Starting a rental property business is a lucrative way to diversify your investment portfolio. However, there’s a bit of a learning curve when doing it for the first time.
This isn’t the end of the world, though. Many people are venturing into making their real estate investments pay for themselves by renting out their properties.
So, here are the tried-and-true ways to plan out how to start a rental property business, even if you’re new to it!
- How Profitable is Owning a Rental Property Business?
- What You’ll Need to Start a Rental Property Business [& Associated Costs]
- Why You Should Consider Starting a Rental Property Business As a Side Hustle
- How to Start a Rental Property Business in 6 Simple Steps
- Things to Consider When Building a Rental Property Business
- INSPIRATION: Rental Property Business Ideas
- Frequently Asked Questions
- Similar Businesses to Consider Starting
- Wrapping Up
How Profitable is Owning a Rental Property Business?
Renting out your property can be a pretty profitable business. After all, everyone needs a place to live, and trends in the US are moving in favor of rental instead of home ownership, according to Statista.
How rewarding the business depends on multiple factors, though. The most important of which is the location and type of property.
Then comes the vacancy rate in that area, the median monthly rent, and whether you cater to residential or commercial prospective tenants.
You should also factor in the cost of property upkeep and whether you’ll hire someone to take care of it or manage it independently.
Paying off mortgages or loans for a certain term can also take away from how financially rewarding it is to rent out your property.
So when you’re looking for the return on investment value of a rental property business, keep in mind that the housing market is constantly changing.
What You’ll Need to Start a Rental Property Business [& Associated Costs]
At first glance, it might seem like all you need for renting properties is the property and the tenant(s).
Well, these are important factors, but you still need a few more things to get the show on the road, including:
- A business bank account for the rental property: This should help you separate personal and business expenses and revenue.
- A property manager: If you own a multifamily property, being the landlord can be a full-time job you can’t take on. That’s why hiring an apartment manager to stay on top of operating income and expenses is advisable. The average yearly salary is $57,000.
- A maintenance engineer: If you’re not planning on handling regular maintenance and repairs yourself, you should hire a contractor or a full-time maintenance engineer. This should help you keep your rental property in excellent shape between tenants. The average yearly salary is $50,000.
- An application screening system: Reviewing tenant applications doesn’t have to be done manually. You can sign up and pay for a tenant screening system to do the heavy lifting for you. Subscriptions to such systems start at about $35/month.
Do I Need a License or Certificates to Start a Rental Property Business?
Depending on which US state you live in, you might need one or more of the following licenses and certificates to start your rental property business:
1. A Rental License
This license is required by some states to make the rental process and any subsequent income legal.
To find out whether you need one, go to your city’s department of housing website, where you can find an online application form.
If a rental license is required, you usually fill out the form, conduct an inspection, then adjust the conditions in your property to obtain the license.
2. A Business License
If you registered your rental property business as an LLC (Limited Liability Company) for the taxation benefits, you might require a business license to rent it out.
3. A Certificate of Occupancy
For newly-constructed buildings aimed for residential or commercial use, you might need a CO.
Why You Should Consider Starting a Rental Property Business As a Side Hustle
Becoming a rental property owner can feel like a huge responsibility, but keep in mind it has its perks, like:
- If you’re keeping up with the current trends in the world of investment, the idea of passive income has dominated almost all conversations. Having a rental business is sort of the blueprint of passive income strategies. For thousands of years, landlords acquired wealth and status from owning property for rental, and that hasn’t changed now.
- An investment property can also be a wonderful way to diversify your investment portfolio and gain experience from the rental property industry insiders.
- In the current economic situation, real estate investing is a relatively low-risk business venture, away from the constantly changing stock market.
- If you own a property that you’re not using or selling, renting it out can provide you with an extra source of cash from rental income.
How to Start a Rental Property Business in 6 Simple Steps
Now that you know why you should start your own rental property business, here’s how to do it:
For the sake of this article, let’s assume you don’t have past experience in real estate investing strategies. So, the first step would be to join a real estate investors club.
