Introduction

Do you want to know how to become a landlord? Are you considering turning your current home into a rental property? Are you considering purchasing an investment property? If you have the capital and the time, becoming a landlord is a great way to generate income and generational wealth. But how do you get started? How much money do you need? How much time will it take? Will you need to quit your job? Do you need to consult legal experts? It’s easy to get overwhelmed when starting a new venture. There is a learning curve when starting anything new, and sometimes the most important thing to do is just get started.

Some people who want to become landlords fail to start simply because they are overwhelmed and never take that first step. While there is no one way to do anything, it helps to break significant problems into more manageable ones. Considering tackling each step one by one instead of the thought of starting a whole new business. You don’t need to be an experienced realtor or real estate investor to become a landlord

1. Assess Your Temperament and Treat Rental Property as a Business

You want to have the right temperament and mindset when starting as a landlord. The most important thing to remember is that being a landlord is a business and must always be treated as a business. What kind of temperament does it take to be a landlord? You need to be able to make difficult discussions and handle the shock of high costs. You’re dealing with homes, and as any homeowner or investor can tell you, repairs can be pretty expensive. Being a landlord also requires patience. Investing in real estate is a long-term investment, so don’t expect the early returns to be life-changing. It is also going to take up some of your time. Even if you hire a property manager to handle the day-to-day busy work, you will still need to consult with your property manager occasionally, especially regarding finances and repairs.

How serious are you about becoming a landlord? Even if you intend only to make it a part-time job, it still needs to be treated as a business. There are inherent risks, and to protect yourself and your personal finances, you need to take the necessary steps required of any business. You’ll need to plan long-term. You’ll need to protect yourself from liability, and you’ll likely need to consult with experts in both real estate and accounting. While you may be making all the decisions, getting good advice always helps.

2. Understand the Responsibilities of Being a Landlord

Do you know how to be a landlord? What are your responsibilities as a landlord? You are always responsible to both yourself and your tenants. This means you must protect your interests while holding up your end of the bargain regarding tenant rights. So what does this look like?

First, you will need to make sure your rental property is safe and habitable. This means all the locks on the windows and doors are functioning, and all the essential appliances are working. You’ll need to make sure the gas and electricity are functioning safely. All of this is done before a tenant moves into your rental property. Your responsibilities don’t end there, though. You’ll need to make all necessary repairs after a tenant moves in. You’ll need to be responsive to your tenant’s needs and communicate with them properly to protect their privacy.

You also have responsibilities to yourself and your business. You can’t just accommodate every single request from your tenant. For example, maybe they want a refrigerator with an ice maker and filtered water dispenser. This would be an excessive expense for your business and create potential long-term problems. Any time the ice machine breaks, or the water filter breaks, you’ll need to pay to have it repaired. Finding the right balance between your business needs and the needs of your tenant is a part of the job.

You also have your business responsibilities. This means keeping track of all your expenses and revenue. This means keeping records and paperwork for everything business related. You’ll also be responsible for filing taxes and budgeting for long-term success. All of your most basic responsibilities are going to be both legal and financial. This means knowing both the law and how to manage your finances. While you may not be an expert immediately, it is a good idea to begin learning for yourself, even if you hire an expert for assistance.

3. Buy an Investment Property

Buying an investment property is vastly different than purchasing a primary residence. When buying a primary residence, you buy for your personal preferences and needs. You may also be willing to pay more to satisfy those preferences and needs because, unlike an investment property, you don’t need to turn an immediate profit. When buying an investment property, you are buying based on the demand of the rental market.

The general rule of thumb when buying an investment property is the 1% rule. No, this doesn’t mean you must be in the top 1% of wealthiest Americans. It means you want your gross revenue from your investment property to equal 1% of the closing costs. If your closing cost is $300,000, you would need to generate $3,000 a month in gross revenue.

$300,000 x $0.01 = $3,000

This should allow you to generate enough revenue to cover all your expenses. Knowing the local rental market will allow you to determine an appropriate closing cost for an investment property.

Rental markets fluctuate, so you want to invest in a rental market that will likely see long-term growth. Two significant factors can determine the type of long-term growth of the rental market, and that is both supply and demand. A market that is seeing both population and economic growth will likely see rents increase even if there is an ample supply of homes. On the flip side, if a market is seeing a population decline, you can see rents stagnate or even decline if the population decreases enough.

Generating a gross revenue of 1% of your closing costs over 20 years isn’t ideal. As a property gets older, it becomes more expensive to maintain. Ideally, you want to be able to increase your rent by 1%-3% every single year. This will help cover expenses as the property ages and make your investment more profitable. So, how much do landlords make? It depends. Some make enough to earn a solid passive income, and others can earn enough to make it their full-time job.

4. Budget for Unexpected Costs

Budgeting for unexpected costs and repairs is a big part of being a landlord. There are a few ways to manage your finances in a way that can protect you from going into debt over unexpected costs. There is the 1% rule which is discussed in the previous steps. There are also a few other rules to help manage your finances.

There is the 50% rule. This rule says you should save 50% of your gross revenue from a property for potential repairs, maintenance costs, property taxes, and other expenses. If your monthly gross revenue is $3,000, you should save $1,500 for all costs

$3,000 / 2 = $1,500

Another rule of thumb you can use is the square footage rule. This states you want to budget one dollar per square foot yearly for repairs. If you have a 2,000-square-foot rental property, you want to set aside $2,000 yearly for repairs. While this may not cover significant, unforeseen costs, it will help you budget for the most basic repairs.

Ideally, start with a large cash reserve to handle significant expenses before renting your property. The last thing you want to have to happen is run out of cash before you can find any tenants. You may learn something about the property after it is purchased, which needs repairs before it can be habitable. If you don’t have enough cash for the repair, you may need to take out expensive short-term loans or, even worse, sell the property at a loss. Over the long term, you should save up a sizable cash reserve for unforeseen costs beyond an annual budget.

5. Understand Landlord-Tenant Laws

Landlord-tenant laws can be highly complicated. This is because there isn’t a single national consensus regarding housing laws and tenant rights. Federal laws and fair housing laws, through the Fair Housing Act, sets basic legal guidelines around discrimination issues but don’t say much about the issues of rent prices and eviction.

Next, you have the state-level laws. Every state has different laws that can go beyond fair-housing laws. For example, states like California go well beyond the Fair Housing Act regarding tenant rights. They have a state-wide anti-price gouging law that protects tenants from landlords making drastic rent increases to force them out. Landlords can’t just evict tenants because they don’t like them or hold some grudge against them. The state requires a lease violation to evict a tenant or if a landlord intends to take the home off the market and/or make it their primary residence.

After the state level, you have the municipal level. Some cities, especially the most expensive, often have rent control laws that limit how much a landlord can increase rent every year. Each rent control law for each city will have different limits and different ways of calculating the amount.

This can all sound very confusing, and people have dedicated their entire careers to understanding these laws. Not only can it be complicated, but these laws can change anytime. For example, San Diego recently implemented more tenant protections. The simple solution for those looking to become landlords is to enlist the services of those who know these laws best. This can be a legal counsel on retainer or a property management company.

There’s also the legal issue of what is a habitable home. This is far less than all the desired amenities a person would want. It’s fairly basic when it comes to what is considered habitable. A rental property is required to have basic plumbing and utilities. It is also required to have all the necessary security and locks on windows and doors. There are also health risks to consider. You can’t have toxic gases leaking into the property or have a mold problem. There is no requirement for luxury or basic amenities like a dishwasher. Still, it is required that a tenant will be able to live a healthy, safe, and secure life within the confines of the rental property.

6. Purchase Landlord Insurance

One of the most important aspects of running a business is protecting yourself and your business from liability. For landlords, this includes landlord insurance. Like homeowner’s insurance, landlord insurance can help protect you financially from problems created through externalities or acts of God. This can include things like burglary and vandalism. Some plans will protect a property from damage even when under construction. It can also cover the costs of bringing a building up to code during renovations. Like any other insurance plan, there are deductibles as well as limits.

These plans typically cover the main dwelling along with any other structures on the property, like a detachable garage. It can also cover any equipment used to maintain the property, like lawnmowers and leaf blowers. This isn’t the same as renters insurance and will not cover tenants’ belongings if damaged or stolen.

One reason you don’t want to use homeowner’s insurance on a rental property is you don’t want to pay to insure the belongings of your tenants. What you want to protect is the property and the income that is generated from it. For this reason, some plans will also protect your income from certain circumstances in which your property may become uninhabitable.

Every plan is different, so shop for what is best for you. However, it is important to go above and beyond to protect your business and your investment because homeowner’s insurance may not help with as much when it comes to an investment property.

7. Get Your Property Move-In Ready

After you have purchased a rental property, you will need to make sure it is move-in ready for renting it out. What does move-in ready mean? There is the legal definition which means that it is legally habitable, which was discussed in a previous section. But for this section, let’s talk about what is “move-in ready” to get the most revenue from your rental property.

You won’t be able to get the market rate rental price from your rental property if you only do the bare minimum. Just because it has running water, locks, and electricity doesn’t mean people will want to move in right away. You can create an essential checklist of things to do before putting a rental property on the market. This can include replacing old carpet, painting the walls with a fresh layer of paint, and replacing damaged but functional items like sinks or toilets. It can also mean upgrading old appliances.

