I still remember the day I officially became a landlord. I stood in the middle of the driveway, collecting cash like a drug dealer, and prayed that the tenant wouldn’t destroy my house.
(They did, unfortunately. But don’t let that scare you.)
In the past 15 years, I’ve made mistakes, learned lessons, and refined my systems. Today, I make a significant amount of passive income—in fact, with more than 600 units, you could say I’ve gotten pretty good at being a landlord (hence the reason my wife and I wrote The Book on Managing Rental Properties). But it didn’t happen overnight.
Anyone can become a landlord. Buy a property; put a tenant inside. Bada bing, bada boom, you’re a landlord.
How to become a landlord and how to become a successful landlord are two completely separate questions, just as having a kid isn’t the same as being a parent.
One is an event. One is a lifestyle. A skill. A journey.
Landlording can be exceptionally profitable and fun. It can challenge you, help you grow, and give you the freedom to live life to the fullest. Spend more time with your family, travel the world, and help others.
But when done wrong, it can also leave you fixing toilets at 3 a.m., crying into your pillow at night, and wishing you chose a different profession. It’s all about learning how to become a great landlord.
Let’s get you trained up.
The ideal rental property investment budget
Becoming a great landlord begins long before signing a lease. It starts with owning a profitable rental property. And the sad truth is that most properties actually make terrible rental properties, because they don’t provide any cash flow. (Cash flow is the extra monthly income you get to keep after paying the bills.)
As you think about buying a property, it’s vital that you run all the numbers to ensure the property will actually cash flow.
The basic definition of cash flow is simple: Total Income – Total Expenses = Cash Flow
However, as with most things in life, the devil is in the details. How much can you rent a house for? (We’ll talk about that in just a moment.) And how much will you spend each month just to hold onto the property?
For example, if you are renting a house and don’t require tenants to mow the lawn themselves, you may pay between $30 and $80 per month for lawnmowing services.
While each property incurs different costs, some common line item expenses to consider may include:
- Mortgage payments
- Insurance and taxes, if you pay these out-of-pocket
- Pest control
- Lawn maintenance
- Property manager fees
- HOA fees
- Utilities that you pay, such as trash, sewer, and water, if applicable
- Local licensing and certification fees
- Capital expenditure repair reserve for roof, appliances, and other major systems—between 5% and 10% of the rent
- Marketing fees
- Cleaning fees
- Vacancy reserve—between 3% and 5% of the rent
- LLC costs, if you’re using an LLC for your rental property
- Accounting and bookkeeping fees
Prepare for renters
It’s one thing to learn how to become a landlord. It’s another to have a property that is worthy of a good tenant. Before signing a lease, make sure that the physical property is move-in ready. Some common preparations include:
- Changing locks
- Providing at least two sets of keys and garage door opener(s)
- Basic landscaping, such as mowing and weeding
- Appliance tests
- Plumbing tests
- Basic window coverings
- Painting/minor repairs
State laws vary regarding a landlord’s ability to do renovations during a lease, so now’s the time to perform any necessary upgrades. In fact, break out the hammer for unnecessary repairs, and you might be violating their right to quiet enjoyment. Use this initial vacancy as an opportunity to get your property in top shape. It’ll make your life easier in the long run.
Determine a rental price
You probably already have a ballpark rent number, but now’s the time to dig into the specifics to decide how much to charge for rent. To do this, you’ll first want to take a look at nearby homes. What are they renting for? Do they offer better or worse amenities than your rentals?
When searching for rental comps (or what other rental property owners are charging), there are three places I go.
Craigslist’s map feature is awesome. Start in the “apts/housing for rent” section for your city and click on “Map” in the upper left corner. There, you can see all the nearby rental listings. What are other property owners asking for their rentals in the area immediately surrounding your potential listing?
Many landlords list properties for rent on Facebook Marketplace. You can scan through dozens—or maybe hundreds—of listings to find the average rent is for different types of properties in different locations. The primary downside of the Facebook Marketplace, however, is that there is no “map feature” like you’ll find on Craigslist. But you’ll still get a pretty good idea by clicking around.
