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So you want to become a landlord, but you’re not sure how to start? You’ve come to the right corner of the internet.
I remember investing in my first property. I didn’t know just how physically and emotionally taxing—or rewarding—investing in real estate could be. I had no clue how to screen tenants, draft a lease agreement, or find a property manager, but I kept at it and figured it out, and you will too.
Even the most seasoned of landlords once started as a novice.
In this article, we’ll cover the nuts and bolts of choosing your first property, where to find good real estate deals, deciding how to manage your units, what to look for in a tenant, and more.
Types of Properties for Landlords
There are many different ways to become a landlord. When first starting out, most people look to buy what you’d think of as a typical house, but there are more options out there for rental properties. Here are the main avenues you can take:
- Single-family homes: These are usually one- or two-story homes with a yard, built to accommodate only one family or a set of a few roommates
- Small multi-family units: These are also referred to as duplexes, triplexes, quadraplexes or fourplexes, depending on how many apartments are under one roof. These are a single house or building that is divided into multiple, independent living spaces. They can accommodate two to four families. They don’t usually have the amenities offered by large apartment complexes.
- Large multi-family units: These are apartment buildings that house many families. They often have additional features like pools, coin-op laundry facilities, fitness centers, or parking lots that smaller dwellings don’t have.
- Commercial real estate: This can be anything from office buildings to a mechanic’s garage to restaurants to strip malls. This encompasses anywhere designed for people to do business.
- Vacant land: This is ground without any buildings on it. Vacant land may or may not have utilities connected. Ranches, farms, hunting properties, and undeveloped city lots all fall under this category.
Each of these types of properties is an article in and of itself, as the expertise, labor, and capital involved in each one are very different.
For the sake of this article, we’ll assume you’re looking at buying a single-family or small multi-family home and renting it out.
How to Choose your First Property
Buying your first property is perhaps the most intimidating part of becoming a landlord. How do you know what property will be a good one? Start with these steps to analyze your potential real estate purchase.
- Determine your real estate goals. Do you want all your properties to be in the same location for convenience, or would you prefer some geographic diversity? How much cash flow is enough to make a property worthwhile for you? Will you be managing the property yourself or hiring it out? Are you buying with cash or with a mortgage? Are you willing to put in some work on a fixer-upper? The answers to these questions will help you hone in on houses that will fit well in your portfolio and nix those that won’t.
- Do some market research. Google search as if you are looking to rent the type of property you want to buy. I’ve also found local real estate rental Facebook groups to be particularly helpful in gauging what rentals go for in a given area, as well as which types of housing are most in demand.
- Start with the 1% rule. This is some basic, back-of-the-napkin math that will act as your first test in screening property. The 1% rule states that the monthly rent you can charge for a property should be more than 1% of the purchase price (including repairs). So a $80,000 property that needs $20,000 in repairs should rent for at least $1,000 per month (1% of $100,000 total). This should definitely not be your only metric to find worthwhile properties, but it will help weed out those that won’t make the cut.
- Run the hard numbers. Write down as many of the expenses and income sources that the property may produce as possible. Include rental income as well as any add-on money-makers (like laundry services, vending machines, parking, and so on). Also, you need to factor in taxes, closing costs, repairs, vacancy, property management, and other costs to determine if a rental property is worth your while. I personally love this rental calculator as it lists out a bunch of expenses you might not have thought about if you’ve never been a landlord before. Use these estimates to determine if the property fits with your investing goals. (More on this below)
Where to Find Cost Estimates
Good investing decisions hinge on good data, so the more accurate your estimates on expenses, the better chance you have of getting a good return from your property. It may be tempting to make a conservative guesstimate, but doing your research now will save you a lot of headaches later.
Wondering how to track down reliable estimates for the costs of a property? Here are a few hints on where to find them.
Closing costs — Call a local title company and see what’s typical for a house like the one you’re considering. Closing costs are typically 3-6% of the home’s purchase price.
Taxes — A quick call to the county assessor should let you know what taxes have been levied on your property in the past or what taxes could look like for the property in the future. Zillow and/or the listing agent often has this information as well.
HOA fees — These can be tricky to hunt down, as HOA documents are not public records. Start by searching for the county assessor’s website, then do a property search. The result will usually come up with the name of the subdivision. Once you have that, you can do an internet search for the subdivision. The HOA’s website usually has a fee schedule.
Insurance — You’ll likely have to get a quote from an insurance agency, as the cost of homeowner’s insurance for landlords varies based on the size, age, condition, and location of the property. Plan on spending about 25% more for landlord’s insurance than you would for homeowner’s insurance if you were living in the same property.