This doesn’t mean you need to go out and add everything you would want in a home. It doesn’t mean you must install central AC, a dishwasher, or an in-unit washer and dryer. Some of these appliances will do very little regarding how much you can increase monthly rent.

You’ll also want to do a deep cleaning after repairs or maintenance. You can do this yourself or hire a cleaning service. This means making sure the place is spotless. All the floors, cabinets, baseboards, and bathrooms are spotless. You don’t want to show a property to a potential tenant and have them walking away, thinking you don’t put any effort into maintaining your property. Tenants want to know they are signing a lease with landlords who are proactive and responsive. A little effort can go a long way in ensuring you can get the most revenue from your rental property.

8. Determine How Much Rent to Charge

Before purchasing a rental property, you’ll need to know what you can charge. There is a difference between what you need to charge to make a profit and what you can charge. One way to figure out how much you can likely charge for rent is to look at various rental websites like Zillow and Apartments.com to see how much landlords are charging for comparable properties.

It’s not just the number of rooms and bathrooms or square footage that will determine how much you can charge. It will depend on the neighborhood and the quality of the home as well. Are you looking for a general market rate rental, or are you hoping to attract luxury tenants? Find homes that are listed not just with similar sizes and room/bathroom numbers but also similar quality.

This isn’t a foolproof way of determining what you can charge for rent, but it will get you in the ballpark. Be wary of outliers and landlords attempting to charge far more than they can get. Pay attention to how long they are advertised on the websites before they are pulled.

There are more modern methods to determine what the likely going rate would be. There are property m management software companies with far more useful and accurate data than just scraping rental websites.

The other option is to hire a property management company from the neighborhood or city with expertise in the area. When in doubt, hire people who know what they are doing. If you list a unit too high, you can lose revenue while it sits on the market, and you may have to lower it anyway. It’s best to get it right the first time around.

9. Marketing the Rental Property

Long gone are the days of tenants driving around neighborhoods looking for “for rent” signs. This doesn’t mean you shouldn’t put a sign up in front of your rental home. This can still be valuable in finding a tenant fast or if you have other rental properties and want to use the opportunity to try to fill those units as well.

The most common place potential renters look for rental homes is online. The easiest, low-cost place to start is free listing sites like Craigslist, Zumper, and Facebook. While these won’t cost you anything, sites like these tend to have more scams and unreliable posts. You’re also listing with landlords who pinch pennies and cut corners and may not be the best landlords when it comes to managing their properties. For these reasons, some renters won’t even bother using these sites.

The best option is to use pay-for sites like Zillow and Trulia. These sites, because landlords pay for posts, tend to be far more reliable and much safer for renters to use. The downside is these sites cost money, which means the longer it stays up, the more it will cost. This means you will want to list your rental property at a realistic monthly rental amount to lease the property as quickly as possible.

Whether you pay for a listing or not, it is crucial to make your listing as high-quality and professional as possible. This means hiring a professional photographer to take pictures of your listing. Real estate photographers know how to use angles and lighting properly to make your rental property more appealing online.

You also want to spend time on the description of your rental home. Tell the truth, and don’t try to hide anything. Even if the home isn’t very spacious, list the square footage. If something as simple as the square footage is left out, potential renters may assume it’s too small and not even bother looking. If they do show up and realize it was a lot smaller than they had hoped for, they won’t fill out a rental application. Make your listing sound as appealing as possible while being truthful and giving all the necessary info. This will ensure you don’t waste time showing the property to tenants who won’t rent the home.

The simplest option is to hire a property management company to handle your listings. This will remove all of the guesswork and streamline the process.

10. Screening Prospective Tenants

Every state and city has different laws governing how landlords can screen potential tenants, so before you do anything, check your local and state laws. If you have any questions, you can consult a lawyer or industry professionals. If you’re uncomfortable screening potential tenants, hire a property management company to manage your rental home.

The last thing you want is to create a tenant screening process that rules out qualified tenants. This can happen if you require too much income or too large of a security deposit. Some states and cities have laws that limit your ability on what you can charge. For example, California limits the income requirements to three times the rent and the security deposit to two times one month’s rent.

If there’s a housing shortage, you may be able to create a higher bar to clear when it comes to screening tenants. One way to look into the past of potential tenets is to pay for services that can do a background check, credit check, and eviction history check. Remember that not everyone who can clear a screening process will be a great tenant, and those with checkered pasts can be good tenants. Conducting thorough background checks costs money, and if you have a high turnover on your property, you will be spending a lot of money conducting background checks.

There is no foolproof way to screen out bad tenants. There will be problems that arise regardless of what you do to screen tenants before them signing a lease. Suppose you aren’t comfortable dealing with these problems, or you don’t trust yourself to be able to screen tenants properly. In that case, one of your best options is to lean on experts like property managers to handle the day-to-day business of running a rental property.

11. Signing Tenants to a Lease Agreement

To sign a tenant to a lease agreement, the first thing you need to do is determine the terms of the lease agreement. Is it a short-term lease or a standard long-term lease? Residential leases typically start at 12 months.

There are some instances in which shorter leases are preferable. Corporations often use short-term leases. For example, businesses may lease rental homes for 3-6 months when relocating a new or current employee. Professional baseball teams do this when they bring minor league baseball players to the majors.

There are standard leases that can be found online, or if you would like one specific to your property, you can consult a lawyer who can draw up a lease agreement for you. The other option is to hire a property management company that usually has in-house legal experts and standard lease agreements. This will take all of the guesswork out of writing your lease when you start.

When a 12-month lease ends, it doesn’t necessarily mean a tenant will move out. If they don’t submit a 30-day notice to move, the lease becomes a month-to-month lease. Every city and state has different laws regarding rental leases, so if a lease can only be available for the time given on the lease, that needs to be communicated with the tenant and put into writing.

12. Maintaining the Property

The most important thing to remember is that the property must remain habitable by legal standards. This means your rental property must be habitable to operate your business as a landlord. At times, maintaining a rental home to this standard can be costly. The best way to ensure it doesn’t get too costly is to identify necessary repairs and make them as soon as possible so they don’t become more prominent, more expensive repairs down the road.

Only some things need to be repaired or brought up to date. You don’t need to replace windows with high-end windows. You don’t need to replace the carpets with expensive wood flooring. However, you want your property to look the day a tenant signs a lease should be how your property looks at all times.

You won’t be responsible for every single repair when a tenant is renting a unit. If it is something they damage, that can be covered by their security deposit, or if they don’t intend on moving out, they can pay for the repair themselves.

The best way to stay on top of any necessary repairs is to make it easy for tenants to report any issues. This could be as simple as an email address dedicated to maintenance issues or using a web portal specifically designed for tenants to report any issues. Some tenants may hesitate to report maintenance issues because they fear being evicted or rent increases. If a home becomes uninhabitable, they may be forced to move out while all repairs are made. This is why it is essential to be responsive to all requests, communicate effectively, and never make your tenants feel like a burden for requesting repairs.

There is some routine maintenance you may want to consider even if a long-term tenant is in one of your properties. For example, if you want your carpet to last longer, you can pay for an annual carpet cleaning instead of hoping the tenant will do it on their own.

You should also conduct an annual inspection of your rental home. This requires communication with your tenant to let them know when you will be coming by for an annual inspection. You can conduct this with someone who handles general repairs and ask for them to look at any current issues or things that may become problems down the road. This is crucial if you have had the same tenant for multiple years. If you have a property with high turnover, then you are usually getting regular inspections every time someone moves out. That isn’t the case with long-term tenants.

13. Staying Organized

Staying organized can be difficult regardless of the job, but managing a rental property involves many moving parts, coordination, and communication. It requires time management and short and long-term planning. There can be stretches with little work and sprints of intense work.

When a rental property is leased, it won’t require as much day-to-day work. When that same unit is being turned over to a new tenant, it can require much work and organization. To help keep track of what needs to be done every time a property is turned over, use a checklist. This will help you coordinate with all your hired workers to complete each task. For example, you may need to replace the carpet, paint the walls, and give the entire rental property a deep cleaning. Using a checklist will help your plan be as efficient as possible.

You should also stay organized with all your paperwork. This is a business, and to protect yourself from liability, you should maintain records as long as they are required. Each state may have different laws for how long records must be kept, so check with an expert to know which records to keep and for how long.

You should keep your lease agreements, annual inspection checklist, move-in/move-out dates, and move-in/move-out inspections checklists. This will protect you in case you need to dispute anything in court. For example, a former tenant may dispute charges and funds withheld from their security deposit. If you have all your records kept in order, your claims will likely hold up in court.

14. Deciding If You Want to Hire a Property Manager

When should you hire a property manager? That’s a question of both time and knowledge. How much time can you commit? How much time are you willing to commit? How knowledgeable are you about real estate? The more properties you own, the more time-consuming and stressful the business of being a landlord will become.

If you don’t have the time, hiring a property manager is a good solution. If being a landlord isn’t your full-time job and you want to make passive rental income off your rental properties, the best way is to hire a property manager to handle all the busy work for you.

The real estate market is constantly shifting from both a supply and demand standpoint, as well as a legal standpoint. It takes a lot of time and effort for experts to keep current on all these ever-changing factors. If you don’t know or don’t believe you will have the mental bandwidth to learn, hiring a property manager might be the best option for you.

Property managers have contractors they work with. They know how to protect your assets. They understand the local real estate market. They are dedicated to that one job of managing rental properties. While their fee will eat into your potential profits, the time it saves you and their expertise will eventually allow you to grow your business without managing each property.

