A rental property business remains one of the best ways to generate a steady income and build wealth. With rental prices rising, the real estate market presents many lucrative opportunities.
Real estate investment allows you to diversify your investment portfolio, reap tax benefits, and build equity. But investing in real estate also has challenges. If you are new to the game, you should educate yourself on the fundamental principles of the real estate market and the current economic situation before making any commitments.
According to the Pew Research Center, more U.S. households rent now than at any point since 1965. Pew conducted research where he found that a third of today’s renters are renting by choice, not circumstances. That means that right now is a perfect time to become a landlord.
This article will cover how to start a rental property business from scratch, avoid costly mistakes and scale your business.
Short and long-term rentals
If you consider becoming a landlord, you should know the difference between short and long-term rentals.
The median rent for vacant units in the United States as of October 2020 was $1,160, according to the U.S. Census Bureau Current Population Survey/Housing Vacancy Survey. Whether you want to operate long-term rentals like houses and condos or short-term rentals like Airbnb’s, the current real estate market offers many investment opportunities.
Short-term rentals are properties that rent for 90 days, or less and long-term rentals have a lease of six months or more. Many landlords choose long-term rentals, but short-term rentals are also increasingly popular, especially in vacation home markets.
Short term rentals
Short-term rentals are rented on a daily, weekly, or monthly basis. For example, you could run a house in a popular vacation destination or a beach-front Airbnb. Another example of a vacation rental is a single-family home with a monthly renter living in a spare bedroom.
Pros of short-term rentals
- Higher-income potential – If you run property in a popular vacation spot, you could generate higher gross income. A short-term rental could easily net 2-3 times a regular rental property’s money.
- Easier maintenance – Short-term rentals are typically easier to maintain because you don’t have tenants occupying the property continuously. You can clean up the property every time a tenant leaves and take care of any potential problems before they worsen.
- More flexibility – Renting a property short-term allows landlords to put their home on the market at a moment’s notice. If you run a short-term rental, you don’t need to wait for a tenant to vacate the property before you can start showing it to potential buyers.
Cons of short-term rentals
- Local rules and regulations – Every municipality has different rules for short-term rentals, and practices for short-term rentals can be more stringent than long-term rentals. For example, landlords could be required to collect an occupancy tax and adhere to the local neighborhood or HOA rules. Carefully study your area’s rules for short-term rentals before making a decision.
- Higher upkeep costs – If you rent your short-term rental daily and even weekly, your property can endure severe wear and tear. Maintaining your property and taking care of major and minor repairs could consume part of your income.
- Consistent income is not a given – Rental property income can fluctuate significantly. For example, if the economy takes a downturn, fewer people will spend money on leisure, and your short-term rental could be sitting empty while you still have to pay your mortgage, taxes, and property upkeep. The same applies to the off-season when tourism dies down.
- Utility bills – As a landlord of a short-term rental, you are on the hook for electric, water, and wi-fi bills. If you have guests that keep the lights on and take long showers, it could cost you a pretty penny. Some of these items could take a chunk of your income.
Long-term rentals are occupied longer than short-term rentals and generate a steady income for landlords. A typical lease for a long-term property ranges between six and 12 months. Also, it includes many conditions like a security deposit that protect a landlord if a tenant damages the property or decides to move out on short notice.
Pros of long-term rentals
- Economic stability – Unlike short-term rentals that often depend on the economic outlook, long-term properties offer a stable income. People always need a place to live, and you can enjoy a security net as a long-term rental entrepreneur.
- Predictable income – When you have a set amount of money every month, it’s easy to budget your maintenance and other recurring expenses. It works differently for short-term rentals, where your income can fluctuate from month to month.
- Less turnover – Long-term properties have less tenant turnover because the same people occupy them for a prolonged period. The main trick here is to find a suitable tenant who will stay in your property for a while and leave it in good condition.
- Lower utility bills – Long-term tenants are responsible for covering utility bills like electricity and cable. As a landlord, you could be responsible for other bills like trash pick-up and water, depending on your property.
Cons of long-term rentals
- Higher maintenance costs – Renting your property long-term can put a lot of wear and tear on it. Aside from cleaning, you also need to factor in any emergency issues like plumbing and electricity that you must resolve promptly.