Aside from offering you an invaluable chance to network with other real estate investors and real estate agents, you can also learn so much there.
You should be able to see how investment decisions are made, what makes for a good property, and maybe even find the property you’ll end up buying.
Putting together a rental property business plan is the next step. In the plan, you should come up with the following:
- Executive Summary: An overview of your plans for the business and what success looks like to you, whether it means growth in your market or other markets.
- Real estate industry analysis: This shows you the current state of the housing market and your niche rental property type; a short-term rental to post on sites like Airbnb or a long-term rental to serve as a family home.
- Marketing and branding: How to reach potential tenants in your area; this includes the business’s name, visual branding elements, and online and offline marketing strategies.
- Management and operations: Will you be taking care of the day-to-day business needs, or will you outsource the responsibilities?
Once you know how to start, you should sort out the financing for your property even before you start looking. This is advisable because you’ll know the price ceiling you need to stay below.
There are different types of loans you can go for. Either take out a conventional bank loan or turn to mortgage lenders for hard money loans.
The former has the benefit of lower interest rates, but the latter can put the money in your bank account faster. Study your options and choose wisely.
Once you find the property you want and sign a contract, the next step would be to get the required licensing and certification. Depending on your state, you might need a business or rental license and a certificate of occupancy.
Set up a screening system for prospective tenants that checks for any past criminal activity and credit history. Then, put together a lease agreement, or get one online.
Unless you’re willing to take on the role of a landlord/landlady, you should hire a property manager to keep track of tenant applications, background checks, and other responsibilities.
Having a contractor or full-time maintenance engineer is also crucial for the regular maintenance of your rental property to keep it in good shape.
Things to Consider When Building a Rental Property Business
Here are some things to take into consideration should you go for a business renting properties:
- The business structure, whether you intend for your rental property business to be in the form of a sole proprietorship, Limited Liability Company (LLC), Partnership, or Corporation. The benefit of an LLC is liability protection in case accidents happen. You could also benefit from “pass-through taxation” while doing your property taxes and income taxes.
- The operating expenses and how much they affect your monthly cash flow from the rental property. Old, dilapidated buildings can cost more than they bring in in maintenance fees and fines.
- The return on investment in the future, which you can do by calculating depreciation to know what your asset could bring in should you decide to sell.
INSPIRATION: Rental Property Business Ideas
Here are some ideas to inspire you when embarking on your rental property business journey:
- Using your own home as the start of your rental property business: you can use the home’s equity as the down payment for financing a new property purchase or using your home as the rental property itself after moving somewhere else.
- Posting your property on multiple listing services (MLS): like Airbnb, Zillow, Roofstock, and Redfin. Here are the Airbnb requirements for property listings.
- Marketing locally through Facebook Ads: this way, you can target potential tenants nearby more directly.
Frequently Asked Questions
Is Owning Rental Property Profitable?
It is, but only if you invest in a property with decent potential for a rental business and know how to manage operational costs.
What is the 2% Rule in Real Estate?
The 2% rule means the monthly rent should be at least 2% of the property purchase price.
That means a $50,000 apartment should rent for at least $1,000 to be profitable.
What Kind of Properties Are Best to Invest In?
Commercial properties like office, industrial, retail, hospitality, and residential multifamily apartment complexes are all profitable ventures.
Single-family homes are also a good investment, but only in higher-income neighborhoods with quality hospitals and schools around.
Similar Businesses to Consider Starting
- How To Start a Car Rental Business: Car rental is a great option to consider if you live in a tourist-laden town.
- How to Start a Real Estate Business: Instead of renting out properties, you can be a buy-and-hold investor.
- How to Start a Laundromat Business: Everyone needs to do laundry. In busy cities with small apartments, a laundromat is an excellent investment.
Learning how to start a rental property business can be an exciting new business venture to add to your investment portfolio.
Once you find your niche in the market, you can put together a business plan to set yourself up for success.
So what do you think? Is a rental property the right side hustle for you? Let us know in the comments below and share this article if you liked it!