15. Keeping Records of Move-In and Move-Out Inspections for Security Deposit Purposes

Keep your records. Keep them in paper form as well as digital. It is the best way to protect yourself from liability and keep track of your business. You don’t want to be a hoarder, though.

You should only keep paper records for as long as you are legally required. You don’t want rooms filled with boxes of paper from 20 years of leasing a rental home. If you’re unsure how long to keep your paperwork, scan it and store it digitally.

Your move-in/move-out inspection checklists are one of the most critical items to keep. It isn’t uncommon for a former tenant to dispute the charges and try to get more of their security deposit back. If you keep these records and have your former tenants sign off on them when they move-in/move-out, you will be less likely to see disputes in court.

You’ll also want to keep your rental agreements. This is in case a tenant has violated a lease in a way that results in their eviction. For example, you may have language that states a tenant can be evicted if they are selling drugs or conducting other illegal activities from the rental home. If this is the case, you will want to be able to point to this in the lease if your tenant attempts to dispute and refuse the eviction.

The eviction process can cost a lot of time and money and is one of the most challenging aspects of being a landlord. The best way to protect yourself from spending time in court disputing claims from current and former tenants and to keep proficient records.

Conclusion

Being a landlord requires a lot of time and knowledge, and if it is something you are considering getting into, it would be wise to start learning before taking your first step. There are professional real estate agents, lawyers, accountants, property management services companies and property managers who have dedicated their entire careers to knowing specific areas of the industry. It’s unrealistic to think a person just getting started would ever be able to know enough on day one.

But you can learn on the job. You can learn from consulting experts and hiring others to help with specific tasks. So, is becoming a landlord worth it? It can be. This isn’t something you need to do on your own. If you run the business properly and become a successful landlord, it is the type of business that can create generational wealth and set you and your family up for decades. Do your research. Make sure you know exactly what your goals are and what you’re getting into. Find the right experts to consult or hire. It can be done, even if taking the first step can be scary.

Rental properties are real estate assets owned by individuals or entities that are rented out to tenants for a specified period. These properties offer a space for tenants to live or conduct business in exchange for monthly rent payments. In this article, we will delve into the definition, benefits, drawbacks, types, investment opportunities, and legal aspects of rental properties.

What Is a Rental Property?

A rental property is a piece of real estate that is owned by an individual or entity and is leased or rented to tenants. It can encompass various types of properties, including residential, commercial, and specialized rentals. Key characteristics of rental properties include ownership, rental income, and property management.

Renting out a property involves allowing tenants to occupy and utilize the space while paying rent. The rental agreement outlines the terms and conditions of the tenancy, specifying the duration, rent amount, and responsibilities of both the landlord and tenant.

Benefits of Rental Properties

Owning rental properties offers several advantages for investors. Firstly, they provide a source of rental income, which can contribute to financial stability and serve as a passive income stream. Unlike traditional employment, rental income allows investors to earn money without actively working.

Moreover, rental properties offer long-term wealth accumulation opportunities through property appreciation. Real estate values tend to increase over time, providing investors with the potential for capital gains when they decide to sell the property.

Diversifying one’s investment portfolio with rental properties is another benefit. Real estate investments can help balance risk and potentially provide better returns compared to other investment options. Additionally, rental property owners can take advantage of various tax deductions available, such as property taxes, mortgage interest, and depreciation.

Furthermore, rental properties serve as an investment vehicle for generating cash flow and building equity. The rental income received can cover mortgage payments, property expenses, and even provide additional profits.

Drawbacks of Rental Properties

While rental properties offer numerous benefits, they also come with certain challenges and risks. One of the primary drawbacks is the responsibility of being a landlord. Landlords must handle various property management tasks, such as tenant screening, rent collection, maintenance, and addressing tenant concerns.

Vacancies and income fluctuations are common challenges in the rental property market. A property may remain vacant for a certain period, leading to a loss of rental income. Additionally, economic conditions or changes in the rental market can impact the demand for rental properties, affecting rental rates and occupancy rates.

Property maintenance and repairs are ongoing requirements for rental properties. Landlords must ensure the property remains in good condition and address any issues promptly to keep tenants satisfied and maintain the property’s value.

Legal complexities can also arise in the rental property business. Landlords need to familiarize themselves with local landlord-tenant laws and regulations to handle evictions, tenant disputes, and lease agreements appropriately. Failure to comply with legal requirements can lead to legal consequences and financial losses.

Types of Rental Properties

Rental properties encompass various types, catering to different purposes and tenant needs. The most common types include residential, commercial, and specialized rentals.

Residential rental properties consist of single-family homes, condominiums, townhouses, apartments, and multifamily buildings. These properties are primarily used for residential purposes, offering individuals and families a place to live.

Commercial rental properties, on the other hand, are designed for business purposes. They include office buildings, retail spaces, warehouses, and industrial properties. Commercial rentals serve as spaces for businesses to operate and conduct their activities.

Specialized rental properties target specific markets or cater to unique needs. For instance, vacation homes or short-term rentals are properties rented out to tourists or individuals seeking temporary accommodation. These properties are popular in tourist destinations or areas with high seasonal demand.

Another way to invest in rental properties is through real estate investment trusts (REITs). REITs are companies that own and operate income-generating real estate properties. By investing in REITs, individuals can indirectly own shares in a diversified portfolio of rental properties.

Exploring Rental Property Investment Opportunities

Researching Investment Opportunities

Researching potential rental property investments is crucial to make informed decisions and maximize returns. Analyzing the local real estate market is a fundamental step. Consider factors such as property values, rental demand, population growth, economic trends, and the overall desirability of the location.

Due diligence is essential in the investment process. Conduct property inspections to assess the condition of the property and identify any potential issues. Evaluate the neighborhood, considering factors like safety, proximity to amenities, and the quality of schools, as these factors can influence rental demand and property values.

Assessing potential renovation costs is another important aspect. Determine whether the property requires any repairs or improvements and factor in the associated expenses. Understanding the renovation costs helps estimate the total investment required and the potential return on investment.

Seeking Professional Advice

Seeking professional advice can significantly enhance rental property investment decisions. Real estate agents or brokers who specialize in rental properties possess in-depth knowledge of the local market and can provide valuable insights. They can help identify suitable properties, negotiate favorable terms, and guide investors throughout the buying process.

Working with property management companies like Autopilot and TurboTenant is also beneficial. These companies assist with tenant screening, lease agreements, rent collection, property maintenance, and other day-to-day tasks. Their expertise can save landlords time and effort while ensuring efficient property management.

Joining real estate investment groups or networking with other investors is another way to gain insights and learn from experienced individuals. Sharing experiences and knowledge within a community of like-minded investors can be invaluable when making investment decisions.

Exploring Financing Options

Financing plays a crucial role in rental property investments. Traditional mortgage loans from lenders are a common financing option. It is essential to understand the interest rates, loan terms, and down payment requirements associated with these loans. Consider the impact of mortgage payments and interest expenses on the cash flow of the investment property.

In some cases, investors may not qualify for traditional financing. Alternative financing methods such as hard money loans or private lending can be viable options. These types of loans may have higher interest rates or shorter terms but can provide flexibility for investors who cannot secure conventional financing.

Legal and Contractual Aspects of Rental Properties

Understanding Legal Definitions

To navigate the legal aspects of rental properties successfully, it is essential to understand the legal definitions and terminology involved. Key terms include landlord, tenant, lease agreement, eviction, security deposit, and rental application. Familiarize yourself with these terms to comprehend the legal framework surrounding rental properties.

Gathering Documentation

Various legal and contractual documents are necessary for rental properties. Rental applications allow landlords to collect essential information about potential tenants. Lease agreements outline the terms and conditions of the tenancy, including rent amount, duration, and responsibilities of both parties.

Property condition reports and move-in/move-out inspections are crucial to document the state of the property before and after tenancies. These reports serve as evidence in case of disputes over damages or security deposit deductions. Security deposits require special attention, as regulations govern their handling and return.

Exploring Online Resources

Reputable websites such as lawinsider.com or official government websites provide valuable information on legal and contractual aspects of rental properties. These resources offer standardized lease agreements, legal definitions, and guidelines for compliance with local laws. However, it is recommended to consult with real estate attorneys or property management companies for personalized advice based on specific circumstances.

Seeking Professional Assistance

Real estate attorneys and property management companies can provide professional assistance in dealing with legal and contractual matters related to rental properties. They have in-depth knowledge of the laws and regulations governing rental properties and can ensure compliance. These professionals can help with drafting lease agreements, tenant screening, eviction processes, and dispute resolution.

While seeking professional assistance involves costs, the benefits in terms of legal protection, efficient property management, and peace of mind can outweigh the expenses.

Conclusion

Rental properties offer individuals and entities the opportunity to generate income and build wealth through real estate investments. Understanding the definition, benefits, drawbacks, types, investment opportunities, and legal aspects of rental properties is crucial for successful ownership and management. By conducting thorough research, seeking professional advice, and understanding the legal framework, investors can navigate the rental property market with confidence and make informed decisions.

FAQs

1. Can I invest in rental properties with little money?

Investing in rental properties with limited funds is possible. Options include partnerships, real estate crowdfunding, or exploring creative financing methods such as lease options or seller financing.