Perhaps the best way to get a super-accurate rent estimate is picking up the phone and calling a property manager. Property managers deal with hundreds of rental properties, and are generally more than willing to help you determine rental rates—because they’ll hope you’ll end up using them for management.
What to know before setting rent
No, you can’t just charge “whatever you want.” Rent is dictated by supply and demand—charge too much and you may not get any prospective tenants. My landlording goal is to charge about the same as everyone else, but offer a slightly superior property. This way, I’ll get plenty of applicants, and they’ll be excited to rent (and stay forever in) my unit.
One thing to keep in mind: It’s against the law to raise the rent before the lease term ends. One way around this is by using a month-to-month rental agreement, so each month is like a new lease. This allows you to change rates as needed, as long as you give proper rent increase notice. (Notice requirements vary by state.) However, this also means the tenant can leave whenever they want as well, so be careful about using month-to-month rental agreements.
Get your team together
Developing a good team is one of the keys to landlord success. Before renting out your house, consider having these team members in place.
Yes, you can manage your own properties. But sometimes you just don’t want to, or simply can’t. Maybe you’re located in another city, or you’re simply not handy. Regardless of where you are, someone must be available to handle regular maintenance and emergency issues, as well as find and manage tenants.
You can expect to pay a property manager around 10% of the monthly rental price, though sometimes that fee can be negotiated depending upon which services you require. The property manager’s job description includes almost all the daily upkeep, including:
- Service professionals
- Tenant screenings
- Seasonal/storm readiness
Although you don’t need to have an attorney when you first rent a house, chances are you’ll need one eventually, so finding a good real estate attorney at the beginning of your landlording journey will save you time and stress later.
Not only will real estate attorneys help you if things go wrong, such as disputes, evictions, and compliance proceedings, they can also help you be proactive by reviewing leases and addendums if you plan to manage the property yourself. Ask your real estate agent for an attorney recommendation if necessary.
Even if you’re handy, it’s good to gather a list of reputable contractors before your tenants move in, especially if you plan to forgo working with a property manager. Find recommendations now for a trusted carpenter, plumber, and electrician so that you don’t have to scramble in the event of an emergency. Don’t know anyone who’s needed a contractor? Sites like HomeAdvisor, Thumbtack, and Angi provide local recommendations.
Bookkeeper and/or accountant
Some landlords hire a bookkeeper to track monthly profit and loss. Others choose to handle the day-to-day accounting on their own with the help of software like QuickBooks, Quicken, or Xero. Similarly, some landlords want to hire an accountant to help with tax preparation, while others choose to do it themselves. Whatever choice you make, don’t forget to count the costs in your budget.
Know the law
Familiarize yourself with landlord-tenant laws. Here’s what you should know.
- When selecting a tenant, the Fair Housing Act prevents discrimination toward tenants on the basis of race, color, national origin, religion, sex, familial status, or disability. (Read more about the Fair Housing Act on the Department of Housing and Urban Development’s website.)
- You’re required to provide “quiet enjoyment” for your tenant. That means they are free to use the property without disturbance of their time and personal possessions.
- Unless there’s evidence of abandonment, you cannot enter the property without reasonable notice, and you can only enter during reasonable hours. Check your local laws to determine what constitutes “reasonable” in your area.
- Support animals, including emotional support animals, must be allowed access—even if you’ve established a no-pet policy. They are also exempt from pet fees.
Be sure to use Google to find your state’s official landlord-tenant laws—and read them.
Insurance is essential to your real estate business. If anything goes wrong, having the proper protections in place is essential.
You probably already know about basic homeowner’s insurance, since it’s required for a mortgage loan. Landlord insurance is similar to homeowner’s insurance in terms of what it covers, but it assumes extra risk by covering properties that the owner does not live in. In fact, some homeowner’s insurance policies will deny or cancel coverage on rentals.
