So You Want to Be a Landlord – Here’s What You Need to Know
Renting out your home is often touted as a sure means of making steady, passive income. While this is true, not knowing some important things might hinder you from maximizing the full potential of your home with regards to getting the most rental income and minimizing your costs.
This is true whether your home is a large duplex or a small studio. This article will state the most important things you need to know to maximize your rental property ROI.
Key Points
There are a number of key factors to consider before renting out your home:
- The demand for rental property in your location;
- The applicable laws for residential tenancy in your area;
- The type of rental to operate: residential vs commercial
- The suitability of your home for being rented;
- The cost of operating a rental property.
- The Demand for Rental Property in Your Location
No use making your home available for rent if there is no matching demand for it. Above all else, using your home as a rental is first and foremost a business, and the aim of every business is to make profits.
The main stream of profit for your home as a rental is the rent, so you have to be absolutely sure your home will get rented. If your home is in an area with low demands for rentals, then you might be left with a high vacancy rate that will leave a dent in your profitability.
The best way to determine this is to speak to other landlords or realtors in your area, as well as look at the online rental sites to determine what price similar properties are renting for in your area. When the prices are low, it means that other landlords are competing fiercely to fill their vacant units.
- The Applicable Laws for Rentals
It is also very important to know whether you are allowed to rent out your home in your location, and under what terms and conditions.
Find out about the laws that govern tenancy agreements, rent collection, etc. Also try and understand the relevant Residential Tenancy Act in your jurisdiction.
Get to know federal, state and local rental laws, as they will educate you about your rights and obligations as a landlord.
These laws are important to consider because they dictate important procedures like how a landlord can go about evicting tenants when they do not pay. If that process takes 1 month or 6 months in your jurisdiction will have a significant impact on your rental business.
- The Type of Rental to Operate
You also have to determine what kind of rental you want to operate: either a residential rental or a commercial one. There are clear and obvious differences between the two of them. For any kind you pick, we advise that you do a proper tenant verification.
Below is a table that briefly explains the differences between residential and commercial rentals.Terms Residential Rental Commercial Rental Contract Name and Type Renting contract; the contract is not fixed and can be altered by the landlord anytime Leasing Contract; fixed contract, lessee usually purchases property after lease expires Maintenance Done by tenants Done by property manager Renting to: Typically to tenant Typically to a business ROI Usually between 4%-10%, based on property type and location Usually between 6%-12%, based on property type and location Non-Payment Risk High. There are more laws protecting residential tenants, and they are difficult to evict Low. If commercial tenants do not pay rent, you can change the locks immediately and rent to a new tenant. Vacancy Risk Low. In most areas it is not difficult to find residential tenants High. Finding the right commercial tenant for your property is more difficult
- The Suitability of Your Property for Rentals
The fact that you have put your home up for rent does not mean it will be rented. Your home has to be attractive enough to be a rental, the rent/lease on it has to be similar to other rental options in your location, or renters will not be interested.
The best way to determine this is to have a real estate market analysis done to accurately know the general prices of other rentals in your location, the level of maintenance and repairs to be done to bring the unit in good living condition, etc.
- The Cost of Owning a Rental Property
The aforementioned market analysis is also a very useful tool here, as it helps to give you a gauge of what to expect with regards to unavoidable costs like home repairs, appraisal fees, home inspection fees, etc. In general, condos have a very consistent maintenance fee each month, whereas a home may be more expensive to maintain depending on its age.
Knowing the costs to expect will also help you set a realistic price for rentals, so you don’t run at a loss.
You may even want to consider a real estate platform that helps manage property for investors—from first-time homebuyers to global financial institutions, one that can help find, finance, buy, manage, and sell residential investment properties.
Conclusion
Owning a rental property does not mean automatic income, if you do not know how to play your cards right.
Making sure that you’ve considered all the factors we mentioned above will eliminate any surprises and ensure that you are set up for success when renting your property.
