While every city boasts prominent landlords who rent and manage apartment buildings on a large scale, it’s the small property owners who support much of a city’s housing stock. These small-scale landlords may rent one unit from the building they live in, or own a few buildings they manage themselves. Regardless of the type of small property owner, deciding to become a landlord is not a decision to be taken lightly.
“Anybody who wants to become a landlord has to understand that this is a business,” says Robert Pinnegar, the president of the National Apartment Association. “Too many think they can buy a place for an income stream, or for something that appreciates in value to sell when they retire. But first and foremost, you’ll need to do some proper business planning.”
Curbed spoke with Pinnegar, as well as small property owners in New York City and San Francisco, about what kind of planning—from setting a maintenance budget to preparing for the responsibilities of tenancy—is required to become a successful landlord.
Understand the law
Prospective landlords should go into any property investment with a deep understanding of federal and local housing laws, which vary depending on where the property is located. “Operating your business in a legal manner is going to protect your investment over the long-haul,” Pinnegar says.
The federal Fair Housing Act, for example, must be followed everywhere, while city-specific housing laws set the standard for matters like rent regulation, eviction, tenant rights, and safe housing. Noni Richen, a small property owner and president of the Small Property Owners of San Francisco Institute, points out that some cities, like San Francisco, have laws in place that make it extremely difficult to evict tenants. And in places like New York, certain types of buildings are governed by strict regulations.
If you need assistance wading through it all, local landlord organizations—the National Apartment Association has 170 affiliates across the country—can help you understand the rules and how to implement them in the day-to-day management of an apartment.
Buy a building you can actually rent
Morgan Munsey, a small property owner out of Brooklyn, New York, offers the simple advice of “buying a good building”—one that is in good shape and located in a desirable part of town. An inspector can help you break down the condition of the building and assess whether it needs any repairs.
It’s also important to determine a rate that is line with the local rental market, so research accordingly. And don’t skimp on making the home safe and appealing places to live. Ultimately, if you have an appealing product on the market, you won’t have trouble finding tenants.
Budget for maintenance and capital improvements
Make it a priority to know your property inside and out, taking full advantage of that early building inspection, advises Pinnegar. Tracking the lifespan of everything from the roof to the plumbing to the carpeting to the asphalt in the parking structure will help you create a realistic, future-minded budget for building upgrades and repairs.
But you also need to think long-term. Tenants will come and go, which means you’ll need to upgrade their apartments along the way. In addition to a maintenance budget, set aside money for capital improvements, which are permanent additions or alterations made to a property that adds to the value of the property or prolongs its life.
“You need to look at the trends in the industry from a design standpoint,” Pinnegar says. Your ability to upgrade apartments with appealing design—replacing shag carpeting with hardwood floors, for example—will help you attract tenants at a better rent.
Establish rental criteria
Once you’ve purchased a building, you will either acquire tenants with existing leases, or will need to set up new leases for incoming tenants. If tenants already live in the building, understand the full conditions of the leases you’re inheriting. Then decide your own requirements for incoming residents.
“You’ll need to have your rental screening criteria written, established, and up-front to let tenants know what you’re looking for,” Pinnegar says. Requirements for tenant applications could include proof of income, credit checks, background checks, references, and even guarantors. You’ll then need to offer prospective tenants a legally-compliant lease. This process is also heavily affected by federal and local laws, so do your homework.
Decide what kind of landlord you want to be
“You’ll have to decide your role as the landlord,” explains Munsey, and how much responsibility you are willing to take on. A hands-on landlord should live in the area and be accessible, willing, and ready to tackle any issues that may come up, no matter the time of day, treating the role like a full-time business.
If this level of involvement is not realistic for you, or if you live in a different city or state than your tenants, it is imperative that you hire a building manger. Munsey calls the manager a “one-stop-shop” who can handle whatever comes up at your building, from collecting rent to calling the plumber in the middle of the night. In larger buildings, you might offer the manager an apartment on the property, but for smaller properties you’ll want to hire someone who lives nearby.
Hire an accountant
Taxes for a landlord are, in a word, complicated. According to the IRS, “all rental income must be reported on your tax return, and in general the associated expenses can be deducted from your rental income.” Indeed, the tax code allows you to expense the cost of purchasing your rental property as well as improvements made over a number of years through depreciation, but there are rules that must be followed in order to claim income and expenses properly. Munsey offers this advice: “Get a professional.”
Prepare for responsibilities
Building repairs, tenant complaints, legal matters, clogged pipes in the middle of the night—“It’s mostly on us,” as Richen puts it. Being a landlord is a huge responsibility that goes way beyond the typical 9-to-5 job: “Things will come up at 3 AM in the morning,” Pinnegar says. So gear up for a job that’s unpredictable and ultimately emotional. You’re managing people’s homes, after all. And while it’s never fun to prepare for the worst, landlords often have to deal with difficult tasks like evictions or tenants passing away in their apartments. But with a well-constructed business plan, a clear understanding of local housing laws, and a willingness to provide a comfortable and safe home to your tenants, you’re off to a solid start.