If you own multiple properties, renting one or more of them out is a great way to earn passive income. Real estate is big money — bigger than ever in 2022 — and starting a property rental business can put you on the path to being a millionaire. But there’s much more to running a successful rental business than owning a property and putting up a HELP WANTED sign. Here are some key steps you should take to make your property rental venture a success.
Set business goals
The first thing you should know is that you don’t need a license, or even necessarily a lot of experience, to get into property rental. But it will help if you have a strong business sense and a solid grasp of how real estate investing works. You could take some classes, enroll in a remote course, or work with a mentor, but you’ll likely have the most success if you don’t go in blind.
The first thing you should do is sit down and come up with a solid plan for your business. Do you want to keep your business small and rent long-term to a few tenants? Sell in a few years and buy a more upmarket property? Expand to become a larger company with even more properties to rent?
These are important questions that will inform your financial and professional goals. It’s a good idea to look to the future and ask yourself where you’ll be in the next five, ten, or fifteen years. Then turn those answers into actionable short and long-term goals.
Decide on the type of rental market you want to target
This is an important early step — do you want long-term tenants, short-term vacation rentals, commercial rentals, or something else entirely? Figuring out what market you want to target will not only help focus your business goals but will also help you determine your ideal renter (see below).
Define your ideal renter
Who you rent to is just as important as where your property lies. The rental market you target should ideally be in line with your values and intentions. Some business owners choose to work with underprivileged tenants who receive federal housing assistance; others cater to more upmarket clients. You might want to rent primarily to dual-income families or to students in college towns. Because this will inform your screening and application process, you should have a clear idea of your ideal renter.
After you’ve determined your ideal renter, it’s time to take your research to the next level — by looking at the rental market. It’s to your benefit to look at location, neighborhood amenities, local development plans, and every relevant detail you can get your hands on. You might consider joining a real estate or property business group to keep yourself informed about developments in the field.
Choose a business entity
Next, you should think about how exactly you want to do business: Will you run it yourself as a sole proprietor? Will you work with a partner? If you do decide to work with a partner, it’s a good idea to set up your company as a Partnership or Limited Liability Company (LLC) in case there’s a falling-out or your partnership otherwise ends.
Have a financial plan in place
This is the part where the business sense and knowledge comes into play: the money. You should know how you plan to manage your finances, not just in terms of buying property, but in taking care of expenses like property taxes, property management fees, maintenance, repairs, and so on. You’ll need a solid plan for how you’ll make an income and reinvest those profits. Working with an accountant or financial advisor could be a big help here.
You’ll also need insurance for the properties you’re renting. Homeowners insurance can cover the basics, such as property damage and liability (liability being especially critical). You should also look into landlord and loss of income insurance in case of problems with tenants or occupancy, and depending on where the property is located, you may have to purchase additional policies, such as earthquake or flood insurance.
Comply with all state laws
This can be easier said than done. Rental properties must be up to code, habitable, and comply with any regulations relevant to your city or state. You should also make sure your business license is up to date and any other necessary certifications have their requirements met.
Get legal input
One thing that can be a major help when trying to comply with all those laws and regulations is professional legal help. Work with a property lawyer who can help you with the finer details of compliance laws, lease agreements, tenancy laws, and anything else you need from a legal standpoint.