2. How can I find suitable tenants for my rental property?

Finding reliable tenants involves effective tenant screening. This process includes conducting background checks, verifying employment and income, and checking references from previous landlords.

3. Are rental properties a good investment for passive income?

Yes, rental properties can provide passive income if managed properly. By outsourcing property management tasks or utilizing property management companies, investors can earn passive income from rental properties.

4. What are the key tax deductions available for rental property owners?

Tax deductions for rental property owners can include mortgage interest, property taxes, insurance premiums, repairs and maintenance expenses, depreciation, and professional services fees.

5. How do I handle tenant disputes or evictions?

Handling tenant disputes or evictions requires understanding local landlord-tenant laws. It is recommended to consult with a real estate attorney who can guide you through the legal process and ensure compliance with applicable regulations.

Despite what many think, owning and leasing rental properties isn’t just for major corporations or real estate professionals. First-time home buyers may choose to become landlords after converting their first home into a rental property and moving into their “dream” forever home. If you’re considering converting your primary residence into a rental property, this article will help guide you through the process.

To find tenants quickly, list the property at turbotenant.com/advertise-rental-property.

Key Takeaways:

• Potential benefits of converting your home into rental property include rental income, depreciation expense, tax loss carry-forwards, and tax deductions.
• Becoming a successful landlord means checking with your mortgage provider to see if the home can be used for a rental, acquiring landlord liability insurance, ensuring the home is livable for renters, and understanding your landlord-tenant laws.
• Cons associated with owning a rental property may include tax implications like paying capital gain tax when the property is sold, dealing with repairs & maintenance, and managing your tenants and related rental property expenses.

5 Benefits of Converting a Primary Residence to a Rental Property

1. Generate Rental Income Until Housing Market Improves

You may have found yourself in a situation in which the potential sale price of your current home is not satisfactory. At the same time, your next “dream” home may be available for purchase at a price you’re very interested in. Assuming your finances are in order and you can afford to purchase the new home, converting your current home into a rental property may be a viable option. If your local markets rental prices are enough to represent a profit on your current home, you could choose to rent your home out and wait for the market value of the home to increase.

2. Tax Deductions

The IRS requires income from a rental property to be reported using Schedule E (Form 1040). However, the amount of income subject to taxation is the net income after all tax deductions and expenses available to you as a landlord have been claimed. Some common expense deductions include:

• Advertising(such as listing the property available to rent and finding tenants)
• Cleaning and maintenance
• Insurance(includes homeowners insurance and landlord liability insurance)
• Management fees
• Mortgage interest
• Taxes(such as property tax)
• Legal fees
• Commissions(like those paid to companies like Ziprent who help find you qualified tenants)

These costs help reduce your overall net income from the property. Imagine over the course of a year the property is netting you $30,000 in annual gross income. If you tally up all your expenses that total $20,000, your taxable income is only $10,000.

3. Depreciation Expense

A key benefit of turning your primary residence into an investment property is being able to depreciate the property over a period of 27.5 years. What exactly does this mean? IRS Publication 946 explains that depreciation is simply an expense allowance for the wear and tear or deterioration of the property. It’s important to understand depreciation applies only to the building and not the land.

For example, if a home is valued at $300,000 and the value of the lot is $20,000, the value for depreciation purposes would be $280,000. Calculating the annual depreciation expense is relatively simple by dividing the value by 27.5 years.

$280,000 value for depreciation / 27.5 years = $10,181
When a primary residence is converted into a rental property, the owner can then deduct the depreciation expense from the income the property generates to effectively reduce taxable income.

4. Passive Activity Loss (PAL)

In general, the IRS considers rental real estate activity to be a passive activity. Even if an investor participates physically, such as visiting the property and meeting with a property manager for example. Under the PAL guidelines, an owner cannot claim deductions that would exceed the amount of income received from the rental property. There is a small disclaimer to this as claimed deductions can exceed rental income if the owner’s gross income is less than $100,000.

Don’t worry though, passive activity loss doesn’t have to go to waste. Should that passive activity loss exceed the income generated from a rental property, you can pass that unused PAL to the next taxable year to offset passive activity profits. Be cautious with topics like this and always enlist the help of a tax professional when needed.

5. Avoiding Self-Employment Tax

Also known as FICA or payroll tax, self-employment tax requires taxpayers to pay a 15.3% tax for Social Security and Medicare on any income earned. However, because a rental property is treated as passive income instead of earned income, there is often no self-employment tax due.

For example, imagine a taxpayer earns $100,00 in self-employment income. The tax(15.3%) would equal $15,300. If a real estate investor earned the same $100,000 in income from rental properties, there would be $0 in FICA tax due.

2 Drawbacks to Converting a Primary Residence to a Rental Property

While the benefits of converting a personal residence into a rental property are clear to see from the above, there are some drawbacks to consider. Let’s briefly cover them below and then get into some steps for converting your current home into a rental property.

1. Depreciation Recapture Tax

What happens if you eventually sell your rental property? Unfortunately, some of the tax benefits we discussed above can have repercussions on tax liability once the property is sold. Typically the owner of a primary residence can exclude up to $250,000 of any sales gains from taxation, or up to $500,000 in gains if married and filing jointly. However, capital gains on rental properties work differently.

In #3 of the 5 tax benefits, we discussed a depreciation expense of $10,181 per year. Let’s assume that the property was used as a rental property for 5 years, for a total depreciation expense of $50,905 claimed. The depreciation expense used to reduce taxable net income is recaptured and taxed as ordinary income, up to a maximum rate of 25%.

$50,905 claimed x 25% maximum taxable rate = $12,726.25.

2. Capital Gains Tax

As is common with most investments, a capital gains tax can be assessed once that asset has been sold, assuming a profit has been made. Any profits on the sale of the property are taxed using the long-term capital gains tax rate of 0%, 15%, or 20%, depending on the owner’s federal income tax bracket.

You can reduce your tax liability through deductible closing costs, such as sales commissions. There is one exception here, in which the owner has owned the property for at least 5 years but sells within 2 years of turning the property into a rental. Consult the help of a tax professional to maximize your deductible closing costs, thus reducing your overall tax liability from the sale.

6 Steps to Converting Your Home Into a Rental Property

Whew, all that tax stuff was a bit of a mouthful huh? The below will be a little more straightforward, ensuring the foundations are in place to become a successful and profitable landlord.

1. Get landlord insurance

Homeowners insurance is still important, but it won’t be enough if you decide to convert your home into a rental property. You’ll want landlord insurance that can help protect you against a whole host of potential liabilities. Landlord insurance can protect you against standard risks like damage from natural disasters, but it will also protect you from liability if a tenant or a guest of a tenant is injured on the property. There are even additional things like protection against missed rent payments that landlord insurance can provide.

2. Complete Repairs & Upgrades

This step can become costly if not done with a level head. You’ll want to make sure that at a bare minimum, your rental property is up to code before you start a lease with a tenant. Once that’s in place, you can also look into what upgrades might net the best return on the property. Unless you’re looking for a specific high-end clientele, you don’t need to go overboard with this.

First impressions are everything. Making sure the landscaping is in order, the house is truly clean during showings and everything mechanical is in working order can go a long way to attracting quality tenants. If you have a budget set aside for serious renovations, you can look into ways to add rooms to increase the overall rental value of the property. Does your property include the amenities expected from the area? All of these can be important to maximizing the potential cash flow from your rental property.

3. Decide How Much to Charge

This is an area where it may be wise to hire a property management company like Ziprent to help. We have access to thousands of properties in your area and data to help ascertain the fair market value of your property. In fact, we offer a market analysis of your rental property free of charge as part of our process. Maximizing cash flow from your property is of course important, but you’ll also want to make sure the rent amount aligns with the surrounding market.

If you choose not to use a property management company, you can look at various rental sites like Zillow, Craigslist, or Apartments.com and compare how much similar units are going for. You can also keep tabs long-term to see how long rental units are staying on the market.

4. Learn the Laws

Housing laws are complex and you certainly don’t want to end up on the wrong side of a fair housing lawsuit. You’ll need to fully understand what keeping your property up to code entails, as well as the laws around fair housing and tenant rights. Not knowing all of this can put your business in jeopardy which is why it is wise to at least consult a legal professional before starting your business as well as if you plan on making any big decisions down the road just in case.

Some other steps to consider:

• Check with the lender to see if the existing mortgage can be used for rental property instead of a primary residence.
• Research options for investment property loans if the home will need to be refinanced as a rental property.
• Notify your insurance agent that the home will be used as a rental property and add the landlord liability insurance policy.
• Make sure the homeowner association (HOA) will allow the home to be used as a rental.
• Apply for any necessary permits and licenses, since some cities and states require a landlord to collect and remit a rental or sales tax.

FAQs: Converting Your Home to a Rental Property

How long do you have to live in the house before you can rent?
This can depend entirely on your lender. It’s best to check with both your lender and in some cases the local laws to make sure you’re in compliance.

Does your mortgage change if you rent?
You may not have to change your mortgage if it already allows for conversion to a rental property. If it’s not allowed under your current mortgage arrangement, you should ask your lender about refinancing an investment property loan.

How do I convert my mortgage to a rental property?
If you are a property owner with a mortgage, it is possible you can convert that mortgage to a rental property. This will allow you to continue to own the property while generating income from tenants. Start by calling your lender and finding out if there are any restrictions with your current mortgage. You will need to create a rental agreement and submit it to your lender typically, but they will be able to fill you in on the specifics. You’ll likely be asked to submit a rental property budget detailing that you are able to cover the mortgage payments, property taxes, and other associated costs.

