxiety will recede, as will your need to consult a lawyer.

Twenty-six states have adopted the Uniform Residential Landlord and Tenant Act as the basis for their local laws. If your rental property is in one of them, you may find it easier to research legal issues yourself online.

Here are some of the more common legal questions you may face:

Discrimination

The Fair Housing Act of 1968 and the Fair Housing Act Amendments Act of 1988 are the two key federal laws that apply to landlords.

These bar landlords from discriminating on the grounds of “race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents of legal custodians, pregnant women, and people securing custody of children under the age of 18), and handicap (disability).”

You can’t discriminate against any of those protected groups when you’re:

• Advertising for tenants — Take care with wording. Legal website Nolo says that even describing a home as within a “safe Christian community” could be construed as discouraging applicants with other religious beliefs
• Selecting tenants — That includes falsely claiming that a vacant home has been rented
• Setting rents or deposits — Of course, those may vary over time. But you mustn’t create a pattern of using rental prices to favor some tenants over others
• Setting and applying rules — The same rules must govern all tenants and be enforced with equal strictness
• Terminating tenancies — Again, you must be even-handed. And you must be able to prove the rules have been applied evenly

Although these federal laws establish a nationwide baseline, many states, cities and counties have other anti-discrimination legislation that applies to landlords. For example, at least 22 states bar discrimination on the grounds of sexual orientation and gender identity.

Security deposits

Restrictions on security deposits are mostly derived from state law. But your city, county, or town may impose further regulations.

Because these state laws vary so much, it’s impossible to provide a useful guide here. For example, in Alabama security deposits are capped at one month’s rent, plus supplements to cover any special risks, such as pets. But, in Wyoming, there are no state-level caps.

You can see a summary of your state’s laws using NOLO’s list.

Late rent

You’ll be lucky if, as a landlord, you don’t occasionally encounter problems with late rent. If you operate in the segment of the market where your tenants have financially precarious lives, you may find such lateness a continuing headache.

Many landlords recommend being strict about prompt payments. That doesn’t mean you can’t help people who have occasional, genuine, and serious problems. But you may find yourself in real trouble if you get a reputation as a pushover.

Rental agreements

Make sure your leases specify the date on which rent falls due. Chances are, when the due date is a weekend or legal holiday, it will be payable on the next business day. And you’ll want to be clear about acceptable payment methods: check, money order, cash, mobile payment apps, credit card, or any other method.

Consider including penalties for late payments in your leases; late fees can provide you with leverage if a renter begins to give you continuing problems.

Enforcing rules

Collecting overdue rent can be time-consuming. Most landlords start off with reminder phone calls and escalate to emails and letters.

You may need to prove you’ve taken reasonable steps to chase your money. So keep a log of calls (even unanswered ones) and voicemail messages left, notes of conversations, and copies of emails and letters.

If none of that works, you’ll serve a termination notice. That provides the tenant with a fixed date in which the rent must be brought current or the premises vacated. Make it clear that you will apply to a court for an eviction order if that demand is not met.

Eviction and debt collection can be legal minefields. So you may want an attorney to hold your hand, at least the first few times. Alternatively, you could research the local laws (state, city, county, or town) that apply where your rental property is located.

Repairs

As a general principle, landlords have a duty to keep a home habitable. And that includes:

• Keeping the structure sound, watertight, and hazard-free
• Making sure plumbing and electrical systems work and are safe
• Providing reasonable quantities of hot water in accordance with your lease
• Exterminating vermin — unless the tenant created the nuisance, perhaps through poor housekeeping

But smaller repairs and maintenance can be the subject of disputes.

For instance, you probably aren’t obliged to carry out purely cosmetic work, such as repainting interiors or replacing stained carpets. And you may be able to clarify what is and isn’t your responsibility in your lease.

However, you may still be subject to local laws. And your tenant might report you to the local building or housing agency unless you keep the home up to code.

As importantly, if you’ve good tenants, you’ll want to keep them happy. The last thing you want is for them to move for the sake of a can or two of paint. You’d probably have to paint anyway to attract a new tenant.

Tenant privacy

Again, this is something that is (or isn’t) covered by local laws. In most states, a landlord is not allowed to enter a home without giving the tenant prior notice.