Repairs — There are many schools of thought on how to budget for repairs. Some landlords say to set aside 1% of the property’s value for repairs each year. Others say $1 per square foot. Still, others go with 1.5 times the monthly rent in annual repair expenses. Regardless of which one you choose, it’s just a guess since you can’t accurately predict the future. Bear in mind, however, that most fixes end up being more expensive than you think.
Vacancy — According to the U.S. Census data, rental vacancy rates are around 7%. Plan for your property to be vacant between tenants for about a month out of the year.
Interest rates and down payment — These costs will depend on many factors, the chief ones being your creditworthiness and income. Many lenders will give you a quote or preapproval online. A quick call to your local bank will also give you a rough idea of what loan terms someone with your assets and credit score can expect to get.
Property management — The industry standard for the property manager’s cut is around 10% of the rental amount. In exchange, property managers collect rent, handle tenant issues, show vacant apartments, and coordinate with repair personnel. (You’re still on the hook for the repairs and maintenance, though.)
How to Find Good Deals in Real Estate
Depending on where you live, finding a good real estate deal can be a challenge. If you plan to invest in the rural Midwest, you can probably find good investment properties on Zillow, Redfin, or Trulia with a simple internet search.
If you’re looking to own rental units in an expensive area, you’ll have to do a little more sleuthing to find a worthwhile investment property.
Here are a few ways to scout out rental properties to buy.
- A real estate agent that specializes in investment properties. Talk to someone that has both real estate industry and geographic knowledge of your target market. Talk to your agent about your price range and ideal property, and they can notify you if a great deal comes up — often even before it hits the market.
- Driving for dollars. Drive around the town you want to invest in and look for neglected, vacant, or abandoned properties. Look for houses with tall weeds around them, gaps in fences, broken gates, or broken windows/doors. You can look up who owns the property on the local appraisal district website.
- Work your network. Spread the word that you’re looking to invest in real estate. Once you tell your friends and associates you’re looking for a rental property, you may be surprised at the number of deals that come your way through friends of friends. Both of my latest real estate deals I’ve located via friends/family members.
- Buy a foreclosure. Houses that go to foreclosure are sold on the courthouse steps to the highest bidder, and this is a tried-and-true way of snagging great deals for many real estate investors. Just know that the condition of these properties isn’t disclosed, so you may need to pour a ton of money into a foreclosure to make it livable. But, if you’re willing to do the work, the returns on your initial investment can be huge.
- Buy a short sale. These are houses in danger of foreclosure; the owner works out a deal with the lender to sell the home for less than they owe the property. This benefits the bank, as they avoid an expensive foreclosure process. It works out for the owner, who also avoids foreclosure, and for the investor who gets a house below market value.
- Wholesaler deals. Wholesalers make it their business to find great real estate deals for investors. The scope out houses to buy, get them under contract, then assign the contract to the investor who is the real end buyer. They take a cut for this service, of course, but using a wholesaler to find properties for you can save you hundreds of hours chasing down your own deals.
- Tax lists. Property tax lists are public record, so for a few bucks in copy fees, you can get a copy of homeowners in the area that are behind on their taxes and may be interested in selling.
- Craigslist or social media for sale pages. Many desperate owners look to the free advertising afforded by these sites, making them a prime location for finding discounted properties.
Great deals in real estate don’t last long, so make sure you have cash on hand or financing lined up to take advantage of the properties you find.
How to Find Reliable Tenants
You’ve found a property and taken the leap to buy it. Congratulations — you’re officially a real estate investor! Now it’s time to get someone to rent out your house.
Screening tenants is no easy task. Even the most seasoned landlord gets a dud tenant every now and then. The two main things you want to ascertain when sifting through applicants are:
- Can this person comfortably afford the cost of rent?
- Will this person treat my property well?
The first question is a lot easier to answer than the second. As a general rule, landlords require that the tenant makes at least three times the rent amount in monthly take-home pay. This makes it more likely that the tenant will pay, and saves them from having to decide whether to pay the rent or feed their kids.
In my tenant screening process, I ask for verification via pay stubs for the last two or three paychecks. I also run a credit check to make sure they don’t have a crazy amount of outstanding debt that will make affording the rent difficult.
Once a tenant passes the income/credit bar, you’ll want to gather as much information as you can about your prospective tenant as a person. Most rental applications ask for any history of criminal activity or previous evictions.
A quick check on social media will tell you a lot about them too.
Warning: While it’s okay to do some recon on the history and habits of your potential tenants, discriminating on the basis of race, religion, gender, sexual orientation, marital status, nationality, disability, or because they have minor children is illegal under the Fair Housing Act.
For more details on discrimination and housing protections, visit HUD.gov.
I personally rely heavily on personal recommendations from employers or previous landlords. People will tell you a lot more than numbers will.