- A more rigorous process for tenant screening – Because you are looking for tenants who will live on your property for an extended time, you need to carefully screen their criminal and financial history, among other things. Short-term rentals are much easier to terminate.
- Limited rent increases – Long-term rental processes are dictated by the housing market rather than an uptick in vacationers, which means you can’t raise your prices above the fair market price.
Other types of rentals
There are some other specialty types of rentals that you may consider depending on the demand in your area. While the rules and regulations with these specialty rentals can be difficult to navigate, these are creative ways to earn extra cash.
- Rent out a garage bay to someone who needs to store a vehicle, ATV, boat, etc.
- Rent out a home office space for day use or partial week use to a remote worker.
- Rent out kitchen space to a business that needs ghost kitchens.
Critical Factors for your Rental Property Business
Analyze your market and competitors
Before investing money in a property, conduct a detailed analysis. Consider your property’s location, neighbors, competitors, and how much they charge. Knowing these things will help you to come up with reasonable prices and stay competitive.
The local housing market can also have a significant impact on rental prices. Look up recent housing prices in your area, or better yet, find out how the housing market has changed in the last couple of years to understand the current trend better.
Create a budget for general repairs and upkeep
The goal of investing money into a rental property is to generate a continuous cash flow. Create a budget to ensure you generate more money than you spend—factor in your recurring expenses like mortgage payments, maintenance, and utilities. You never want to have more expenditures than income, and you should always allocate some money in your emergency fund for unexpected expenses.
Complete renovations and upgrades
Consider hiring professional contractors to complete renovations and updates when you purchase the property. If you have a multi-family property, consider inside and outside amenities for clients, the design of units, and the landscape. Before starting the project, create a list of renovation ideas and research their costs and benefits.
Engage with online customers
After you finish renovations, it’s time to start marketing your property to potential tenants. But how do you do it? Research what kind of people usually move in and out of your neighborhood. Reach out to local experts and realtors and check online forums to get a more accurate picture. Research the current housing market trends to better target prospective tenants.
Protecting your investment
As a property owner, you have many expenses and operational costs. To ensure that your property stays profitable, you can implement some basic rules for your guests and tenants. Deposit fees and non-refundable deposits are some of the most common ways homeowners protect their property.
Consider buying property insurance and adjusting your liability limits to avoid costly repairs or losing your property.
Rental property inspection
Regular inspections are necessary for rental properties. During a rental property inspection, a landlord assesses the property’s condition inside and outside. Inspections are conducted prior, during, and after the renting period. It’s not uncommon to have tenants present during the inspection to establish trust and ensure that you are on the same page.
A thorough inspection before renting a property can help you catch many problems before they worsen. Some landlords also do drive-by inspections that don’t require a notice to tenants to assess the property’s condition from the outside.
When your tenant moves out, conduct a thorough walkthrough to check the condition of your rental property. Your goal is to ensure that the vacated property looks the same as when your tenants moved in.
Legal aspects of renting
Legal aspects of short-term rentals
As a landlord, you must consider the legal aspects of long-term and short-term rentals. For example, some popular destinations have very stringent requirements for vacation rentals or prohibit them entirely. The COVID-19 pandemic triggered restrictions on short-term rentals across the country, as rising home prices pushed many locals out of the housing market.
In many jurisdictions, operating a short-term property requires a business license and a short-term vacation rental license. You also need to comply with local HOA rules and regulations.
Finally, you should contact your tax adviser to get a clear picture of how you will pay taxes on your rental property. Not only do you have to pay income and self-employment taxes, but you also might have to pay lodging taxes. Understanding what deductions you can claim can make a huge difference in your budget.
Legal aspects of long-term rentals
When you run a long-term rental property, there are many things to consider. Look into getting landlord insurance because when you run a long-term rental, you could be subject to lawsuits from your tenants.
Before renting your property, make sure it’s in sound condition. Take care of all maintenance and minor repairs before showing it to prospective tenants.
You must also specify security deposit conditions and draft a lease agreement covering renting conditions. When someone applies to be your tenant, check their background history and credit to avoid potential issues in the future.
Don’t forget about creating specific policies regarding smoking, disabilities, and other matters that might arise. Each landlord has a particular set of rules; yours should be specific to your property.