Starting a rental property business can be a lucrative venture at present. It provides a steady stream of passive income and potential long-term wealth accumulation. This guide will walk you through the essential steps to establish and manage a successful rental property business.
Definition and Overview of Property Rental
Rental properties encompass a range of real estate assets. It includes residential apartments, single-family homes, multi-family units, commercial spaces, vacation rentals, and more. The property owners (landlords) lease these properties to tenants for a specified period. It is done typically through a lease or rental agreement. The rental income generated from tenants is a primary source of revenue for the property owner.
In simple words, the rental property business is a business of acquiring property or real estate and then leasing out the property in exchange for monthly rent. You can rent out the whole property to one client. Or you can divide it into several separate units and rent out each part to different people. Therefore, it is a business of owning property and earning money in the form of renting the property.
Benefits of Owning Rental Properties
There are several advantages and benefits of earning rental properties, be it residential or commercial. Some of them are listed below:
- Passive Income: Rental properties provide a consistent stream of income. It can help you achieve financial stability and supplement your earnings.
- Appreciation: Over time, real estate properties have the potential to increase in value. It will lead to capital appreciation and potential long-term wealth accumulation.
- Diversification: Owning rental properties allows you to diversify your investment portfolio beyond traditional assets. It includes stocks and bonds.
- Tax Benefits: Rental property owners can often take advantage of tax deductions. It includes mortgage interest, property taxes, maintenance expenses, and more.
- Complete Control: As a landlord, you will have total control over property management, rental rates, and property improvements.
Types of Rental Properties
There are various types of rental properties. Some of them are listed below:
- Residential Properties: Residential properties include single-family homes, apartments, townhouses, and condos that are rented to individuals and families.
- Commercial Properties: Commercial rental properties include office spaces, retail stores, warehouses, and industrial spaces.
- Vacation Rentals: These are properties rented for short-term stays by tourists and travelers.
- Multi-Family Units: Buildings with multiple rental units, such as duplexes, triplexes, and apartment complexes are considered multi-family units.
- Specialty Properties: These are unique properties like student housing, senior living communities, and co-living spaces.
Here are the 12 Steps to Start Rental Property Business
1. Research & Homework
Before you start the business or spend money on it, do thorough research on the details and trends of the Rental Property Business. Find out what kind of properties have the greatest demand for rent or lease, and what is the prospect for new players like you. Think of the scale of your business to start with. Whether you want to start with one property or multiple properties, or you want to rent out your house or a part of it in the beginning.
Another important thing is deciding on the area or locality where you want to buy the rental property. Before deciding on the area, do good homework on the demand for rented properties and the standard rate in that area.
2. Setting Your Target & Niche
The first and foremost target of your business is always earning profits and scaling them up gradually. In your rental property business, you have to set a target on your expected income, since this business involves an investment of money. If you can set your target with clarity, you can plan accordingly and then at later phases scale up your business.
Set a niche for your rental property business. You can go for apartments and rent them out to families on a time-based lease. Or, you can opt for short-term rent like Airbnb, where your property will be rented to tourists or people on business or professional tours.
3. Getting the Finance
For any business, arranging finance is the most important aspect. In your rental property business, you need to buy property, so you need a good amount of money for that. If you have your savings and investment, you can buy the property paying in cash. A cash purchase will give you more profits no doubt, but it will leave you without any reserve funds.
You can opt for a mortgage loan, where you will get a loan against your existing property mortgage. The advantage of this form of finance is that you can repay the loan from the rent you will be getting. After the repayment, you will be able to earn more profits. There are different forms of mortgage loans offered by banks and financial institutions. You can choose any of them.
In this respect, it is best to seek the advice of a financial expert who will guide you properly regarding this matter.
4. Legalizing the Business
After you have decided on the Rental Property Business and going one step further by taking the financial decision, you must take another important step. That is, legalizing your business. Form an LLC in the name of your Rental Property Business. This will provide you with the necessary legal protection and tax benefits. Moreover, in times of crisis, your personal property will be protected.
You have to buy Landlord Insurance, to insure the property you are investing in. This insurance will protect your property from natural calamities as well as accidents.
5. Marketing Your Business
Marketing your Rental Property Business is the most important stepping stone in establishing yourself and earning profits. You have to make the existence of your property known to prospective customers. Digital advertising on various property/rent-related websites like Zillow or Rent.com is an effective tool.
You can also advertise on social media platforms like Facebook, Instagram, or Twitter. Create a page in the name of your company and give a lot of pictures of the interior as well as the exterior of the property. Try to give some promotional offers like a special discount or a festival discount to attract clients.
Some of the steps to promote your rental property business is listed below:
- Create a Website – Upload your properties and add an easy-to-use contact page
- Create promotional materials like flyers and brochures
- Create a Logo for your rental property company – Fiverr is a great place to get these jobs done at cheap prices.
Advertisements in print media are also effective since many people search the classified ad section of newspapers to find out properties for rent.
6. Buying the First Property
Buying your first property is a significant step in your business and hence needs time, attention, and research. Consider these facts while buying:
- See several properties before deciding on anyone.
- Select a property that is conveniently located.
- Find out a property that is much sought after for rent.
