Real estate is often touted as one of the best investments, especially for people with limited financial knowledge. Famous industrialist Andrew Carnegie once noted that 90% of millionaires made their money in real estate. Dollar for dollar, experts agree that property ownership is one of the safest and most reliable ways to build wealth.
However, owning investment properties takes work. Real estate is not a “set it and forget it” kind of proposition. Landlords need to be hands-on investors and prepared for the curveballs they will invariably face. With that in mind, here are 12 essential tips for new landlords and first-time rental property investors.
Evaluate the Property
As a landlord, it is your legal duty to ensure the property you rent out is safe and legally habitable. Applicable regulations and requirements are usually set at the municipal level. Thus, you should request detailed information from local authorities before you begin your search for tenants.
Go through the property and make sure it adheres to legal standards point by point. If you lack the necessary expertise, consult a local, licensed building inspector. The cost of hiring a professional is far less than the liabilities you will incur if your property is later found to be noncompliant.
This bit of advice more readily applies to landlords who inherited their properties, or acquired them some other way than buying them. However, even if you had the property professionally inspected before you bought it, double-checking is a good idea. The initial inspector may have evaluated it with different property usage intent in mind.
Get Property Insurance That Protects You
When it comes to real estate investments, minimal insurance coverage is a major gamble. Insurance is not a place to cut corners. When you live in a home you own yourself, you are the one in control of your choices and actions. This is not the case with tenants.
Recognizing this, insurance companies have devised a unique product known as landlord insurance. Some companies call it by different names, with “investment property insurance” ranking as a common alternative.
Landlord insurance offers more complete and targeted protection than default, standard property policies. Depending on the provider and the terms and conditions of the plan, landlord insurance may cover:
- Accidental damage to the buildings and its valuable contents.
- Emergency repairs for situations like gas leaks, plumbing-related flooding, and pest infestations.
- The loss of legally due rent.
- Compensation for on-site injuries suffered by tenants.
- Liability coverage for visitors and other members of the public.
- Coverage for the primary dwelling and any other outbuildings on the property.
Shop around for the most competitive quotes. Also, remember: as with all other forms of insurance, you can adjust your premium costs by tinkering with limits and deductibles. Just avoid exposing yourself to undue financial risk.
Know Landlord-Tenant Law
Landlord-tenant law strives to balance the legal rights and obligations of both parties in a rental agreement. Some jurisdictions tip the balance in favor of the landlord, while others favor the tenant. In any event, it is your responsibility to abide by applicable statutes. Courts will not accept ignorance as an excuse for failing to adhere to them.
On a more practical level, understanding the law protects you from risky and undesirable situations. Unscrupulous renters will not be able to take advantage of knowledge gaps. You will also be familiar with your recourse options and remediation steps in the event of a dispute. This will help you resolve such situations more quickly.
Treat Your Property As a Business
Sometimes, first-time landlords choose to just wing it. They start renting out units without any plan in place and choose to deal with problems as they arise.
Such an approach may take less work, but it also creates risk. Instead, experts recommend being proactive. Try to identify and solve potential problems before they happen by doing things like:
- Carefully maintaining the property, both structurally and aesthetically.
- Following all applicable laws and statutes.
- Pre-screening contractors for situations like HVAC repairs, plumbing and electrical problems, lockouts, and lost keys.
Set Rental Rates Strategically
Before you start to advertise vacancies, research local market rental rates for comparable dwellings. This will help you maximize your rental income, but it also serves another important function:
Below-market rental rates tend to attract applicants who are more interested in saving every penny than having a home they take pride in. Thus, you could be exposing yourself to added risk by enticing less desirable tenants with rock-bottom rates.
It is also worth noting that charging below-market rent may disqualify you from certain tax incentives or benefits. This could lead to hundreds or even thousands of dollars per year in extra expenses.
Find Tenants Online
The internet has become the primary way people search for places to live. According to one widely cited study, 72% of poll respondents began their apartment searches online and 66% ended up living in an apartment they first found on the internet.
Here are some tips for a successful online property listing:
- Advertise vacancies on as many websites and platforms as possible.
- Include a large number of well-lit, detailed, and accurate photos of the space.
- Profile both the interior and exterior of the property in images.
- Explicitly state all key details, including location, monthly rental price, the number of bedrooms and bathrooms, parking availability, and whether utilities are included or not.
- Make any restrictions (no smoking, no parking, no pets) clear.
- Highlight any amenities or unique features of the property in the post.
Establish a Process for Screening Potential Tenants
With any luck, a lot of people will respond to your advertised rental vacancies. Now you need a process for screening them. While you may be inclined to go with informal interviews and rely on your gut, experts stress the benefits of having a standard process to use in every case. This allows you to make direct, accurate comparisons as you evaluate applicants.
Consider the following:
- Requiring tenants to fill out an application form.
- Requiring proof of employment and/or income.
- Making references mandatory.
- Conducting credit score checks.
- Investigating potential criminal histories of applicants.
- Hiring a third-party agency to conduct background checks on your behalf
However, tread carefully. You need to make sure your screening process does not violate any local, state, or federal regulations. Anti-discrimination laws and civil rights statutes may also factor in, so consider these as well.
The Pros and Cons of Allowing Pets
Many people love pets, but landlords are often lukewarm on them. Dogs, cats, and other animals can damage properties in umpteen ways. In some cases, this damage can be expensive to repair.
Some of your tenants may prefer not to share common spaces with animals. A no-pets policy creates a level, consistent playing field while simultaneously eliminating any associated financial risk.
However, you may limit your pool of prospective tenants by disallowing pets. Thus, you could end up missing out on a great tenant just because he or she had a dog or cat. In the end, this is your decision to make. Weigh the pros and cons relative to your situation, then choose your course.
Make Renters’ Insurance Mandatory
Insurance companies have also created special products for tenants, which they usually call renters’ insurance. It covers tenants’ valuables and protects them from liability claims in the event of an injury.
In most jurisdictions, renters’ insurance is optional but landlords retain the right to require it of their tenants. Mandatory renters’ insurance reduces your personal risk exposure. It also helps you attract a better quality of tenant, which further enhances this strategy’s value.
Establish Clear Rules (and Enforce Them)
Most jurisdictions entitle landlords to put reasonable restrictions on tenant activities. It is especially important to have a clear set of rules in place if you own a building with multiple dwellings. Bad neighbors are no fun for anyone, and they can cause you to lose tenants you would have preferred to keep.
When you create rules, you must also enforce them. Otherwise, tenants who are inclined to break them will take note of your lenience. This could lead to further conflict.
Put Everything In Writing
Formal rental agreements are standard practice. However, if you are renting to someone you have a personal relationship with, you may be tempted to keep things informal as a show of good faith. This is not generally a good idea, since it can lead to legal liabilities and give you little recourse in the event of a dispute.
Make sure your written agreements explicitly state all terms and conditions associated with the rental. All policies (regarding pets, parking, bills, property maintenance, snow removal, property rules, etc.) must be covered. Be sure to cover the respective responsibilities of both parties, not just the tenant.
Keep Good Tenants Happy
Last but not least, remember that responsible renters can be hard to come by. Once you find good tenants, you will want to keep them as long as possible.
Maintain amiable relationships with your occupants, address any problems or issues promptly, and make yourself available to help them should they need you. Squeezing every last dollar out of your renters sets the wrong tone, and could set you up for problems with high turnover and unit vacancies.