One of my current tenants had crummy credit history from a prior divorce, but she had a stable job and a glowing recommendation from a previous landlord, so I took a chance on her. She has paid rent early every month, and renting to her has been one of my best decisions as a landlord.
How to Manage your Property
There are really only two ways to manage the details of your rentals: do it yourself or pay someone else to do it. Managing your own properties is a big undertaking— you are the go-to person for every lock-out, breakdown, missed rent check, and appliance failure.
You also have the maximum control over your investment as the sole decision-maker, enforcer, bill collector, and accountant. You are also the one and only payee, so you’ll make more money if you manage your units yourself.
Many landlords start out managing their own properties. However, every landlord is only one person with a limited amount of time and energy. So if you want to scale your real estate investments to more than a few units, you’ll need to hire out some of the work.
A property management company will take quite a few tasks off of the landlord’s plate, such as:
- Collecting rent
- Handling tenant complaints
- Ordering repair work
- Advertising and showing vacant units
- Managing cleanings and inspections between tenants
- Drawing up lease documents
- Screening tenants and conducting background checks (though many landlords do this part themselves)
Each property management company will have a different list of tasks that they do and don’t do, so if you go the property management route, be sure to spell out their duties in your contract.
It’s typical for a property manager to collect around 10% of the rent for these services, though it could be more or less, depending on how many of the above tasks they take on.
Pro tip: Make sure to structure your payment to property managers so they are paid 10% of the rent collected. That way, you won’t be paying for management on vacant units.
Things to Consider Before Becoming a Landlord
While everyone would enjoy the stellar returns of being a landlord, not everyone can or wants to put in the time, money, and effort to do so. Before you leap into this asset class, it’s a good idea to ask yourself the following questions:
- Am I prepared to ride out the highs and lows? Just like other investments, real estate has peaks and valleys. These get a lot more personal than numbers on a chart, however, when your tenant calls you at 2 a.m. to tell you they’re without water and they’re moving out. If you want to be a landlord, it’s not a matter of if you’ll have issues with your rentals, it’s just a matter of when they show up. You must be emotionally and financially prepared for the rough patches. They WILL happen.
- Am I willing to delegate? You can only do so much on your own, particularly if you are investing in a town you don’t live in. If you’re a control freak, landlording will be challenging for you because as your business grows, you’ll be stretching your time and energy across more and more doors. Successful real estate investors set up systems and rely on a team of contractors, property managers, real estate agents, attorneys, and more to ensure that their business runs smoothly.
- Am I willing to run this like a business? As a beginning landlord, it’s all too easy to lump rent payments in with your personal checking account or charge the repair bills to your own credit card. But sloppy bookkeeping makes things a nightmare come tax time (been there, done that), and you are likely to miss out on valuable tax breaks if you don’t keep things organized.
- Can I keep my emotions out of my investment decisions? You’d love to renovate that historic, three-story Victorian with foundation damage or rent to the tenant with the most Hallmark-worthy back story. But as a landlord, you must be prepared to check your emotions at the door. If you don’t make your investment decisions based on logic, you’ll get to ride the emotions of evicting the tenant that couldn’t pay the rent in the first place or eating the costs you sunk into the Victorian’s sinking foundation.
If you’re still not sure if landlording is right for you and you want more details about what it entails, take a peek at our Should I Become a Landlord article to explore all the pros and cons of becoming a landlord.
How to Invest in Real Estate WITHOUT Becoming a Landlord
If you’re keen on the returns of real estate, but not so thrilled by the prospect of chasing rent checks or cleaning up after trashy tenants, there are alternatives.
Landlording isn’t for everyone, but with real estate investment trusts (REITs), you can get the returns and diversity afforded by multiple real estate investments without leaving your couch.
REITs used to only be accessible to people like high-value investors or hedge fund managers. Luckily, apps like Fundrise have now made REITs available to anyone with a smartphone. With a few taps, you can select a REIT that meets your investment goals—and your initial investment costs much less than a down payment on your own rental unit.
The Bottom Line
Becoming a landlord isn’t for the lazy or the faint of heart. There’s a lot of work involved—physical, logistical, financial, and even emotional. Start by doing the necessary legwork to find a great deal and the analysis to make sure the numbers are solid. Getting accurate cost estimates will help you avoid expensive mistakes in the future.
Once you’ve purchased a property, take your time screening tenants. Make sure you get someone who can afford your place and who will treat it right by thoroughly checking the applicant’s income, credit, and background info.
Being a landlord is demanding, but there are multiple ways to make landlording less hands-on. As you look to expand your rental properties, consider whether it makes more sense to manage them yourself and keep all the profits or to hire out the day-to-day taste ofto property management.
You also have the option to outsource the whole thing completely by investing in a REIT like Fundrise. Evaluate your investing and lifestyle goals and choose the investment that’s right for your portfolio.