Managing rental property takes a lot of work and a decent amount of know-how. Step one in this process is finding a good property to use for rental purposes. The building’s location is very important as is the neighborhood. You want an area that illustrates stability so that should you decide to re-sell down the line, your investment is safe.

In looking at the various potential properties don’t only think about the mortgage. Consider how difficult the property will be to upgrade and maintain. Safety, security, and attractiveness all matter to potential renters. Additionally as a landlord there will be specific zoning laws to which you must adhere. Do your research so you know what to expect.

After locating a suitable property you’ll have to finance it. Owner occupied buildings with less than four units aren’t regarded as investment buildings so you won’t have to come up with a huge down payment. By comparison the absentee landlord with more than five units has to pay larger down payments and higher interest rates, usually as much as 30%. The risk factors for investment properties is always higher, and gets reflected in those percentages and rates. Note that Adjustable Rate Mortgages aren’t recommended for rental properties. If the rate goes up substantively there’s no way you’ll be able to adjust rents to cover the additional expense.

There are other costs too. For example, your property insurance and taxes are going to be higher when you rent. Since the landlord doesn’t have 24-7 control over the property, renters represent a damage risk. Additionally it’s a good idea to have liability insurance on the property in case of personal injury lawsuits. Note that the cost for insurance, the interest you pay on the mortgage, and some of your rental property repairs and renovations are tax deductible.

The Tennant Equation

If finding a good property and handling all the financials wasn’t complex enough, now you have to find tenants. It’s strongly advised that you screen tenants using credit checks, bank references, previous landlord recommendations, and employment verification. Additionally get a security deposit in the form of a bank check. If you want extra verification you can pay for a renter’s evaluation through a national database. This costs about $25 each and will tell you if the renter has a criminal record too.

After a tenant moves in, it’s time to consider how you want to handle complaints and rent payment. Complaints are best handled in writing so you have a document trail (this protects you and your tenant). Rent receipts are also a very good means of keeping track of things. Note that some landlords encourage timely rental payments by offering a small discount to individuals who pay early or on time.

Summary:

This is only a very small portion of the overall landlord equation. For example, what happens when you want to go out of town? Who will handle things in your absence? How will you handle renter-to-renter issues? What do you do when someone’s in arrears?

These kinds of questions makes it clear that becoming a landlord isn’t something to do on a whim. Educate yourself, get advice and input from your accountant or tax advisor, and really take your time. At the end of the day ask yourself if you want to trust 4, or 5, or 6 complete strangers in an investment property. If the answer is no, being a landlord is not for you.