How to Be a Landlord: A Guide to House Expenses, Tenants, and Taxes
Real estate investing has a major advantage over any other form of investing. This advantage is called cash flow.
The ability to offset house expenses with tenant income can mean nonstop profits for savvy landlords. The process of becoming a successful landlord begins with understanding common house expenses, taxes and tenant responsibilities.
Check out this guide to becoming a landlord and help launch a profitable real estate investing career.
How to Become a Landlord
The most basic step to becoming a landlord is buying a property. Finding an investment property is a simple process in many housing markets. Follow the following steps to locating your first real estate investment property:
Connect with a Realtor
Though it’s possible to drive around your area looking for properties for sale, realtors have access to the multiple listing service (MLS) which can give insider details like property tax information, needed repairs, and school district.
Narrow Down Your Search
Whether you choose to work with a realtor or search on your own, you need to narrow the scope of your search by deciding on a price point and zip codes. Owning a rental property near your home is one of the easiest ways to manage your own investment. The only exception is when your own neighborhood and the surrounding area has a low demand for rental properties.
For many, this is the first step in performing a property search. Investing, however, isn’t like buying a car or a home for you to live in. It’s possible to obtain financial partners to help cover the expense of the purchase in exchange for sharing profits. Your investment can have investors, but it’s a good step to find out how much you can buy on your own.
A walkthrough is critical for an investment property. The condition of the property directly relates to repair and housing expenses. Most rentals don’t require the latest kitchen appliances to attract tenants, but reliable plumbing and HVAC are necessary. Once you have a home under contract, you’ll be able to hire an inspector to make sure everything in the home is move-in ready or whether or not major renovations are needed first.
Market the Property
Once you find and close on the investment property, the next expense comes with marketing the vacant home to prospective tenants. Online services like Homes.com offer a fee to place a listing ad to prospective tenants. Your realtor might be willing to list your home on the MLS so that other realtors can refer your property to their clients.
All landlords need tenants to make a profit making the marketing strategy a big financial factor. Don’t skimp on producing a professional ad because you want to make the best impression with high-quality tenants.
Always conduct a thorough credit and background check on new tenants. Past landlord references help give an idea of the tenant’s character and cleanliness. If you choose the right tenants, your property can remain well maintained while making you a profit each month.
It’s illegal to discriminate against a prospective renter based on race, gender, religion, family status or disability. Avoid questions on the rental application that speak to any of these tenant qualities.
Read up on the Fair Housing Act before creating your rental application if you’re unsure where to draw the line. Landlords who violate discrimination laws could be fined or jailed depending on the extent of the offense.
Focus instead on the character of the tenant and his ability to provide a stable source of income for your rental property. The rental application should include minimum requirements for doing business with you in the following areas:
- Credit Score
- Annual Household Income
- Previous Evictions
- Length of Employment
You may or may not be able to ask about criminal history depending on the state. This should be a nonfactor if the tenant meets your minimum requirements in the other areas.
Follow Up on References
The trail of paperwork during the tenant screening process can seem endless. In order to save yourself the hassle of a future eviction, these paper trails are necessary.
The tenant’s credit report is full of potential references for you to follow up on. Call past and current employers to verify employment and always call past landlords.
During your interview with the tenant, she may have explained previous situations with housing that you can refer to in your conversations to gauge her level of truthfulness. A tenant willing to lie during an interview cannot be trusted with your investment property.
Read the details of the tenant’s credit report. Don’t ignore red flags. High income means nothing if a tenant carries high debt to match.
Reliable tenants have many housing options. Don’t assume that they don’t expect your property to be well maintained just because they are renters. They may not know the difference between a ductless air conditioner from National Air Warehouse and a second-hand unit you find on Craigslist, but they expect a clean, well functioning residence.
Consider the workload of an apartment complex. When something breaks, tenants expect immediate repair and not to have to spare any expense. This is less realistic for a privately owned single-family residence, but you should still have a plan in place to promptly respond to repairs.
Your housing expenses will cover both maintenance and repairs. Consider contracting a handyman to cover all upcoming damages to your property. Using the same person for regular maintenance can mean getting a good deal on ongoing services.
Be sure to choose a handyman who lives and works in the area where your property is located. A long drive is a deterrent for anyone and can prolong their ability to do a quick repair. The right handyman means low housing expenses in the long term.
Housing expenses can make or break your profit on a rental property. If it’s your first time owning a home, you might not know what to expect and how to budget for your investment. It’s important to not overspend or under prepare for housing expenses.
Network with other landlords to find out how much to budget for your property. A local real estate investment club or realtor can connect you with other landlords willing to answer questions. Some realtors are also property managers giving them insight into the costs associated with providing maintenance on a rental home.
Here are a few common fixed housing expenses you should expect to pay outside of repairs and maintenance:
Water and Sewer: If utilities are included in the tenant’s rent payment, be sure to include that in your annual expense budget.
Electric: This expense is usually the tenant’s responsibility unless the home is vacant. With multifamily housing, shared spaces like hallways and storage units incur this expense.
Trash and Recycling: Trash pickup is one easy way to help your tenants avoid rodents. Consider adding this expense to your rent to ensure your property is always serviced.
Insurance: Check your first mortgage statement to ensure insurance costs are included. If you don’t see the expense itemized, set aside the premium amount each month to be paid once each year. Installment insurance payments generally incur a fee.
Homeowners Association Fees: Many subdivisions who offer amenities like a swimming pool or tennis courts charge monthly or annual HOA fees. The HOA manages the shared amenities and creates bylaws for the entire community. Most condominium buildings require HOA fees.
Managing a property is a time-consuming process. The learning curve is steep but it’s worth it, in the end, to be able to anticipate housing expenses before they arise.
If you have a full-time job, hiring a property manager might be the most reasonable solution for maintaining your property. You lose the option to get hands-on experience, but if they keep you updated with reports and maintenance schedules you still get an overview of what’s needed to run your business.
No matter whether you get a mortgage loan or pay cash for your rental property, taxes are due every year. Property taxes are often included with your mortgage payment, but not always.
Check your mortgage statement to avoid unneeded property tax delinquencies. Expect taxes to increase each year as property values rise. To accurately estimate your property taxes for the upcoming year, look at next year’s tax bill, not last year’s.
Your rental property is considered a source of income and must be filed on your tax return each year. Consult with an accountant to decide whether it makes sense for you to form a business or keep the income in your personal name.
The tax code changes each year which means that this year’s deductions might not apply next year. The number of deductions you’re allowed can save you hundreds, sometimes thousands, each year in tax liability so always consult with a professional to ensure you’re getting the maximum benefit.
Making Your Investment Work
Keeping good records of house expenses and income makes managing your property easier year after year. It helps you decide whether your investment is working or whether changes need to be made.
When tax season rolls around, you can make the process relatively painless by handing over all your documents at once. Commit to your rental property for the long haul for the biggest opportunity for a return on your investment.
Being a landlord isn’t a get rich quick scheme, but it’s a good option for building wealth over time. For more real estate market information, visit our website.