There are many benefits to becoming a landlord and earning passive income from owning and renting real estate, but the effort and risk may not be for everyone. Let’s break down how to get started and what you need to know to help make your efforts a success.

Know Yourself

Ask yourself an honest question. If you were to buy a vacation home, would you be comfortable renting it out to people you don’t know when you’re not using it? Or would you prefer to keep the property exclusively available to you and your family and nobody else? Would you be concerned about damage done to the property and feel put-off if you consistently have to make improvements or fix things? 

If you can emotionally distance yourself from the property and view it as  an investment for the purposes of earning income and gaining a return on that investment, then rental real estate might be for you.

What does it mean to be a landlord?

Once you decide to become a landlord and invest in a rental property, it’s important to understand who pays for what. As the landlord, you’ll be covering things like property insurance, taxes, maintenance, and maybe even property management fees. On the other hand, your tenant will usually be responsible for things like utilities—electricity, water, gas, that kind of stuff.

If you’re planning to rent the property out short-term, like through Vrbo or Airbnb, then you’re on the hook for pretty much everything. That’s why having some cash set aside for the times when you’re not collecting rent is a smart move. A good rule of thumb is to have at least six months’ worth of expenses in reserve.

To help you get started, here’s a handy sheet outlining what costs to expect when you’re creating a rental budget and tenant agreement.

Aside from having cash reserves, you’ll also need to think about the time you have available—especially if you’re planning to manage the property yourself. How much time you’ll need to dedicate really depends on your tenant and the age of the property. But don’t assume you’ll just rent it out and watch the checks roll in—things will come up with both your tenant and the property itself.

If you want being a landlord to be both financially rewarding and stress-free, make sure you can carve out the time to handle any issues that pop up quickly.

All of that said, if you are prepared to look at your rental property as an investment and have both the investment capital set aside and the time available to make your venture a success, let’s dig into how you can make owning and renting real estate a financial game-changer!

Set some goals and run some numbers

Besides just earning passive income, set some financial goals for yourself. 

• How much rental income are you seeking? 
• How much do you have available to invest upfront? 
• What are your long-term goals?
• What are the geographic areas you wish to concentrate on?

Once you’ve set some clear goals, identify the type of property you want to buy and rent. Are you interested in buying and renting a single-family home, a condominium, a multi-family complex, or possibly a short-term rental? Different properties will naturally come with different types of costs, all of which need to be factored into your analysis. Try NOT to buy a property without first running a cash flow analysis and income projection! 

Don’t let your emotions take over just because you love the property or the location. Remember, this is an investment, and the success of an investment is all about the return on investment (ROI). Here’s a handy Google Sheet to help you break down your property expenses and figure out a monthly rental rate that gives you a solid ROI. Once you’ve got that rate, compare it with the market to see if the asking price for the property makes sense.Once you’ve decided on the type of property that suits your budget and goals, you can zone in (no pun intended!) on the area that is best suited for you.

Know Thy Market!

Location, location, location. We hear that cliche all the time and know how important it is when investing in real estate. You can’t just pick up your rental property and move it like you can move a house on a game board! Here are a few suggestions:

• Choose a market. Start with the area you live in and become a student of the property type you are interested in. Here’s a Google Sheet to help you keep track of the important variables, including market price, location and distance from your home, features and property condition, and comparable rents.
• Review the tax rolls. Research your local online Real Property Tax Assessor’s tax rolls and gauge property assessment values, both historically and currently. 
• Consider total return.  Total return includes both the rental income you’ll earn and any increase in the property’s value over time (capital appreciation). So, it’s important to choose an area where there’s strong demand—not just for rentals but also for long-term property appreciation.
• Stable economy. Look for a stable, local job market that can offer a tenant population capable of paying the rent you are asking over the long term.

How to Finance Your Rental Property

Many investors finance a rental property through various methods and then refinance the original loan to pull out their initial down payment. They use that money for their next investment property. It’s a rinse-and-repeat strategy that helps build wealth by accumulating multiple properties over time.