- Find out a property in fairly good condition, so that you need not spend much on renovation.
- Choose an area that is closer to your home, as you have to monitor it regularly.
7. Joining Real Estate Investor Club
Joining a Real Estate Investor Club will help you in your Rental Property Business in many ways. These clubs have many experienced and senior members. You can get a lot of important information and guidance from them. They will be able to give you effective suggestions on different aspects like fixing the rent, drafting the contract with tenants, renovation of your property, etc.
8. Renovating your Property
After buying the property, it is very important to renovate or rehab it. You have to do it before putting up the property for rent. The main aim of the renovation is to attract the tenants so that they agree to the rent and other conditions. You can do interior decoration, add some attachments or furnish it according to popular or trendy taste.
However, remember to do detailed budgeting of renovation, as you have to recover the cost incurred from the rents you charge. Don’t go for anything which is highly expensive and cannot be recovered through rent, as that will be a loss for you. If you are not sure of rehab ideas, you can consult an expert.
9. Fixing the Rent
The rent of a property depends on several factors like the city, location, size, and amenities offered by the property. Collect detailed information on the trending rent structure of the particular area, and fix the rent. To get more rent, you can elevate the standard of your property by adding different facilities while renovating it. In the case of short-term rentals like Airbnb, you can add some value to your property for higher rents.
10. Making Contracts & Collecting Rents
Remember to make a specific contract before renting out your property. Put the important clauses like tenure, security deposit amount, payment of rent on or within a fixed date, taking care of the property, restrictions, and many other things. Take the help of a property lawyer to draft a suitable contract covering the important points.
Make an organized system of collecting rent every month. You can physically go and collect it. For multiple properties, you can employ staff to collect the rent. In this digital age, online transactions are hassle-free and easy. You can go for online rent payment terms with your tenants. Give a reminder message before the specific time of payment and once it is made, send an acknowledgement-cum-thank-you message.
11. Managing Your Finance
Managing finance is the key to the success of your business. The Rental Property Business involves regular cash transactions and also regular expenses on various heads. Keep a thorough and detailed statement of both cash inflow as well as expenses. Make provisions for an emergency fund. Set aside a portion of your profit every month and invest it, so that you can scale up your business in a short span.
You can take the help of an accountant for keeping the accounts. You can also use any of the different accounting software available.
12. Maintaining Your Property
It is very important to maintain the standard of your property in the Rental Business. Make a move-in and move-out clause with the tenants and check everything properly before any tenant leaves. Apart from that, make a regular check on the condition of your property. If anything is damaged by the tenant, deduct the required amount from the security deposit.
Remember, the property is your investment and the capital. Therefore, you need to take very good care of it for the prospect of the business. Damaged property will not attract tenants and you have to incur further costs to rehab it.
These are the important points you should follow to start your Rental Property Business. It is a business with good income opportunities, as there are always demands the rented houses by different sections of society from students to families.
According to IBISWorld, the Real Estate and Rental & Leasing Sector has done quite well in the last 5 years (2015-2020) and the expected growth in 2020 alone is 2.2%.
Frequently Asked Questions
Is the rental property business a profitable venture?
Yes, the rental property business can be highly profitable. It offers a consistent stream of rental income and the potential for property value appreciation over time.
Do I need a real estate license to start a rental property business?
Generally, a real estate license is not required for property owners renting out their own properties. However, if you plan to manage properties on behalf of others, a license may be necessary in some states.
How can I finance the purchase of rental properties?
Popular Options for financing rental properties include personal savings, traditional bank loans, private lenders, partnerships, and real estate investment loans. You need to research the best option for your financial situation.
What are the responsibilities of a property manager?
A property manager handles tasks such as tenant screening, rent collection, property maintenance, and addressing tenant concerns. Property managers ensure the smooth operation of rental properties.
How can I ensure a high occupancy rate for my rental properties?
Maintain competitive rental rates, provide well-maintained properties, and offer excellent tenant service. Effective marketing and tenant retention strategies also contribute to a high occupancy rate.
What are the potential risks in the rental property business?
There are some risks involved in the property rental business. It includes property damage, non-paying tenants, legal disputes, and market fluctuations. You need to have proper risk management, tenant screening, and insurance coverage to mitigate these risks.
Can I start a rental property business with limited capital?
Yes, it is possible to start small and gradually expand your property portfolio. You need to establish creative financing and partnerships. It will help you acquire properties even with limited initial capital.
How do I calculate the return on investment (ROI) for rental properties?
ROI is calculated by dividing the annual rental income by the total investment cost (including property purchase, renovations, and other expenses). This gives you a percentage that indicates your annual return.
Which Type of Rental property is Most Profitable?
Renting commercial properties fetches the highest returns in the present day. However, it must be borne in mind that the location of the commercial place will lay a big role in the margin of profit. There are many kinds of commercial properties one can invest in. It can be retail space in a shopping mall, and office spaces in a commercial building.
How Much Profit should you Make on a Rental Property?
Generally, the rule of thumb is that if you earn a rent of 2% of your property value, then it can be said that
About the Author: 99businessideas.com led by Rupak Chakrabarty is committed to helping beginners, entrepreneurs, and small business owners in starting, managing, and growing their businesses.