How to Become a Landlord: A 16-Step Beginner’s Guide

1. Make sure you can lease property in the area

If you already own a home in the area and are debating whether to rent or sell your home, it’s important to check whether you can lease your property. Many houses sit in a community governed by a homeowner’s association (HOA). HOAs often restrict the number of rental properties in a community, how long tenants can stay, and how many tenant turnovers are allowed in a calendar year. They can also enforce specific terms of the lease. Make this the first thing you check when considering rental homes in areas within an HOA. 

If you’re looking to invest in a rental property, then make sure you consider potential HOA rules in your home search. However, if the home you plan to rent out is located in an area without HOA rules, you’ll likely have an easier time establishing the house as a rental.

2. Find and buy your rental property

Are you considering a single-family home, condo, townhouse, or something else? Each typeof property has its own regulations, maintenance demands, repair risks, and profit potential.

If you become a landlord, you’ll probably finance your purchase differently than you would if you were buying it as your primary residence. Mortgage lenders often require a larger down payment for a rental property since they see a loan with a higher risk of default. Depending on the market and lender, you may need a 15%, 20%, or 25% down payment to purchase the rental property.

Some people choose to create a limited liability company (LLC) for their rental business. This can separate their assets and reduce risk. LLCs are considered “pass-through” entities, meaning LLC members can claim their profits and losses on their tax returns.

It can help to understand the three property classes before considering specific homes. Each can affect a landlord’s decision differently. They’re easy to remember: A, B, and C.

Class A

Class A properties are generally newer properties built within the last 15 years. Its design and features tend to be more modern. It could have granite countertops, in-style kitchen cabinets, or newer appliances.

For these reasons, Class A properties usually have lower vacancy rates and are often professionally managed.

Many Class A properties can demand higher rents and require less maintenance, at least in the short term. But they’ll also cost more to purchase upfront.

Class B

Class B properties are a little older than Class A properties. Their average rental income isn’t usually as high as that of Class A, and there could be a higher risk of maintenance issues.

Many buyers see Class B properties as “value-add” investment opportunities because you can upgrade them and charge higher rent. They can be lucrative for buyers, especially if they have good contractor connections or know how to renovate homes themselves.

Class C

Class C properties are usually more than 20 years old. These properties are more likely to need updates or repairs to keep everything up to code, or in line with newer properties in the area. On average, they may rent for less than Class A or B properties. They may also require a little more budget space for future repairs.