First-Time Landlord: 8 Things You Need to Know

Are you ready to be a landlord? Here are eight things you need to think through before you find your first tenants.

By: Daniel Caughill

Thanks to HGTV and the allure of passive income, many people dream of investing in rental properties. Of course, becoming a landlord can be a great way to build your wealth or to make use of a second property that you own. However, property management can take a lot of work, too. Whether you’re leasing your apartment to family friends or to tenants you just met, you need to understand one thing up front: You’re not a host. You’re a business owner.

With that in mind, here are eight things to keep in mind when preparing to rent out your first property.

1. Find your rent-price range.

You’ve probably put a substantial investment into your rental property, and you’re likely dependent on the monthly income it generates to keep up with mortgage payments. However, depending on your region’s rental market, you might also face stiff competition from other landlords in the area. That’s why it’s important to put thought into how much you should charge for rent. Ideally, you’ll have enough to cover all of your monthly expenses and still make a profit, but you also need to make sure your property is attractive to potential renters.

Some advisers will encourage you to use the “1% rule,” which states that you should charge about 1% of the property value of your home each month. So, a house worth $200,000 would demand a rent of approximately $2,000 per month. If your rental market allows you to hit this benchmark, you’re probably doing well as a landlord. However, the rule is overly simplistic and probably too high for most rental markets.

Instead, you should determine your base rent by calculating the total amount it costs you to own that property each month, and the maximum amount you charge should be driven by the market.

Tally the cost of all your monthly expenses to determine your minimum rent. This calculation should include mortgage payments, insurance premiums, maintenance fees, property taxes, estimated vacancy losses and any other costs you’ll face. If you’re at least earning this amount, you’ll know you’re not losing money on the property. If the rental market doesn’t allow you to bring in this much, you’ll need to decide for yourself whether retaining the property for a monthly loss is worth it—or if you’d be better off selling it.

To determine the maximum amount of rent you can reasonably charge, you’ll need to turn to the market. You can use online house-hunting tools like Trulia, Zillow or RentHop to compare prices in your area. You can also check the newspaper for local listings or ask other landlords and property managers what they charge. Make sure you compare your property with similar homes in the immediate area. You may struggle to find tenants if you’re charging the same price for a studio apartment as a larger one-bedroom apartment across the street.

Once you’ve determined this range, you can decide how to price your rent. Slightly lower rents may earn you less, but they may allow you to minimize the amount of time your property is vacant. Higher rents will earn you more but could take longer to fill.

Since your property is a business, and your rent is the primary revenue that drives it, you’ll need to make sure you collect rent on time. Set clear expectations to your tenants about the day rent is due, and outline how many grace days they’ll have for late payments. If they exceed that limit, enforce a consistent late-payment penalty. Of course, you don’t want to be harsh to someone struggling to make payments. But if they can’t fulfill their obligation to you, you might not be able to fulfill your obligation to your mortgage lender.

The best way to manage rent collection is to offer automatic online payments. Not only will this eliminate the need to cash checks each month, but it will also lead to consistent, timely payments.

3. Purchase and require insurance.

Insurance is a crucial part of your rental property business. If you’re renting out a home you previously lived in, you may have assumed your homeowners insurance policy would continue to cover the house with its new tenants. Unfortunately, that’s probably not the case.

Landlord Insurance

Most homeowners insurance policies exclude long-term rental properties from their standard coverage. Instead, you’ll need to purchase landlord insurance. Generally, landlord insurance provides the same basic coverage as a standard homeowners policy, but with a few differences.

First, a landlord insurance policy may offer more liability coverage than standard homeowners policies. On the whole, rental properties face more liability claims than primary residences, so increased liability coverage is a good idea for most landlords.

Second, landlord insurance may provide loss-of-income coverage, either as part of the standar