Rental properties offer a steady stream of income in the form of monthly rent payments, making them a popular choice for investors looking to build wealth over time. The key to success in the rental property business lies in selecting the right properties, managing them effectively, and maximizing returns.
One of the main advantages of owning rental properties is the ability to generate passive income. However, it's important for rental property investors to carefully research and analyze potential properties before making a purchase.
Continue reading to find out how to start a rental property business.
What is a Rental Property Business?
A rental property business involves owning and managing real estate properties with the intention of generating rental income. Ideally, each property will generate positive cash flow from the first month. You can manage the rental properties yourself or contract a property management company to manage the rental properties while you focus on other business initiatives.
To build a rental property business, you'll need to secure financing, purchase properties and rent them either for long-term rentals or short-term vacation rentals. While there are many details to cover, the basics of earning income in a rental property business are simple: purchase properties, renovate them if needed and begin renting. With each additional property in your portfolio, you diversify income streams, reduce risk and increase asset value over time.
12 Steps to Starting a Rental Property Business
If you're ready to start a rental property business, here are 12 simple steps to get started. Learning how to start a rental property business isn't difficult but requires persistence and research. Here's what you need to know.
Read Up On Real Estate Investing
To start, it's important to understand the basics of real estate investing, rental property management, landlord-tenant laws and local real estate market trends. Consider reading books, taking courses and seeking advice from experienced investors.
Local real estate networking events can provide opportunities to meet other investors, property managers and realtors. Building relationships with local realtors can provide in-depth market insights and understanding to build your portfolio. Likewise, access to the local MLS to research comps can provide insight into under-market values and expected returns.
Define Your Strategy and Goals
Once you have a strong foundation in real estate investing, it's time to define your focus and individual goals. Determine the type of rental property you want to invest in. Residential, commercial, vacation rentals or multi-family residential units are common choices. Then, consider your financial goals. Property type and income goals may influence each other, as larger income goals may suggest a different investment strategy.
As part of the financial goals, consider the amount of rental income you want to generate, the number of properties you plan to acquire and your desired return on investment. Create realistic cost-expense analysis based on current market figures for rental income on comparable properties.
Create a Rental Property Business Plan
Creating a rental property business plan will outline your target market, location, investment criteria, financing options and exit strategies. You may want to include projected income, expenses, average vacancy rates and contingencies. Outlining objectives, financial forecasts, marketing strategies and operational plans can demonstrate a clear roadmap toward growth. The more detailed and variable your business plan, the easier it will be to secure financing.
At this stage, it's important to decide on a business structure, such as a sole proprietorship, LLC or corporation. For most rental property business owners, an LLC offers liability protection with administration and tax filing flexibility.
Secure Financing
Once you have a clear business plan, it's time to determine how you'll finance your rental property purchases. Common financing options include personal savings, mortgages or loans, commercial loans, grants, building a partnership with another investor or securing private investment.
If you plan to finance purchases with a mortgage, obtaining pre-approval from lenders can facilitate a fast transaction when you're ready to make the purchase. You could even consider real estate crowdfunding to purchase a rental property.
Rental Property Search and Analysis
Once you have pre-approval or investors in place, it's time to research potential properties that fit your investment criteria. Conduct thorough property analysis, considering factors such as location, property condition, potential rental income and market demand. Use comps for similar rental properties within the area. Consider working with a real estate agent with in-depth market knowledge to locate the greatest opportunities.
Purchase and Property Acquisition
Once you locate properties within your target market, it's time to make offers on properties that meet your criteria. Be prepared to negotiate terms and create a compelling offer to beat other interested parties.
If the offer is accepted, it's time for thorough due diligence. This process includes property inspections, title searches and a legal review. You'll typically have one to two months to complete due diligence, but you can negotiate longer if needed. Once all contingencies are satisfied and due diligence hasn't raised any issues, it's time to complete the purchase.
Property Management
After you buy your first rental property, create a plan to minimize vacancies. An empty property is losing money. Creating a property management strategy even during negotiation ensures you can quickly implement the plan after purchase. For this, you'll need to decide whether you'll manage the properties yourself or hire a property management company.
Research market norms and set rental rates based on comparable properties in the area. Consider pricing slightly below market value to secure reliable, long-term tenants. At this stage, you'll want to screen potential tenants and consider screening criteria such as credit score, income and references. You will also need to draft leases or speak with a lawyer about finalizing a lease agreement.
Once the paperwork is signed, it's time to oversee and support handling tenant move-ins and move-outs. If you've chosen to work with a property management company, it will advise you on pricing and manage the rest of the tenant relations, from tenant screening to move-in support.
Legal and Regulatory Compliance
It's essential to understand landlord-tenant laws and regulations in your area for compliance. You can speak with the local chamber of commerce or the Secretary of State’s office to understand state and locality-specific regulations and mandatory filings and to comply with safety and health codes.
Before listing the property, it's essential to ensure proper insurance coverage. This can include:
- Property insurance
- Landlord insurance
- Liability insurance
- Hazard and fire insurance
- Sewer and water line backup
- Flood insurance
- Tenant rent default insurance
- Pet coverage
- Worker's compensation coverage (if you have employees)
- Umbrella insurance
Maintenance and Repairs
You'll need to budget about 3% of the total property value for annual repairs and maintenance. Maintaining the property at a high standard can help secure higher rental income and better long-term tenants. To protect your investment, regularly inspect and maintain your properties to keep them in good condition. Good landlords are known for addressing maintenance requests promptly to keep tenants satisfied.
Bookkeeping and Financial Management
Maintaining detailed financial records for each property is essential, just as you would for any other business. Plan to track income, expenses and taxes related to your rental properties. You can use one of many accounting apps to automatically import important income and expenses or keep track of everything by hand. These detailed financial records are necessary to prepare annual tax returns, secure financing and protect your cash flow and investment value.
Scale and Grow
As you gain experience and build equity, consider expanding your rental property portfolio by replicating the steps above. Continuously refine your investment strategy based on market trends and your own experience to build a diversified, multi-income stream portfolio.
Networking and Education
To build understanding, market insights and connections, attend real estate investment seminars, workshops and networking events to stay informed about industry trends and opportunities. Networking is a valuable asset in real estate investing and can lead to new investment opportunities, insights or connections to grow your rental property business.
Final Tips for Starting a Rental Property Business
Remember that not every property will appreciate in the short to medium term, and buying a rental property doesn't guarantee high occupancy rates. Starting a rental property business can be a losing proposition without proper research. Remember to run the numbers, create conservative estimates and double-check projections to create positive cash flow and build long-term value.
With an in-depth understanding, a rental property business as part of a diversified investment portfolio can build stable returns. For other real estate investment opportunities, consider real estate investment trusts (REITs) vs. rental properties.
Frequently Asked Questions
What rental properties are most profitable?
Is rental business profitable?
What is the best business type for real estate investment?
One of the most popular business types for real estate investment is forming a real estate investment company or LLC (limited liability company). This structure offers several benefits, including liability protection for the property owner, tax advantages, and flexibility in management and ownership structure. By setting up an investment company, investors can protect their personal assets from any potential lawsuits or debts that may arise from the property investment.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.