What are the tax consequences of converting my property?
This can depend on a variety of factors. This includes the amount of time a property was used for rental purposes and the amount of depreciation that was claimed on the property. As we discussed above, any depreciation that was taken on the property will need to be recaptured when the property is converted to personal use. In addition, any rental income that was earned on the property will need to be reported as income on the taxpayer’s personal tax return.

How do you turn a residential home into a commercial property?
If you aren’t interested in converting to a rental property, commercial property is also an option. However, this comes with its own unique challenges. The first step is to change the use of the property. This can be done by contacting your local council and informing them of your plans. The council will then send you a form to fill out that outlines the changes you are making to the property to turn it into a commercial property. These changes will of course have to be compliant with all local laws and regulations. If an inspector approves the changes, that same council will issue you a certificate for change of use. Once that certificate is in hand, you’re free to start advertising your commercial property for its intended use.

Can my rental property be my primary residence?
It’s hard to provide a definitive answer to this question as it will depend on the specific circumstances of each case. In some cases, it may be possible for a rental property to be treated as a principal residence for tax purposes. You should speak to a tax professional and explain why you are pursuing this route.

Landlords comparing local options may also want to review TurboTenant’s property management services in California for a flat-fee, tech-enabled approach to rental operations.

Here at Ziprent, we know the goal for any property owner is to minimize vacancy time and ensure tenants are placed at their properties with as little delay as possible. But as many owners know, placing a tenant without properly screening their applications can invite a whole host of problems down the line; late or unpaid rent, property damage, etc.

Accurate data from a trusted source is the key to effective decision-making when evaluating a tenant’s application. Ziprent achieves this by integrating payroll, banking, paystubs, tax returns, credits scores, and background data into an automated system that sets us apart from our competitors. By sorting the most trustworthy and accurate sources of information, and moving beyond outdated sources, like reference checks, our system allows us to fully vet an application within 15 minutes of it being submitted, empowering owners to evaluate applicants right away!

In this blog post, we’ll explore the various sources of data used by our system to screen applications, and show the accuracy and trust associated with each to give you a better understanding of how our system works.

Why reference checks no longer cut it:

• Low Accuracy
• Low Trust

Reference checks are often used as part of the tenant screening process when evaluating a tenant’s application. This involves contacting the tenant’s past landlords, employers, or personal references to gather information about their rental history, employment stability, and character.

While reference checks can provide insight into a tenant’s background, they are not foolproof and can have many flaws. One of the main limitations is that the information provided by references may be biased or subjective, as references may not be forthcoming about any negative experiences they had with the tenant.

Additionally, reference checks can be time-consuming and may not always provide complete information, as some references may not respond or may not have enough information to provide a full picture of the tenants history.

Reference checks are provided by the applicant, increasing the possibility of fraud or bad information. Reference checks are not an official document, which makes it more difficult to verify a reference’s credibility or relationship to the applicant.

Ziprent no longer uses reference checks, in lieu of faster and more reliable innovations that make them obsolete.

Screening a prospective tenant’s income

To evaluate a tenant’s income, Ziprent’s Instant Application Process uses a blend of multiple sources: integrating data from payroll providers, banks, paystubs, tax returns, and W2s.

Payroll Data

• High Accuracy
• High Trust

Payroll data comes directly from payroll providers either automatically or when tenants sign in to their payroll provider when filling out an application.

Payroll data is a valuable resource when evaluating a tenant’s application. This information provides insight into a tenant’s income and employment stability, which are important factors in determining their ability to pay rent, and ensuring that they meet the owners minimum income requirements.

By using payroll data as part of the tenant screening process, owners can feel confident in their decision to approve or reject a tenant’s application, and can better protect themselves from potential financial risk.

Banking Data:

• High Trust
• Medium Accuracy

Banking data can also be useful when evaluating a tenant’s application. While banking data can only provide medium level accuracy — because it can’t provide the source of all deposits — the data itself is highly trustworthy and comprehensive. This data comes directly from the tenant’s bank account when they sign in on Ziprent’s website.

This information can show the tenant’s financial situation, including their spending habits, savings, and payment history.

By reviewing banking data, Ziprent can determine if the tenant has a history of making timely rent payments and other bills. This information can also reveal any red flags, such as a history of overdrafts or bounced checks, which may indicate financial instability.

Ziprent uses banking data to calculate the tenants income by looking at the recurring nature of the income line and the total deposits for up to 12 months, helping us determine if the applicant meets the owner’s income requirement. The more the deposits reoccur in the records, the more consideration will be given to the income source.

It’s important to note that banking information is the only source that can be used for assessing the income of self-employed applicants.

Paystubs

• High Accuracy
• Medium Trust

Paystubs can offer a detailed view of the tenant’s income, including their hourly or salary rate, tax withhold, and any deductions. However, paystubs come from paperwork supplied by the applicant, which can make them more prone to fraud or forgery.

To identify possible fraud, Ziprent uses a provider that implements an Artificial Intelligence system to identify fraudulent pay stubs quickly and accurately, increasing trust that there is no foul play involved.

Tax Returns and W-2s

• Medium Accuracy
• Medium Trust

Tax returns show the tenant’s total income, deductions, and any tax credits they received, while W-2s show the amount of income the tenant received from each employer.

Since tax returns and W-2s are often delayed up to a year or more, the data accuracy and trust isn’t as reliable.

Because this information is supplied by the applicant directly, these documents can have a higher chance of forgery and fraud, which is why it’s important to contextualize it with other sources of data.

Credit Score

• High Accuracy
• High Trust

Credit score is often used as a key factor when evaluating a tenant’s application. This three-digit number provides a snapshot of the tenant’s creditworthiness, including their payment history, outstanding debt, and credit utilization.

By reviewing the tenant’s credit score, Ziprent can determine their financial stability and ability to pay rent on time. A high credit score typically indicates that the tenant has a good track record of paying their bills, while a low credit score may suggest financial difficulties or a higher risk of default.

The major credit score bureaus are Equifax, Experian, and Transunion. FICO and Vantagscore are scoring algorithms used by these agencies. The FICO score ranges from 300 to 850 and is based on a person’s credit history, payment history, outstanding debt, length of credit history, and recent credit behavior. VantageScore ranges from 300 to 850 and is based on a person’s credit history, payment history, credit utilization, and other factors.

Ziprent uses Transunion VantageScore for our credit data.

Background Data and Criminal History

• High Accuracy
• High Trust

Background checks are an important component of the tenant screening process when evaluating a tenant’s application. This process involves checking the tenant’s criminal and public records to determine their background and assess the potential risk associated with renting to them.

By conducting a background check, landlords can uncover criminal history, including convictions for serious crimes such as theft, fraud, or violence, which may affect the tenant’s ability to rent.

Furthermore, background checks may also provide information about the tenant’s previous evictions, which can give insight into their rental history and ability to maintain a tenancy.

Criminal and eviction history is obtained from CIC and from Pitchpoint. The source aggregates data from court records, which is highly trusted and mapped to the applicant via their name and social security number.

Some jurisdictions, like Alameda county, have banned the use of background checks when screening applications. We use background checks wherever they are allowed.

Conclusion:

Ziprent’s Instant Application processing is a testament to our commitment to providing innovative and effective solutions for homeowners.

By considering this data intelligently and with the homeowner’s best interests in mind, we are able to provide highly accurate information with speed and efficiency, empowering homeowners to make the best decision for their property.

This quick and accurate process allows us to reduce vacancy costs for our owners and provide the owner with a qualified list of candidates to choose from nearly instantly after an application is submitted.

Whether you are a seasoned property owner or just starting out, Ziprent’s Instant Application processing is the solution you need to make the rental process simple, quick, and effective.

For some landlords, the prevailing instinct is to take on as little risk as possible. This means unless they are legally required, a majority of landlords won’t allow their tenants to have pets. While taking on fewer risks is generally a wise real estate investment decision, avoiding some risks can be short-sighted. Most households, roughly 68%, in America are pet owners. If a landlord decides not to allow pets, this means out of the gate, they are eliminating a vast number of potential tenants. In the long run, a landlord could lose out on far more revenue from rent than it could lose from the cost of damages caused by pets. Allowing tenants to have their furry friends has its advantages.

And yet, only about half of landlords allow for pets which means potential homes for tenants with pets come at a premium. The demand for pet-friendly rentals is always high. Not only does this increase the demand through a larger pool of potential tenants, but tenants with pets are also willing to pay a premium because of their limited options. There are ways to reduce risks as well beyond increased rent. You can charge tenants with pets a pet deposit and pet fees.

Know the Law: Illegal to Charge for Service Animals or Emotional Support Animals

Navigating the labyrinth of federal, state, and municipal laws can be a difficult task which is why some landlords opt for property management services companies. The laws around pets and pet fees will vary city by city and state by state, so before deciding on a policy, read up on all your local and state laws. For example, federal fair housing act laws ban all pet fees and deposits for all service dogs and animals. Service animals aren’t just limited to those with physical disabilities. They also include those with emotional disabilities like anxiety or PTSD. For this reason, pet fees and deposits aren’t allowed for emotional support animals either.

Allowing Pets: Pros and cons

PROS:

More potential tenants: More simply put, supply and demand. The more renters compete for your rental property, the more you can charge for rent, and the lower your vacancy rate will be. You can shorten the time your unit sits vacant when turning it over and increase your annual revenue.