Unfortunately, landlord insurance can be 15% to 20% more expensive than basic homeowner’s insurance. Insurance companies assume—for the most part, rightly—that renters won’t practice the same level of care as an owner. Check with your insurance provider to ensure your investment property is properly insured as a rental.
While your landlord insurance will cover your property, renter’s insurance will cover the tenant’s property (don’t worry—the tenant usually pays for their own renter’s insurance). Renter’s insurance is inexpensive—as low as $15 to $20 per month—but highly important in the case of a disaster. Consider requiring your tenants to obtain renter’s insurance, or at lease encouraging it when drafting the lease. Some landlords impose financial penalties for those who do not provide proof of renter’s insurance. Others offer incentives such as gift cards to encourage their tenants to sign up for renter’s insurance.
Prep your policies
Before you create your first lease, you’ll want to decide on common rental policies. Making up the rules as you go opens yourself up for a lot of hassle. Tenants will know if you are making rules up on the spot, so having a written policy—that your tenant has access to—will make life much easier. Rather than trying to explain why a certain action is not allowed, you simply can refer to the policy.
Consider the following policies before you establish your landlord-tenant relationship. It’s likely that you’ll discuss these policies verbally during a walk-through, and you’ll also want to officially put them in the lease.
More than 60% of Americans own pets, so disallowing pets will definitely limit your pool of tenants. However, pets can cause significant wear and tear. If you decide to allow pets, you’ll need to create a policy that states the number, kind, and size of pets. If lawful in your area, you may also want to include a pet deposit.
First, set a date on which rent is late. Typically if rent is due on the first of the month, it’s late on the fifth. Some landlords set a late fee based on percentage, such as 5% of the monthly rent. Others have a set fee written into the lease. Some late fees will increase daily as rent continues to remain unpaid as well.
Check the governing laws in your area and talk with your real estate agent to see what the local standard is regarding late fees.
Important note about late fees: It may seem cruel, but I always charge a late fee when I rent a house—and I make it known ahead of time about this policy. I don’t know how many times I’ve had a tenant call with a claim of not being able to pay the rent on time, but as soon as they discover I’m going to charge them a late fee, somehow they always seem to find the money.
By being strict with late payments, you place rent higher on your tenant’s priority scale than other obligations.
Decide how often you’d like to inspect the property and let the tenants know what to expect. Many landlords will at least do a biannual inspections. Remember, you’ll need to give your tenants proper notice when the time comes.
Breaking the lease
Consider any penalties that tenants will incur for breaking the lease early, along with any exceptions. For example, losing a job or getting deployed is different than a tenant deciding they want another bathroom.
Decide whether or not you’ll allow sublets and under what terms and conditions. Personally, I don’t allow for this in my business. Too much risk, not enough reason to do it.
Less common (but still important) policies may include planting policies, painting policies, key duplication policies, and security system policies. Consider creating a tenant handbook or posting relevant policies inside a cabinet door for easy reference.
Know your responsibilities
As a landlord, you’re required to provide an implied warranty of habitability for your tenants. That means you’re responsible for all the basic necessities of shelter, including:
- Access to clean water
- Access to heat
- Access to electricity
- Access to sanitation, i.e. a functioning bathroom
- A rodent-free environment
- A fire-safe environment
- An environment that meets local building codes
Bottom line: If a major system breaks, you’re responsible for fixing it. But you may be able to require tenants to handle minor maintenance items, such as squeaky hinges and burnt-out bulbs. Check your local laws. Also, communicate to your tenants exactly what you expect of them when it comes to reporting problems. You don’t want them letting water drip under the sink without telling you!
Plan your lease
Using a state-specific template gives you a solid basis for your lease. Although you could pay an attorney to draft one, you can save money by using a lawyer-reviewed, state-specific fill-in-the-blank template. In fact, you can order one from BiggerPockets—and I promise you it will be cheaper than going to a lawyer.
