Being a landlord sounds easy. You just bought a new house, so why not rent out the old one? You may even have friends that have been landlords for years and make a lot of money. You can just go buy another house nearby, find a good renter and cash the checks.
But before you do anything, it’s a good idea to understand exactly what all your responsibilities, expenses and downfalls would be or could be as a landlord.
“Many people become landlords with very little thought,” says Denise Myers, director of learning at the Rental Housing Association of Washington (RHAWA) in Seattle. The organization has more than 20 instructors who are professionals in all aspects of the rental housing industry, including attorneys, CPAs, property managers and investors.
Some people are thrown into becoming landlords, such as in situations where they inherited a house or they need to leave their primary residence when it’s not a good time to sell.
There is a great deal of risk in doing this without learning about the market, local laws and tax ramifications. Regardless of traditional thought, owning a rental home is a business and must be treated as such,” she adds.
Here is some information to peruse before ever stepping into the world of landlording:
What are the responsibilities and liabilities of a landlord?
The landlord is responsible for keeping the property in safe and habitable condition, Myers says. Each state provides different remedies to the tenant if the landlord fails to properly maintain the property.
For instance, in Washington if the landlord does not make repairs within a reasonable time period, the tenant can make the repairs and deduct the cost from rent. If anyone is harmed due to unsafe conditions, the landlord can be held liable for damages.
What type of personalities shouldn’t become landlords?
“Someone who is not detail oriented and doesn’t like to deal with people,” she says.
How much do you need to make on a rental property to come out in the black?
“You can only charge what renters are willing to pay,” she adds. “Just like analyzing comps when buying and selling, you need to look at rental comps.”
A simple, free tool to get a general idea is Rentometer.com. Then, you can look at actual listings to compare the features of surrounding rentals.
How can you find out the local laws pertaining to landlords and tenants, and who can you turn to for help?
State and municipal landlord-tenant laws can be found online, although most education provided there is usually geared toward the tenant’s interests, Myers says.
“Most states and sometimes larger cities have rental housing associations. These are non-profit trade associations whose membership is made up of rental housing owners, developers and/or property managers,” she adds.
Before investing in an area, it is important to become a member of the local association to learn from those that are already in the market.
How can you buy the right rental property if you don’t already have a home to rent?
Successful rental housing investors are very familiar with the market area, and they closely monitor trends impacting rents, such as job growth, building development, city planning and local laws, she explains.
“So while the inclination is to simply look for a home where you live, it might not be the right time to buy in that market. If rents are going down, you could easily find yourself in negative cash flow,” she says.
What should your apartment or home have in it to attract renters?
“Today’s tenants expect a dishwasher and in-unit washer/dryer. About 75% of renters have pets, so it’s advisable to have a “pets welcome” policy and pet-friendly flooring, like textured laminate or vinyl plank,” Myers says.
Décor and other amenities are truly market-area dependent. This is another way that good comp research can help you. Keep in mind, using the right words and photos in your ad can make up for dated décor.
How can you pick good tenants?
“Picking good tenants is arguably the most important thing you can do to protect your investment,” she adds.
Having clearly defined screening criteria is crucial, and in many states is legally required. Your criteria should establish that the tenant has the means to pay rent, positive credit history and positive rental history.
For credit and public record history, use a good local screening service that follows local laws. Review documentation of income and identity, and call employer and formal landlords to confirm good standing.
What should your customized lease say in it?
Residential leases are legal contracts that must be customized to comply with local laws and include terms and rules of tenancy specific to the property, Myers says. Most local rental housing associations and/or MLS associations will have a good lease template you can fill in with your specific information and rules. If not, have a local real estate attorney draft your lease.
Can you put in the lease that you will inspect the premises regularly?
Landlord tenant laws provide that the landlord has the right to inspect the property with proper notice and reasonable frequency, with the specifics varying state to state. It is a good idea to include your specific inspection policy in your lease and explain the process to your tenant.
“A common practice is to inspect after the first three months and then semi-annually or annually,” Myers explains.
What kind of bookkeeping should landlords do?
In order to monitor ongoing cash flow and properly file taxes, it is important to keep track of all income and expense for each property aligned with the categories outlined on the Schedule E tax form.
Who should use a property manager?
All rental properties should be actively managed by someone who is educated on local laws and best practices for property management. This means regular inspections, timely maintenance and repairs, handling emergencies after hours, turning over vacancies, etc. If you do not have the ability to do this, you should hire a property manager.
How can you enforce that the rent is paid on time?
“You should have a late-fee policy in the lease and consistently enforce it. If that doesn’t work, use “pay or vacate” notices appropriately as outlined by your local laws,” she says.