HONESTY IS THE BEST POLICY

Because of the limited number of rental units available to tenants with pets, tenants will sometimes just end up hiding the fact they have a pet. This can be solved by evicting a tenant for violating their lease, but you’ll need to turn over the rental property again and let it sit vacant. Like anything prohibited, some will break the rules for their convenience or gain, so sometimes the best thing to do is just allow it and charge fees upfront.

LONG-TERM TENANTS

The longer a tenant stays in a rental property, the fewer days that unit sits unoccupied on the market. If tenants move out after their lease is up every year, you’ll likely, at best, have a unit that misses out on a month of revenue annually. That missed revenue compounds over time. Since options are limited for renters with pets, they tend to stay in their rentals longer than tenants without pets.

CONS:

NOISE POLLUTION

Keeping other tenants or neighbors happy is part of being a successful landlord. If one tenant is causing a lot of noise and disturbing others in the building or nearby, that can be an issue. At best, you’ll need to resolve the matter with angry neighbors, and at worst, a noising unit may cause other tenants to leave. If a pet is regularly barking whenever a person walks by or whines and cries at all hours of the day, it can have a negative impact on your business.

DAMAGE

The size of the pet doesn’t determine the amount of damage that can be caused, and there can be a lot of damage. It can be anything from scratched floors, shredded screens, stained carpets, chewed-up moldings, etc. Even with an increased security deposit and pet fees, this may not cover the total damage caused by a pet.

POTENTIAL HUMAN HARM

While it is unlikely, there is always the possibility that a pet may attack another tenant, neighbor, or worker who is on the property. This risk can be mitigated by good communication with your tenants, but it can never eliminate all risks or unforeseen circumstances.

FLEA INFESTATION

No, I’m not talking about the bass player from Red Hot Chili Peppers crashing on the couch. I’m talking about the flea that drives you and your dog crazy. A pet with fleas spreading the bugs all over your building can have a costly impact on your business which is one reason it should be considered when making your pet policy.

What is a Pet Policy?

A pet policy is a comprehensive policy for landlords regarding allowing pets on their properties. A good pet policy weighs all of the pros and cons of tenants with pets, along with all of the potential damage costs and financial gains, and makes it reasonable for tenants to afford. There are a few options regarding pet fees for your pet policy.

When choosing a pet policy, you must first know what is legally allowed in your city and state. Some cities and states do not allow any non-refundable fees or deposits when it comes to rental units. For example, California does not allow non-refundable pet fees. Upon moving out, a landlord can only use the funds from a security deposit based on actual damages caused by the tenant or their pet.

Pet deposits may also be illegal or limited in certain states. For example, in California, they are legal, but they can’t exceed more than the sum of two months of rent or three months if the unit is fully furnished. Again, the laws are different wherever you go, so the best advice is to seek advice from local experts.

Pet Deposits, Pet Fees, and Pet Rent: What’s the Difference?

Pet deposits, fees, and rent all accomplish the same thing differently. Depending on your local laws, your options can be limited, but you’ll be able to address your needs regardless of where you are. Here is how they work:

PET DEPOSIT VS. SECURITY DEPOSIT:

A security deposit is typically used to cover potential costs from damages with an average tenant. In contrast, a pet deposit is traditionally used to cover the specific costs related to damages caused by pets.

WHAT IS A PET DEPOSIT?

A pet deposit is a separate one-time, refundable fee in addition to a regular deposit. The amount in the deposit is then used to cover some of the damage that may be caused by the tenant’s pet. If the damage caused by the pet doesn’t exceed the deposit, the landlord must return the rest of the pet deposit along with any of the regular deposit left over.

PET DEPOSIT PROS:

The significant advantage of the pet deposit is a tenant will pay the money upfront. If the tenant leaves the property for any reason before the lease is over or they leave after just one year, you should have enough money to cover any possible damages.

PET DEPOSIT CONS:

If the tenant ends up being a long-term tenant, the pet deposit may not be enough to cover all of the damage. It also may cause damage to portions of the home that would’ve required repairs over time which means a landlord might be unable to charge the tenant.

PET DEPOSIT VS. PET FEE

A pet deposit is a refundable deposit, while a pet fee is a one-time, non-refundable fee. What does a non-refundable pet deposit cover? Whatever the landlord wants, since it is a one-time fee, the tenant can’t get back.

WHAT IS PET RENT?

Pet rent is simple to understand. It’s just charging rent for the specific pet. You can charge whatever amount for a monthly fee that seems fair as long as tenants are willing to pay. The amount gets included in their rent, and they pay it along with their monthly rent. So, what does pet rent cover? It’s included as part of the rent, which means it can cover any costs over time.

PET RENT PROS:

If you tend to have low turnover with your tenants, this may be the best option. It allows you to collect more revenue over time than you could with a pet deposit or pet fee. This is also money that doesn’t need to be refunded and can be used to make all necessary repairs if and when you need to turn over the unit to a new tenant.

PET RENT CONS:

If the tenant leaves after a short period, you may not be able to college enough to cover any damages caused by the tenant’s pet. The shorter your tenant stays, combined with the amount of damage caused by the pet, means a landlord could lose money.

WHAT ARE PET FEES?

What is a pet fee? A pet fee is a simple one-time fee that is non-refundable. A landlord can collect the money and use it for repairs regardless if the pet causes any damage or not. For this reason, some states and cities have banned this kind of fee in favor of the refundable pet deposit.

PET FEE PROS

You get a one-time payment up front and never have to worry about collecting more or proving the costs of repairs from the pet. It’s a simple fee and hassle-free, not requiring any extra effort or thought once collected. Like the pet deposit, this will cover any costs of repairs from damages caused by pets if the tenant doesn’t stay long.

PET FEE CONS

It’s not legal in some places, which makes it a pretty big con as it would leave you open to litigation. Beyond the legal issues, it isn’t very enticing for potential tenants. You may be able to get by with this kind of policy in a housing shortage, but if there is a good supply of housing, tenants will simply choose better options.

Pet Fee vs. Pet Deposit

A pet fee is a one-time fee that is typically non-refundable. It is illegal in states like California, which makes the refundable pet deposit the more traditional type of pet fee.

WHAT SHOULD I CHARGE?

Start with whatever the market rate is for rent in your area. This should be in line with what you can charge based on similar units, and hopefully, that will be able to cover all other expenses. Regarding additional pet fees, you’ll need to consult your local laws, which will determine if there are any limits on what you’re allowed to charge. As mentioned before, states like California limit how much you can charge for a security deposit. As far as pet fees and pet rent go, you’ll want to charge a reasonable amount; otherwise, you may scare off potential tenants and ultimately limit the amount of rent you can charge.

CAN I USE A SECURITY DEPOSIT TO COVER PET DAMAGE?

You can use a security deposit to cover any damages that require repairs that wouldn’t need to have been made through normal wear and tear. This means if a rabbit chewed up the corner of a wall which requires you to replace the drywall, that could be taken out of a security deposit. If a tenant stays in the unit for a decade and a pet scratches some of the paint on the walls, you may not be able to use the security deposit because you would need to repaint the walls anyway.

Every state has different laws, and some won’t allow you to use security deposit funds to pay for damage from pets. This is on top of laws that limit what kind of repairs security deposits can be used for. Regardless of which pet policy you choose, you’ll set yourself up for success as a landlord by protecting yourself from any financial risks.

FAQs About Pet Fees

CAN A LANDLORD DENY A PET?

Yes, a landlord can choose not only the kind of pets they allow their tenants to have, but they can also choose specific breeds. For example, some landlords ban specific breeds like Pitbulls because they see them as more aggressive than other breeds. This excludes any service or emotional support animals. Landlords are required by fair housing laws to allow all service and emotional support animals.

ISN’T PET RENT NORMAL? SHOULDN’T IT BE FREE TO HAVE PETS IN RENTALS?

Typically there is some fee for tenants who have pets. This can be implemented in several ways, but it is standard industry practice. Because pets create higher costs and risks, landlords typically want to cover those risks.

WHAT HAPPENS IF YOUR TENANT IS HIDING A PET?

This is up to the landlord. Typically, most leases state clearly that if a tenant violates the lease agreement, they can be evicted, but evictions can be costly and time-consuming. This means a landlord may want to allow the tenant to find a new home for their pet or ask them to find a new place before eviction.

ARE EMOTIONAL SUPPORT ANIMALS EXCLUDED FROM PET FEES AND DEPOSITS?

Yes. Service and emotional support animals are excluded from any pet fees or deposits. Fair housing laws make them an extension of the tenant which means landlords can’t deny them even if they don’t allow pets at all.

WHAT DO MOST LANDLORDS CHARGE FOR PETS?

This depends on your local market and which option you choose. For example, pet rent may be as low as an extra 10 dollars a month and as high as an extra 50 a month. The best option is to look around and see what other landlords are charging.

CAN A LANDLORD CHARGE EXTRA FOR A PET?

This is the function of all pet fees. The reason is to charge extra to cover the additional damages pets typically cause over time.

WHAT IS THE REFUND POLICY FOR PET DEPOSITS?

Consult your local laws, but typically any money not used to cover damages should be refunded.

CAN PET DEPOSITS BE USED FOR DAMAGES?