Make sure all the policies you established are covered in writing along with landlord and tenant responsibilities. Fees and payment information should be included as well.
You can have your lease signed digitally or in person. Either way, make sure both you and your tenant have a signed and dated copy. An airtight lease is important should you ever need to go to court.
Need assistance? It never hurts to have a real estate attorney review your lease before renting a home.
Market your property
With all the pieces now in place, it’s time to let people know that your property is for rent.
First, take good photos that highlight the positive features of your property, such as any upgrades, bonus areas, and extra appliances. Make sure to give people a good look at each room so they can envision themselves living in the space. And don’t forget about outdoor areas! Hiring a professional photographer could be a good investment—remember, you can hang onto those photos for future listings as well.
Next, write a thorough listing. Give potential renters all the information they need without having to call or email you for clarification. Include things like location, number of rooms, amenities, appliances, outdoor details, parking, utilities, pet policy, and included services. You’ll also want to be clear about any application fees and the security deposit.
Then, post your property on rental websites, such as Facebook Marketplace or Craigslist. You may also want to look at websites like Zillow, HotPads, and Trulia—they typically sync together and can help you reach even more prospective tenants. Most property management software auto-syndicates listings to the major rental websites.
Finally, in some areas—especially large metropolitan cities—it is common for real estate agents to place your listing on the local MLS (Multiple Listing Service) so other real estate agents can show their clients your rental. Real estate agents typically charge between half and a full month’s rent, and you’ll be responsible for managing the unit after it’s rented.
Show the unit and screen prospective tenants
After your listing goes live, hopefully you’ll have lots of interest from potential renters. To save time, try to schedule multiple showings back-to-back. You may also want to consider an open house. Awkward? Sometimes. But nothing gets people excited to rent your property like competition!
During showings, if you have people who wish to move forward with an application, be sure to communicate directly about any fees associated with screening and credit checks. Have applications on hand, or directions to where they can apply online.
Your rental application should include employment verification, previous landlord references, background checks, and credit checks. Screening your tenants properly is key to a happy landlord-tenant relationship. A variety of online tenant screening services are available to help with screenings, such as TransUnion SmartMove and Clearscreening, and you can have the applicant pay the fees, which typically range from $15 to $40.
For your own peace of mind, it’s best to make the employment and landlord reference calls yourself. (Here are my favorite reference check questions.) Check property records to ensure that landlord names match prior addresses to avoid deception. For employers, verify monthly income and ask about any layoffs that may be coming soon. Don’t forget to screen every adult that will be on the lease!
Deal with the security deposit
Once you’ve chosen your tenant, it’s time to collect the security deposit. A security deposit will help protect you from tenants abusing your property, and you should collect it at the time of lease signing. Some landlords (like myself) require security deposits in the form of certified checks to avoid bounced personal checks. Develop a policy that works for your personal situation and falls within local market norms.
Security deposit laws vary from state to state, so you’ll need to do a little research. Here’s some information you’ll need to gather.
- How much can I charge?
- How much should I charge?
- What damages are legally deductible?
- Do I need to keep the security deposit in a separate escrow account? Does it need to accrue interest?
- What constitutes “normal wear and tear” in my state?
- What is the time frame for returning security deposits?
Generally speaking, we charge one month’s rent for a security deposit. If the rent is $1,200, the security deposit is $1,200. Simple.
Deal with evictions
Hopefully your tenants will always pay on time, and you’ll never have to deal with an eviction. But if you do, there are certain things to remember.
First of all, do not take matters into your own hands. An eviction is a legal process, and as such needs to be handled according to state-mandated rules in conjunction with local authorities. Throwing possessions on the curb and changing the locks is not the way to go.
Start the process with a phone call to the tenant. If you can work out an early termination or some similar compromise, it’ll be better for everyone. We often rely on paying bad tenants to leave, a strategy known as cash for keys, as a cheaper option to eviction. It hurts to pay a horrible tenant $500 to leave, but it hurts worse to pay an attorney $1,500 and lose two months of rent!