So don’t expect to let yourself in without prior permission. Do so where a law forbids it, and your tenant could report you to the state agency that enforces fair housing laws.

That’s a lose-lose for you: You may require a lawyer to defend you while the tenant doesn’t need one because the state’s doing the enforcement job.

Insurance

On becoming a landlord, you’ll acquire all sorts of new legal liabilities. And you’ll need insurance to protect you from them.

But, just as with your homeowner’s insurance, it’s easy to buy more landlord insurance coverage than you need. So take care you don’t pay too much for things you don’t need.

Get multiple quotes. And do a cost-benefit analysis to decide which risks you’re prepared to shoulder yourself and which you want your insurer to cover.

You can also require tenants to carry renter’s insurance which covers their belongings.

6. Marketing: How to find good tenants

The best landlords are usually either trained or instinctive marketers. All that means is they optimize the profitability of their products (investment properties) by analyzing their options.

So here are some extracts from Marketing 101:

Marketing mix

When professional marketers want to make plans they often start with the “marketing mix,” also known as the “Four Ps:”

1. Product — Do I have a marketable product? And, if not, can I make it marketable? In other words, can I improve it in order to enhance its profitability?
2. Price — What’s the most I can make from my product without deterring demand too much?
3. Place — For most marketers, this is about where the product will be sold. But for landlords, it’s about the home’s neighborhood, city, or county and the impact those will have on the tenants it will attract and the rent it can command
4. Promotion — How much will I have to spend upfront on marketing to generate optimum demand? And where (using which media) should I spend it?

Landlords can benefit by thinking about their rental properties in those terms. And, unlike most professional product managers, they can select the products they want to market by carefully choosing the homes they buy.

Target markets

Your target market is the group of people who will “buy” your product — or in your case who will be able, ready, and willing to rent the particular home.

At its most basic, that means recognizing who will want to occupy your property and can afford the rent.

The more you research local demographics (broken down by age, sex, employment, income, household size and so on), the more accurately you’re likely to understand your target markets. And the more profitable your purchase may prove.

Promotion (advertising)

Most landlords will rely on four types of media for marketing their properties:

1. Digital — Online sites that provide local classified advertising may get you directly to tech-savvy renters (e.g. Craigslist)
2. Direct mail — As your reputation as a landlord grows, you might get inquiries at times when you have no homes available. Build an emailing list so you can contact prospective tenants later. And remember, you never know when a unit might become available
3. Advertising — In some areas, local newspapers may remain the best way to attract renters, or fliers on local grocery stores, gyms and other bulletin boards. And don’t forget to put up a yard sign
4. Personal selling — You probably won’t be going door-to-door to drum up business. But, unless you employ a property manager, you’ll likely be the one showing homes to prospective tenants

With experience, you’ll get more comfortable selecting and employing your most effective marketing methods.

Tenant selection

For some marketers, every customer is a good customer. But that isn’t the case for landlords.

You’ll need to screen out prospective tenants who might fail to care for your property — or perhaps even actively vandalize it. And you need to steer clear of those who might not pay their rent on time (or perhaps at all).

Even if you consider yourself a good judge of character, you shouldn’t rely wholly on an interview. You need much more information.

But how do you get that? Well, though it’s no guarantee, past behavior is often the best indicator of future behavior. So do background checks.

Of course, if you have a property manager, that will be their job. But you might want to review the information they collect.

Background checks

If you don’t have a property manager, you’ll have to do the checks yourself. Or, rather, you can select an online service to do it for you.

Just do an online search for “tenant background checks” or “tenant screening.” But pick a service with plenty of positive reviews from landlords.

A good one should reveal an applicant’s:

• Prior criminal convictions
• Current credit report and credit score
• Past evictions, based on public records
• Previous addresses

You need a signed consent form from the applicant in order to carry out a background check.

If you have plenty of other, better prospective tenants, you might eliminate an applicant for a single blot on any one of those records. But, especially if you’re short of alternatives, you may want to dig deeper.

Do you really want to punish someone for an eviction or a criminal offense that happened many years or even decades ago? Often, a poor credit score arose from a brief period of unemployment or sickness that is now well behind the applicant. Are you going to exclude them for something that’s not their fault?