This all depends on your local laws and what you’re able to use security deposits and pet deposits for. Typically, the two deposits are separate and reserved to cover specific types of damages. Pet deposits are used for pet-related damages, and security deposits are used for the rest.

In an ideal world, there is no need to compromise. For property owners and property management, this might mean no applicants have pets, and every landlord allows pets for tenants. Unfortunately, businesses operate in reality, which means companies and customers need to find suitable accommodations and compromises to get what they are looking for.

Roughly 90 million American households own household pets which means for landlords to fill vacancies quickly, they likely can’t hold out for pet-free tenants. While households with pets may not be the most desirable for landlords, security deposits and pet screenings can mitigate the risks associated with pet ownership for landlords. 

There are several reasons landlords could be hesitant to rent a unit to tenants with pets. Depending on the type of pet, they can cause various problems. For example, dogs may chew up walls and scratch wood floors. They may go to the bathroom or vomit on the carpet, leaving odors and stains that are difficult to get out. Cats may scratch and claw at various surfaces and ruin window screens. Birds and dogs may be loud and disturb neighbors. There’s also the risk that a pet can harm another tenant or neighbor, which creates liability issues. 

These issues are why some landlords choose not to rent to renters with pets. Finding a place to live in a desired location can already be tricky and finding a place when you have pets can be even more difficult. This isn’t only because tenants can choose to ban pets altogether, but because some landlords will limit the kind of pets that are allowed. For example, they may not allow specific breeds of dogs like Rottweilers or Pitbulls. They may not allow pets over a specific size or weight. Some pets can make finding a place to live uniquely difficult. 

What Is Pet Screening?

Pet screening is similar to a background check used when screening human tenants. It is a way to mitigate risks for landlords and simplify the process for tenants is to use a pet screening process as part of the rental application. There are several reasons why this can benefit both landlords and tenants. It can streamline the process, create clear standards for both parties, and create some level of comfort for landlords to broaden the pets they allow in their rental units. This is all done through a pet profile. 

What Is A Pet Profile?

A pet profile is a digital record of pets that can be accessed by both owners and landlords. This allows landlords to access some information about the area of concerns they have regarding allowing tenants to have pets. For example, it’ll contain photos, vet history, vaccination records, and behavioral traits. This will allow landlords to accurately assess the risks and determine not just the kind of pet a tenant has but how responsible the pet owner is. 

Why Pet Screening Is Important To Landlords and Tenants

For landlords, most of the business is assessing risks and managing costs. There are expected costs when turning over an apartment for a new tenant. This can be as simple as repairing walls and deep cleaning a carpet. Landlords want to avoid additional costs that may exceed a security deposit and pets have the potential to create that kind of damage. For example, a dog or a cat may chew on the wall creating drywall damage. They may claw at a window screen that requires screens to be replaced. They may scratch wood floors and need them to be refinished or replaced. 

This leads some landlords to refuse to allow pets altogether. Unfortunately, this limits the number of potential tenants for landlords,decreasing the demand and possibly the amount they can charge for rent. Pet screening allows landlords to increase the pool of prospective tenants by allowing pets they believe are unlikely to cause excessive damage to the rental property. It also decreases the likelihood of a tenant keeping a pet secretly to rent the unit or avoid any extra security deposit.

Finding a place to live based on your needs and preferences is hard, especially in a housing shortage, even before you consider the limiting options for pet owners. Pet screening can help expand the number of potential rental units by allowing for more landlords to allow pets as well as helping landlords confidently allow a more broad range of pets and breeds. Responsibly pet owners will have a clear understanding of where they stand when applying for a place to live, especially if they have a breed or type of pet landlords may be reluctant to allow like a Pitbull.

What To Know About The Landlord’s Pet Policy

When it comes to the rights of pets for tenants, there are very few laws. Federal Fair Housing laws (see the fair housing act) require landlords to allow official service animals. This means a service dog that is trained to help a tenant who suffers from seizures must be permitted by law. This doesn’t mean a landlord is required to enable a dog to just because it makes you feel warm and fuzzy inside every time he does a big stretch. Because there aren’t many federal laws, landlords need to consider any state or municipal laws and ordinances when it comes to their pet policies. Mostly, landlords just use common practices when it comes to their pet screening criteria.  

Common pet policies include: 

• Additional security deposit
• Pet fees
• Pet screening
• Limits on weight
• Limits on breeds
• Limits on the type of pet (dog, bird, etc.)

Like tenants, landlords can also evict pets for any behavior that causes problems with neighboring properties as well as other tenants on the property. This means a landlord can evict a pet (at which point a tenant has to decide whether to give the pet to a caretaker or move out) for barking excessively or showing aggressive behavior with people or other pets. For these reasons, pet screening for apartments can be especially important because of the proximity to others and shared walls. 

How To Prepare For A Pet Screening

The first thing you will want to do is gather any necessary documents to help with the process. This will include any vet records, vaccination records, and any training school certificates. You may want to include information like how long you have owned the pet, how old it is, the breed, size, and weight. Before bringing your pet to meet the landlord in person, you may want to run through any basic pet screening test with commands like “sit”, “stay”, and “lay down” in case the landlord wants to test how responsive they are. 

If you have an overly energetic dog, you may want to take it for a long walk before meeting the landlord to make sure it’s a little calmer and more responsive instead of being overly stimulated by a new place. At this point, landlords will also be looking for potential red flags (especially for dog screening).

Red flags include: 

• Baring teeth
• Raised fur on the back
• Excessive barking

Pro tip: Spend time socializing with your dog with other dogs and people regularly. This will increase the likelihood of your dog having a positive response when meeting a potential landlord.

The pet screening checklist

As part of the tenant screening, a landlord will likely have a checklist to answer any additional pet screening questions that may not be included in any vet records. You’ll want to be prepared to answer any of these questions on the spot so be prepared. Some landlords will use a third-party service as a pet screener so ask the landlord about their pet screening policies first. Landlords may use a pet screening application.

Some questions include: 

• What time of pet do you have?
• How long have you owned your pet?
• Are you able to provide the necessary documents from your vet?
• Does your pet have medical conditions?
• Does your pet have behavioral problems?
• If so, are you seeking treatment/training for these problems?
• Do you have caretakers for pets for when you’re on vacation or during a medical procedure?
• Can you pay an additional security deposit?
• Is your pet house-trained?
• How much time does your pet spend alone each day?

Conclusion

Pet screening is a win-win policy for landlords and tenants. When done correctly, it can expand the number of potential homes for tenants and the number of potential tenants for landlords. It also creates clear guidelines for what pet records tenants should keep and what is expected of pet owners by landlords. That’s why it’s sensible for landlords and renters alike to use property management solutions like Autopilot to conduct pet screenings, streamlining the process so tenants no longer have to scramble to gather necessary documents and landlords can confidently rent to responsible pet-owning tenants.

Without any national laws regarding tenants’ rights around pets, everyday practices like pet screenings can do the job and eliminate confusion. Creating clear expectations for landlords and tenants allows for less mess in the application process.

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One of the first and most important decisions a new landlord or longtime landlord procuring a new investment property needs to determine is how much to charge for rent. Many variables are used to calculate how much to charge for rent each month, but leases don’t always start on the first day or end on the last day of the month. So what do you charge for rent when a tenant doesn’t stay the entire month and a tenant moves in or moves out? In this situation, a landlord needs to prorate the rent. 

Automating rent collection means prorated amounts are calculated and charged for you.

What is Prorated Rent?

As stated above, not every single lease lines up exactly with the first and the last of the month. This means at some point, you’re going to need to charge less than the total amount of the monthly rent. This usually happens on the first and last month of a lease. The prorated rate for rent means you are charging for the number of days a tenant will be occupying your property during the calendar month. There are other circumstances beyond partial month occupancy in which you may be required to prorate rent as well, so understanding this simple concept will go a long way in helping you manage the finances of your real estate investment. Also, prorated rent won’t impact how much a renter will pay for a security deposit. So, how is rent prorated?

How do you prorate the rent amount due? 

There are three ways to calculate the prorated rate rent.

1. Days of the Month

The first method is to calculate the daily rent cost based on the number of days in the month. Since not every month has the same number of days, the daily rent amount will differ.

For example….

Let’s say you charge $2,000 dollars a month for rent. To calculate the daily rate for rent in the month of January, you would divide $2,000 by 31. This means the daily rate for rent would be $64.52. Let’s just say the lease starts on the 8th day of the month. To calculate the prorated rent for the remaining portion of the month, you would multiply $64.52 by 7. This would give you $451.64 for the 7 days out of the month the tenant is not occupying the unit. Once you have that number, you subtract it from the total, which leaves you with a total prorated rent of $1,548.36. 

• Step 1: $2,000 / 31 = $64.52
• Step 2: $64.52 x 7 = $451.64
• Step 3: $2,000 – $451.641 = $1,548.36
• Total rent for January: $1,548.36

Now, let’s look at how this same method will impact the prorated rate in the month of February, which has 28 days instead of 31. This obviously adds an extra day to 29 in a leap year.

• Step 1: $2,000 / 28 = $71.43
• Step 2: $71.43 x 7 = $500.01
• Step 3: $2,000 – 500.01 = $1,499.99
• Total rent for February: $1,499.99

As you can see, using this method, even though the tenant isn’t moving in for the same number of days, the prorated rent rate changes due to the total number of days in the month. Every additional day a tenant doesn’t occupy the unit, you would subtract the daily amount from the total amount of monthly rent due for that month.