Evictions are messy, time-consuming, and expensive, so unless your tenant is not responding, you’ll do well to find alternate solutions if possible. Check out our guide to evictions for more details.
Know your taxes
Landlords are required to pay taxes on the rental income they receive, but there are many deductions that you can claim in order to reduce the amount of tax you’ll be required to pay. Be sure to keep proper records and receipts for tax filing purposes. Some common landlord tax deductions include:
- Interest: If you’re paying a mortgage on your property, this one will likely be your biggest deduction.
- Insurance: Premiums are deductible.
- Repairs and maintenance: Not to be confused with improvements—repairs must be necessary and reasonable.
- Travel: Travel to and from your rental property for rental business is deductible, and you can deduct either actual expenses or calculate mileage.
- Contractors and employees: The amount you pay your team and service providers is deductible.
- Depreciation: Each year, you can deduct 3.636% of your cost basis—the cost of the building and any improvements (learn more about depreciation at the IRS).
There are a few things to note here. First, any remodeling or improvements cannot be deducted outright, but they can be included in your cost basis for depreciation. Secondly, for depreciation, the value of the land cannot be included, since land cannot be “used up.” Also, depreciation can only be assumed for 27.5 years.
Talk with an accountant to learn more about your tax situation.
Troubleshooting tenants: FAQ
What if mold is found in the property?
Mold is a hazard and must be fixed promptly. In most cases, you as a landlord are responsible for remediation and repairs, and you could be responsible for your tenant’s temporary housing costs if they cannot live in your property during the process. However, if you can prove that the mold was caused by tenant negligence, they may be responsible for damages.
What if my tenant won’t pay rent?
Not paying rent is a serious offense. Always start with a conversation, and be firm about your expectations and the subsequent consequences. The bottom line? You need to nip that in the bud immediately.
States differ on the exact process, but it usually involves issuing a pay-or-quit notice, which usually gives between three and 14 days to pay up.
What should I do about tenant-on-tenant harassment?
This can be a nuanced problem. Verify the claims and, if true, evict the harasser—or you could be held liable.
What is an “uninhabitable living situation”?
While there may not be a firm legal definition, the generally accepted idea of “uninhabitable” implies a sense of danger. Any condition that would harm a tenant would be deemed uninhabitable. This could include broken windows, pest infestations, unlockable doors, electrical issues, bad air quality, and more.
Should I rent to family or friends?
Not a month goes by that I don’t get a call from a friend or family member asking if I have any place available for rent. My answer is always the same: No. As part of my 7 Deadly Sins of Real Estate Investing, renting to family or friends is one of the most common but disastrous mistakes many new landlords make.
I didn’t know this when I first began, and ended up renting to several close friends and even some family. Each time, I was faced with a choice: Get screwed over or lose the relationship. Every time I chose to get screwed over in order to preserve the relationship. I finally had enough and “put it in the policy.” No more stress.
Should I accept rent in cash?
No. Never. Nope. I know in the story at the beginning of this post I said I did it. And it screwed me over, many times. No more. Don’t do it.
Can I be a landlord with no money?
Yes and no. If you’re asking, “Can you invest in real estate without your own money,” there are definitely a lot of ways to do that. In fact, I wrote an entire book on that topic called The Book on Investing in Real Estate with No (and Low) Money Down. Check it out.
But that said: Once you learn how to be a landlord and begin managing your rental property investments, you’re going to have tough months. Maybe the water heater goes out and needs to be replaced. Maybe your tenant can’t pay rent and you have to evict. Stuff happens. So it’s vital that you have reserves as a real estate investor—aim for at least six months of your monthly mortgage payment in reserves.
Do you need a license to be a landlord?
Possibly. Many cities may require you to obtain a permit to operate a rental property in the city. So while you aren’t necessarily “licensed to be a landlord,” your property may need to be licensed. Check with your local city hall to see what the requirements for leasing properties are in your area.