Renting or leasing property can be an excellent way of bringing in a fairly steady flow of income. However, if you want to be successful at renting, you have to make wise investments and protect yourself from lawsuits.
Start by creating a limited liability corporation. Landlords, especially inexperienced ones, are often targets for litigation. Thus, you should never purchase property in your own name because then you will be held personally liable if a tenant sues.
Creating a limited liability corporation is a fairly simple process in most states, but you should check with an attorney to ensure that you aren't missing any steps. In general, you have to choose a business name and file articles of organization with your state. This costs about $800 in most states. Once you've done this, draft an operating agreement, and have everyone involved with the corporation sign it. This agreement spells out what each member's responsibilities to the corporation are and what rights he has if the corporation is sued or if it is dissolved. Finally, obtain any necessary business licenses and publish a legal ad regarding your intention to incorporate if your state requires it.
Once you’ve created your limited liability corporation, start by purchasing one small property and getting it ready to rent. After you are comfortable with managing one property, you can consider adding another property to your inventory. However, you should create several limited liability corporations if you intend to manage many properties so that only a few of your properties are affected if you get sued.
When looking for your first property, there are several things you should consider:
What is the neighborhood like? You have options when it comes to purchasing property for investment. Properties in middle-class neighborhoods are fairly stable properties; you probably will easily rent this type of property. Conversely, properties in lower-end or up-and-coming neighborhoods may quickly make you money if the neighborhood improves, but you risk losing your investment to crime, deterioration or lack of interest in the neighborhood. Be aware that you may have to rent to lower-income tenants who can't afford luxuries or extras. You will also be responsible for keeping your property free of drugs and crime, which can be more difficult in high-crime areas.
What type of people are you hoping to rent to? If you're hoping to do business with families, you'll need properties in different neighborhoods than if your ideal tenants are career-minded professionals who don't have or expect to start families. The middle-class neighborhoods mentioned above are best for family-oriented rental businesses, while professionals may want to rent in neighborhoods that have good public transportation and an active nightlife for when they need a break from work.
What types of units are you hoping to rent? You have the choice between renting single-unit homes or multi-unit homes. Multi-unit homes require you to manage many different units and deal with a wide variety of tenants. They also give you greater potential income because you charge separate rent for each unit. However, multi-unit homes can be more expensive to purchase and may be zoned for only a certain number of tenants.
Purchasing a rental property is similar to purchasing a home for private use. Use a broker who specializes in rental properties to help negotiate the best mortgage possible for you on the property. Make sure you understand all mortgage terms before signing a mortgage. Remember that you will be responsible for the mortgage regardless of whether the property rents; you should have several months of mortgage payments in savings before making an investment in case it takes time to find tenants.
Once you have the property secured, all that's left for you to do is find your first tenants. Prepare a standard lease agreement before meeting tenants so that you'll be prepared to rent to them if they are interested in the property and pass your screening procedures. You should consult an attorney when drafting your lease agreement to ensure that you have included all required disclosures and that your lease is legally enforceable.
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