2. Days of the Year 

The other option when it comes to calculating prorated rent is to use the total number of days in the year instead of the month. The way to do this is to add up the total amount of monthly rent for the entire year.  For example….
Using the same amount as the previous example, the total yearly rent ($2,000 x 12) would be $24,000. In order to calculate the per day amount for rent, you would just divide the total amount of annual rent and divide by the number of days in the year.  Then, you would divide $24,000 by 365 which would come out to $65.75 per day. Using this method, you would then multiply the per day amount by the days the tenant isn’t occupying the rental unit. Using the same number of days in the prior example (7 x $65.75) the total would come out to $460.25 for the seven days. Subtract this from the monthly rent amount of $2,000 and the total amount for the prorated rate of rent would be $1,539.75. This amount wouldn’t change between months like the first method.  

• Step 1: $2,000 x 12 = $24,000
• Step 2: $24,000 / 365 = $65.75
• Step 3: $65.75 x 7 = $460.25
• Step 4: $2,000 – $460.25 = $1,539.75

3. Flat Monthly Rate

Used exclusively in California, the flat monthly rate is the third method to calculate prorated rent.

To calculate the prorated rent by a monthly flat rate, simply dividing your monthly rent charge by 30 days (no matter the month), then multiply the total number of days the tenant isn’t occupying the rental unit. Using the average month of 30 days simplifies the process for both tenant and the landlord.

For example…

• Step 1: $2,000 / 30 = $66.66
• Step 2: $66.66 x 7 = $466.62
• Step 3: $2,000 – 466.62 = $1,533.38
• Total rent charged for the month: $1,533.38

Pro Rate Tips

1. Tip 1: Using a spreadsheet can allow you to build these equations and automatically calculate the prorated rate by just plugging in the numbers.
2. Tip 2: While the practice of prorating rent is standard across the country, the rules that govern property management vary by both state and municipal laws and ordinances. In order to make sure you’re acting in accordance with the local laws, you can consult a local lawyer or conduct your own research. 

Real estate laws are a labyrinth of municipal, state, and federal laws that are difficult to navigate even for those with extensive knowledge of the industry. Expertise doesn’t always transfer from location to location and there’s often a learning curve for those entering new markets. It’s always best to seek professional assistance when entertaining a new market. 

Pro Rate Examples

When else does rent need to be prorated?

1. Moving in and Moving Out

The most frequent situations when a landlord will pro-rate the rental is on the month when a tenant moves in or moves out.

2. Repair Work

If substantial repairs to the rental unit are required that will inconvenience the tenant for a few days, you may need to prorate rent for the number of days work takes place. Substantial repairs and renovations would be things like remodeling a bathroom or kitchen, repairing the floors, and repairing pipes. Anything that would give your tenant limited use of their rental unit during the construction. 

3. Rent Credit

You can also use the daily rate as a guide for rent credit for how much of the property is affected by work done or what the tenant is unable to use for x amount of days. If the daily rate is $66.66 and the tenant is unable to use 10% of the property due to malfunction you can use 10% of the daily rate, which the credit issued could then be offered as $6.66 a day. Sometimes it is easier with a rent credit to round up to a whole number that seems fair. Say this tenant was affected for 11 days instead of crediting $73.26 an even $75 rent credit would likely seem fair. 

Ziprent Prorated Rent Calculator

Managing a rental property can be time-consuming. Newcomers to the real estate industry often assume managing a property is just as simple as finding a tenant, renting out the property, and forgetting about it until it’s time to find a new tenant. If you don’t want to spend too much time on tasks like prorating rent, there are other options. You can hire a property management company like Ziprent to handle time-consuming jobs like figuring out how to prorate your incoming tenants’ rent correctly.

Owning a rental property requires hundreds of tasks occupying your time every day of the year. There is no day off when managing a business that is open 24 hours a day. Prorating rent is just one of many tasks that will take up a percentage of your workday and hiring a company like Ziprent will allow you to complete these tasks more efficiently.

The Pros and Cons for Prorating Rent

As long as you are primarily working with long-term leases, the method you choose to use shouldn’t have too much impact on your bottom line. Using a daily rate based on the total number of days in the year instead of monthly means you would charge less in January, but more in February than if you were to use the monthly method. That is something to consider if you’re doing mostly short-term leases. With short-term leases, there tend to be more move-in dates in the middle of the month making a prorated rent necessary for both the first month’s rent and the last month’s rent. Short-term rentals tend to have more vacancies than long-term. This means you won’t always be collecting a full month’s rent. 

The Challenges with Tenant Relations

Whichever method you decide to use, you will want to communicate the amount and the method to your tenants in the lease. This will protect you against any claims in a lawsuit in regard to how much you are owed. Once you have picked one method and included it in your lease, you should stick to that method with the tenant. Decreasing confusion can help protect you and your business from potential liability and help you collect any disputed charges. 

Conclusion

Managing a rental property is a long-term investment and every day a rental unit is vacant is lost revenue that cannot be recovered. Every month a unit is rented under the market rate is a month of lost revenue you will never be able to recover. Using a property management company will give you access to the tools and the data as well as professional assistance that will help ensure you can maximize the profits from your long-term investment and allow you to invest in the future growth of your own business.

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Ziprent removes the uncertainty of managing your rental property. For landlords who want to streamline operations and protect long-term revenue, tools like TurboTenant Autopilot can help automate key property management tasks.
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The daily and weekly cleaning of heavily trafficked surfaces like floors, countertops, and tables can give your home the feeling of cleanliness but there is one portion that is often overlooked. The baseboards can collect a lot of dirt and dust and over time it’ll start to show. To keep cleaning your baseboards from being a long task, you should wipe them down regularly. Here are some tips for cleaning your baseboards: 

Vacuum with brush

When you’re vacuuming your floors, it’s a good time to hook up the brush attachment and run them all along your baseboards throughout your home. This will help to remove all the dust and dirt that has collected on the baseboards, especially in all the cracks and crevices. If you don’t want to use a vacuum, you can use a small whisk broom. 

Wipe them down

Once the dust and dirt are removed from the baseboard they are ready to be wiped down. This is especially important with the baseboards in the kitchen which will often college a lot of food and grease. Prepare yourself for this because you’ll need to spend some time on your hands and knees. 

Fill a bucket of soap and warm water up and use a sponge. If you don’t have a sponge or you don’t want to waste one on the baseboards, you can use a damp cloth instead. Soak your sponge or cloth in your soapy water, and wring out as much water as you can to avoid water collecting around the baseboard. Next, wipe down your baseboard. If you want to get in all the grooves and crevices, you can use a toothbrush to scrub the baseboards as well. 

Clean the edges

To properly clean the top and bottom of the baseboards where they are connected to the floor and the wall, you’ll want to use a cotton swab with the cleaning solution. This is a more gentle way to clean these areas where you also don’t want to risk any extra water seeping through any cracks or holes. 

Clean regularly

You can use your vacuum to clean your baseboards regularly, especially the areas of the baseboards that aren’t covered up by furniture. Another trick is to use dryer sheets to rub along the baseboards which will help collect all the dust. By doing this regularly, you can go longer between deep cleanings.

Being a landlord is more than just paying a mortgage and collecting rent. You’re operating a business and you’ll want to protect yourself the same way any other business protects itself from potential liability. It’s a cost to consider when deciding how much you need to charge for rent so plan accordingly. Here are some tips when looking for landlord insurance: 

Why landlord insurance is required

So you decided to become a landlord but your current home insurance isn’t enough. Why is that? This is because your homeowner’s insurance only covers the home when you are living in it. It won’t cover your tenants and many municipalities and states require landlord insurance in order to do business. If there’s damage to the property or someone were to get injured on your property, you want to make sure you are covered for any potential liabilities that may put your entire investment at risk. 

What does landlord insurance do?

What exactly does landlord insurance cover? First, you need to remember that when you become a landlord, you are becoming a business. Just like any other business, you want to protect yourself from any unforeseen misfortunes. This includes property damage. Landlord insurance covers all kinds of damage. It can be natural or accidental damage. It can be from vandalism. Any kind of damage you can think of. 

There’s also a loss of income/rental default insurance. This can help protect you in the unfortunate circumstance where your rental property becomes uninhabitable for any reason. This feature will cover any rent you cannot collect over a short period of time because of the damage to the property.

Landlord insurance will also cover any injuries that happen on your property. This will protect you if a tenant gets injured on the property or even a guest they may have over. This will protect you if these injuries are caused by any maintenance issues, for example, if something collapses on the property. 

Options to consider

When it comes to picking the policy that is best for you, you’ll also want to look into any add-ons that may address any additional coverage you need. One example is guaranteed income insurance. This can help protect your cash flow by making up for rent if a tenant comes up short. 

Flood insurance is one that ultimately may be required depending on where you live. If you live in a floodplain or an area where there are severe storms, you might want to consider getting flood insurance. 

Additional construction expenses are a great option if you are renting out an older property that may need to be brought up to code. While plenty of older properties are covered by a grandfather clause, that may not always be the case, especially if it comes to health and safety issues.  

What are the costs?

There’s no way to know how much landlord insurance is going to cost when it comes to your specific property. There are a variety of factors that come into play when calculating the cost. Some of these factors are the location and the age of the property. When you are budgeting or considering becoming a landlord, this will be a cost you want to consider to make sure leasing your property will be profitable.