How to become a landlord: a step-by-step guide

Becoming a landlord is part business, part customer service. With one property, most of the work is up front: getting the numbers right, the paperwork in place and the right tenant in the unit.

1. Run the numbers

Before anything else, check that the rent covers every cost with room to spare. Put the price or your current loan, the rent, taxes, insurance and a realistic repair budget into the rental property calculator. Look at:

• Monthly cash flow after the mortgage, repairs and vacancy.
• Cap rate, to compare with other properties nearby.
• A reserve. Many landlords keep three to six months of expenses in cash for repairs and empty months.

Turning your own home into a rental? Compare it with selling first: the rent vs sell calculator shows both paths.

2. Insurance

Switch to a landlord policy before the first tenant moves in. It covers the building, your liability and often lost rent after a covered loss. Many landlords add an umbrella policy for extra liability coverage, and ask tenants to carry renters insurance for their own things.

3. Learn the rules where the property is

Landlord-tenant law is set by states and often cities. Before you advertise, find out:

• Whether the city requires a rental registration, license or inspection.
• Security deposit limits and how and when it must be returned.
• Notice periods for entering the unit, raising the rent and ending a lease.
• Whether there is rent control or a limit on rent increases.
• Fair housing rules: federal law bans discrimination based on race, color, religion, sex, national origin, familial status and disability, and many states and cities add more protected groups, such as source of income.
• Lead paint: for homes built before 1978, federal law requires a disclosure and an EPA pamphlet before the lease is signed.

Your state’s attorney general or housing agency usually publishes a landlord-tenant guide. When in doubt, a one-hour consultation with a local attorney is cheap insurance.

4. Set up the money side

• Open a separate bank account for the rental: rent in, expenses out.
• Keep every receipt and invoice. Rental income and expenses go on Schedule E; see how rental income is taxed.
• Note the date the property is ready for rent and your cost basis: you will need them for depreciation.

5. Price the rent

Look at similar listings nearby: same size, condition and amenities. Pricing a little below the market often fills the unit faster, and each vacant month costs a full month’s rent.

6. Screen tenants

Write your criteria down before you list, and use them for every applicant:

• Income, often at least 3 times the rent. The rent-to-income calculator checks it.
• Rental history and references from past landlords.
• Credit and background checks, with the applicant’s written consent and following the rules for using consumer reports.

7. Sign the lease and hand over the keys

Use a lease written for your state. It should cover rent, due date, late fees, the deposit, who pays which utilities, maintenance, entry, pets and how rent for a partial month is worked out (the prorated rent calculator does that math). Do a move-in inspection with photos, signed by both of you: it is your best evidence when the deposit comes back.

Questions

Sources

• HUD: Fair housing rights and obligations
• IRS Publication 527: Residential Rental Property
• EPA: Lead-based paint disclosure rule