Here are a couple of ways to finance your rental property:

• Hard Money: Hard money is a short-term loan with a low loan-to-value ratio and a high interest rate. These loans are typically offered by individual investors who want a high return on their cash while keeping their risk low. For example, a hard money lender might loan you 65% of a $100K property purchase and charge 12% interest. If you don’t repay the loan, the lender—who has the first lien—can take ownership of the property to cover the debt. While this option has significant risks and higher closing costs, it can be useful if you need quick financing to buy a property, fix it up, rent it out, and then refinance with a more traditional, long-term loan.
• Traditional Mortgage: Based on your credit, you could qualify for a traditional mortgage, but should be prepared to put down 20% or more in cash to qualify.
• Bank Loan: Local community banks will be your best bet for a bank loan, specifically credit unions in your area that have a vested interest in helping your community. Seek out the assistance of a loan officer at a local credit union and ask with the terms and conditions might be.
• FHA Loans: If you are a first-time home buyer and interested in a multi-family property, you could qualify for an FHA loan with a low down payment, but you will likely need to live in one of the units.

Getting pre-qualified and having cash ready to buy will be required in almost any community where you are seeking rental real estate. Competition for properties is fierce! Be prepared with financing in place to bid and close on a rental property that fits within your pre-established real estate rental plan.

Tenant Screening – Consider Who Will Be Paying Rent

Your endeavor as a successful landlord rests squarely on finding the right tenant who will treat your property well and pay their rent on time! Newly minted landlords often find themselves selling their property and exiting the business after having a poor experience with a tenant who did not do either of those two things. So, how do you find the right tenant? 

• Check their prior rental history and look for frequent moves.
• Check credit and gauge the tenant’s financial stability.
• Check employment and be sure the tenant has a steady source of income available.
• Obtain a security deposit, as well as first and last month’s rent. If the tenant does not have the cash available, you now have another reason to carefully consider the financial viability of the tenant candidate.

If you are not skilled in drafting a lease agreement, hire an attorney. Yes, this is an added cost in your landlord venture, but it is well worth it. Many landlords today are experiencing challenges with tenants “squatting” on their property, either through a fictitious lease or through a legitimate lease, and just not paying rent. A local real estate attorney can guide you with lease language specific to the laws and ordinances where your rental property is located. Protect your property, along with your emotional well-being, by being smart about the laws in your area.

Repairs, Maintenance, and Property Management (and Bills!)

Think about how you want to handle those day-to-day calls from tenants about repairs and maintenance. Are you okay with giving up some of your rental income to hire a property manager? A property manager can take care of things like collecting rent, leasing the property, communicating with tenants, and coordinating repairs, but they come with a cost. Be sure to budget for their services and consider how that will affect your Net Operating Income (NOI) and Return on Investment (ROI). We’ve included a spot for property management costs in our rental budget worksheet.

Also, don’t forget to budget for repairs and maintenance. A good rule of thumb is to set aside about 2%–4% of the property’s value each year. So, if your rental property is worth $200,000, plan to save $4,000 to $8,000 annually for upkeep. It’s always better to have extra funds set aside and not need them than to face unexpected expenses that eat into your profits!

Taxes, Taxes, and More Taxes

As we like to say at SmarterWellth, “It’s not what you make, it’s what you keep that counts.” Whether you’re starting with one rental unit or planning to build an empire, it’s crucial to get the right tax and financial advice. You should also talk to an attorney about setting up a corporation for your rental business. This can protect you personally from any claims related to the property.

The good news is that once you’ve gotten advice from legal, tax, and financial experts—and followed it—you’ll have peace of mind knowing you’re set up for success. Plus, as your rental business grows, the cost of that advice will pay off, giving you the confidence to make smart decisions as you expand your real estate portfolio.

Be Smart with your Investment Dollars and Build Future Wellth!