Becoming a landlord for the first time is nerve-wracking, to say the least. You’ll have a significant chunk of your net worth on the line by purchasing your first rental property, and you know your limited experience could expose you to legal and financial risks as you try to make your investment profitable.
While there’s no way to completely foolproof your real estate investment strategy, there are some steps you can take to ensure the long-term profitability of your property.
Get Your Legal Ducks in a Row
There are many different laws all landlords must follow. Some of them are common-sense, while some of them are complicated and niche. Some apply at the federal level, but most vary from state to state and area to area. If you make a mistake or ignore one of these laws, it could render your entire strategy unprofitable; if a tenant sues you or costs you an inordinate amount of legal fees, it could take you years to fully recover.
Accordingly, one of the best things you can do to protect your profitability as a first-time landlord is to spend time proactively making sure you understand and are following the law in full. Work with a lawyer to make sure all your paperwork and property management strategies are in order.
Choose the Right Neighborhood
Next, it’s vital that you choose the right neighborhood for your first rental property. Your choice in neighborhood will determine the price of your property, the price you can charge for rent, the types of issues you’ll have to deal with, and most importantly, how your property may grow (or shrink) in value in the future. Good neighborhoods, with low crime rates, good schools, and access to lots of amenities, almost always do well—but make sure you think about how each neighborhood might grow in the near future. Ideally, you’ll find a low-cost area on a sharp upward trajectory.
Collect a Security Deposit (or Move-in Fee)
There’s some debate as to which is truly better, but no matter what, you should collect a security deposit or a move-in fee. Both of these are designed to grant you some immediate capital when a new tenant moves in, and both can make up for whatever minor forms of damage the property sustains from the tenant. Whichever you choose, make sure you document the transaction appropriately, and make sure the tenant understands the nature of the transaction.
Estimate Expenses Conservatively
Too many landlords fail to make a profit simply because they ran inaccurate numbers. Expenses are often higher and more numerous than you expect; a bad winter storm or a freak accident could cost you thousands of dollars in repairs, and small expenses (like routine maintenance) can add up fast. When calculating the possible return on investment (ROI) of a given property, estimate expenses as conservatively as possible, so you always have some wiggle room. It also helps to have an emergency fund to cover unplanned expenses.
Prioritize Quality Tenants (and Tenant Retention)
Once you have a good property, the best asset you can have is a reliable, long-term tenant. Tenants who miss rent, treat your property poorly, or leave after just a few months can ruin your bottom line. Take your time when screening tenants, and prioritize people who are most likely to provide you with a return. Once you find those tenants, treat them well and reward them to increase the likelihood they’ll renew their lease in the future.
Find Additional Streams of Income
You can increase rent to make more money, but the disadvantage is you could upset your current tenants. Instead, try to find alternate streams of income to keep your property growing, like coin-operated washers and dryers, or optional extra storage for an additional monthly fee. Depending on where you live, you could even add a premium parking area and charge a monthly fee for parking.
Stay on Top of Maintenance
Regular household maintenance is far less expensive than the cost of a repair that grows unwieldy, so be proactive. Whether you do it yourself or hire someone to do it, inspect your home every season, and take action on small problems before they get any larger. As an added bonus, if you’re attentive and consistent with maintenance, the property will stay in better condition, your tenants will be happier, and tenant turnover will shrink.
If you safeguard your investments and work actively to keep your financials in good health, rental property investment is one of the most reliable strategies for becoming independently wealthy. There’s no single “right” path to take, and you’ll likely make mistakes along the way no matter what, but the more conservatively you plan and the more research you do upfront, the higher your chances of success will be.