Purchasing a rental property is a long-term investment that can create a significant nest egg for retirement. It’s also more hands-on than other investment types because you’ll have to actively manage the home until you sell it.
The idea is that you’ll buy a second home, apartment, or condo and rent it out instead of living in it. Your renters will pay for your mortgage and many other expenses associated with the property while it builds equity.
You can then sell the home once you pay off the mortgage or use the rent you receive as your monthly income in retirement. The arrangement is win-win because renters need somewhere to live, and you want to earn a return on your investment.
Renting your property to a complete stranger comes with challenges, though, especially if you’ve never been in this situation before. This guide provides some tips a first-time landlord can follow to make the process a little more straightforward.
Benefits of Buying a Rental Property
You’ll want to determine if becoming a landlord is right for you before you begin. Rental properties can be lucrative, but they aren’t for everyone. Some benefits of becoming a landlord include the following:
Landlords can receive tax perks on their investments because the rental property isn’t subject to income or self-employment taxes. Your property could also benefit from devaluation, which could lower your annual tax burden. Deductions on insurance, mortgage interest, property tax, maintenance fees, and advertising may also be available.
Your rental property provides a consistent cash flow as long as you have tenants paying rent. Most of this cash will go toward your mortgage, property taxes, utilities, and maintenance fees to start, but it becomes income once you pay off the mortgage or own the property outright. Your cash flows are far more predictable than with other investments, too, since you set the amount you’ll charge monthly.
Property Value Appreciation
Rental properties typically appreciate over time, leaving you with a more valuable investment than the one you purchased. You’ll have to pay capital gains tax on this appreciation, but it’s worth the extra tax if the home appreciates significantly over the years.
Becoming a landlord won’t create instant wealth, but renting out residential real estate can be a steady income source that could appreciate significantly over the years. The result is a nest egg in retirement that you can sell or continue to rent out later in life.
7 Items to Include on a First-Time Landlord Checklist
Becoming a landlord can be stressful because there’s a learning curve. You don’t want to forget to cover any aspects as you rent your property for the first time because this home is a significant part of your future. Here are some first-time landlord tips you’ll want to consider:
1. Complete Safety Checks
An unsafe property could open you up to lawsuits, so you’ll want to ensure the walls, stairs, floors, and roofs are in excellent condition and well-maintained. Tending to the plumbing, ventilation, HVAC system, and water heater is also an essential part of renting your home. The property should have working smoke and carbon monoxide detectors, too, and you’ll want to check the batteries to ensure their functionality.
2. Clean and Make Repairs
Landlords should deal with any repairs that arise at the property immediately. These repairs could make the place unsafe to live in, and you could experience problems collecting rent from your tenants if you don’t keep the home in excellent condition. Thoroughly cleaning the house before your first tenants arrive is recommended to start the relationship on the right foot.
3. Write a Proper Lease Agreement
Creating a valid lease agreement is a vital part of becoming a landlord. This document includes the rules a tenant must follow when living on the property. It also provides the terms for things like maintenance, damages, pets, deposits, rental amounts, rental duration, and limitations for your tenants. Failure to write a high-quality lease agreement could leave you in a tough spot legally if the tenancy goes awry.
4. Install New Locks
You probably don’t know who lived in the home before you bought it, so replacing the locks is advisable. Your tenants don’t want past residents showing up in the house or, worse yet, robbing them, but new locks can help eliminate that possibility.
5. Vet Applicants
Vetting any applicants you’re seriously considering renting to is crucial to becoming a landlord. The vetting process includes speaking with past landlords, collecting employment information, and looking at credit history. This information helps you make better decisions about who will be living in the house you’ve spent your hard-earned money to purchase.
6. Set a Price
Figuring out how much to charge is an important piece of the landlord puzzle. You don’t want to set it so high that it eliminates most candidates in your area, but putting it too low could attract less-than-desirable applicants. The sweet spot will be based on the current market in your area, so it will depend on the neighborhood and type of property.
7. Collect Damage Deposits and Rent
Determining the amount you’ll charge for a damage deposit and how you’ll manage it is vital before your tenants move into the home. You’ll also want to figure out how and when you’ll collect rent each month, and you might ask for the first and last months’ rent up front.
Following these first-time landlord tips can help set you up for success as you get your rental property up and running. It’s a lot of work, but the payoff is worth it once you own the property outright.
Get the Help You Need Managing Your Property
It’s easy to be overwhelmed as a first-time landlord, but assistance is available. A property management firm can take care of the extra work, so all you have to do is sit back and collect income from your investment.
Nomadic Real Estate offers property management services in the Greater D.C. area. Our team of experienced professionals can handle nearly every part of the landlord process, including maintenance, vetting, and collecting rent, eliminating a massive workload from your plate. Contact Nomadic Real Estate for more information on our property management services.