Of course, you’re not in the business of giving second chances. But you’ll probably want to be reasonable. So you might want to talk to the applicant about anything that bothers you.

Contacting previous landlords

The applicant’s previous behavior as a tenant can tell you more than most other kinds of background checks. Ask for references from previous landlords and call them for an off-the-record chat.

Time invested in picking good tenants can be the difference between becoming a landlord who’s successful and becoming one who’s constantly stressed.

7. How to evict bad tenants

The state where your rental property is located will have its own laws governing eviction. And you must observe those to the letter.

Even a minor quibble over wording or how a notice was served can allow a tenant to drag out the process for weeks or even months longer than normal.

Eviction without cause

Unless your investment property is in a rent-controlled city, you can normally serve a tenant who’s on a month-to-month lease with notice to vacate the home. You usually have to give either 30 or 60 days notice, depending on local laws.

This is called termination without cause. So you don’t need a reason. Maybe you think you can find a tenant who’ll pay a higher rent. Or you want the home for a friend or relation. Or maybe you need to move in yourself.

As long as you follow the law, you have the right to require a month-to-month tenant to move out.

Eviction with cause

Of course, you will probably want to avoid evicting anyone. And most landlords try to resolve issues face to face with troublesome tenants.

But, if that fails, you may be able to evict a long-term renter on the following grounds:

• Failure to pay rent
• Breach of local ordinances covering things like noise levels and health requirements
• Breach of lease — Perhaps the tenant has a pet, has sublet the home, or is allowing too many people to live there. Those things must be specifically banned in the lease in order to be grounds for eviction
• Creating safety or health hazards
• Causing significant damage to the home beyond reasonable wear and tear

Don’t go to court relying solely on the credibility of your word. You’ll need comprehensive documentation, photographs, or witness evidence to prove your allegations.

Executing the court order

Once you have a judge’s eviction order, your problems are nearly over. But not quite.

The safest way forward is to have a neutral law enforcement officer execute the order. Merely the presence of such an officer often defuses tensions. And you will have a reliable witness that the tenant and their possessions were removed lawfully.

A note on forms for landlords

Many landlords hire a lawyer to put together any forms they need (like lease agreements or eviction orders). But few lawyers come cheap. So you may decide on becoming a landlord to become your own amateur lawyer, too.

That will only work if you’re prepared to put in the hours to do your homework. You’ll need to become an expert on landlord-tenant law in your state, including any federal or local legislation that applies. And that means you need the sort of mind that is comfortable acquiring and using such knowledge.

If you search online for “best law books for landlords,” you’ll find plenty of choices. Just make sure the ones you choose are from reputable publishers and by expert lawyers. And that they cover your state.

Standard forms

Good ones include templates that you can customize for all sorts of legal forms you’re likely to need. Those might include:

• Receipt and Holding Deposit Agreement
• Landlord-Tenant Checklist
• Move-In Letter
• Month-to-Month Residential Rental Agreement
• Month-to-Month Residential Rental Agreement (Spanish Version)
• Fixed-Term Residential Lease
• Fixed-Term Residential Lease (Spanish Version)
• Cosigner Agreement
• Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards

That list came from a description of NOLO’s “Every Landlord’s Legal Guide.” But you’ll likely find similar standard forms in other books.

Downloads

Of course, you can also download those sorts of forms from various websites. Some even offer them for free. Or for about $30-$50, you may purchase a comprehensive bundle that you can use repeatedly.

So, is it worth paying for something you may be able to find for free? That’s a judgment only you can make. The paid-for sites may be more credible. And the money you pay might mean the publisher owes you a duty of care that incentivizes it to ensure the reliability of its products. It’s up to you.

Final thoughts on becoming a landlord

Many find that becoming a landlord is the best move they ever made.

Depending on how hands-on you choose to be, owning rental properties can also involve a lot of work. However, the financial and emotional rewards can make all that worthwhile — and then some.

Your borrowing on each home reduces each month, while the rent you can collect may well go up most years. True, owning a rental property rarely makes people rich quickly. But getting rich slowly is a very attractive alternative.

What’s the first step to becoming a landlord? Buying a rental property. So before you take any next steps, you should check your eligibility with a lender. If you’re ready to get started, you can do that right here.