How to Start a Rental Property Business

Rental property investing can be a great strategy for building wealth and ensuring a brighter financial future. Across the country, landlords earn about $35,000 more than the median household each year [1], so with the right strategy, you can earn a very comfortable income with rental properties.

However, starting a rental property business is not an easy gig. There is a lot of work to do before you even collect your first rent check, and there are also some significant risks involved.

In this guide, we’ll show you how to start a rental property business and cover all the steps, from finding to financing, marketing, and maintaining a property. Let’s get started.

Whatever property you own will impact the people who can become clients, whether they are families, young professionals, travelers, or businesses. Here are some aspects you must consider when determining who the ideal client is for your rental property business.

• Do you want long or short-term clients?  – Rental income from long-term tenants may be more consistent, while short-term rentals can have a higher income.
• Who can afford your prices? –  Once you have a rental price, certain types of clients may or may not be able to afford it.
  
• Why are they renting this property? –. Renters have different needs, such as raising a family, enjoying a vacation, or needing a place to stay temporarily for a work assignment.
  
• What amenities do they need? – The amenities your investment property offers, including community amenities, will impact the kind of tenants you attract.
  
• How will they treat the property? – No one wants troublesome tenants, as they can end up costing you money if they treat the property poorly.
• Do you need business or residential tenants? – Marketing to commercial and residential clients is vastly different.

Establish Your Niche, Unique Value Proposition, and Branding

Building a rental property business into a successful brand requires hard work. You need a solid plan, an effective structure, and clients to bring in. Deciding on the niche, unique value proposition, and branding for your rental property business will set the tone for achieving long-term success and a profitable company.

Establish a Niche

A business niche refers to the market segment with the most demand for your product. For rental property businesses, that means the type of tenants who are most likely to rent a unit that you own. Figuring out this niche will help you prepare the property for the right tenants and market it effectively. Niches can include the following:

• Students
• Families
• Businesses

Choose a Unique Value Proposition

What makes your property the best option for tenants in your target market? Once you have a unique value proposition sorted, you can use it in your marketing pieces to convince tenants to choose your property. Standing out from the competition is key when you own rental properties, especially if your market has a high volume of similar properties available to tenants. Here are some examples of things you can focus on:

• Location
• The layout of the property
• The amenities in the building

Figure Out Branding

Branding is important because it focuses on consistency within a company. When people see your business name, colors, or logo, they will recognize it. A solid branding package will unify all your marketing collateral and increase brand recognition. Brand elements include:

• Business Name
• Colors
• Logo

Define the Services You’ll Provide

Services can set your rental property apart from others in the area. Whether you own vacation rental properties or long-term housing units, your services can be the difference between filling your vacant units and struggling to attract tenants. Some examples of services include the following:

• Free Wi-fi included with rent
• Utilities included in the rent, such as electricity, heating, or water usage
• Garbage removal
• Shoveling/plowing during snowfall
• Parking availability/assigned spots
• Outdoor space usage
• Patios
• Upgraded appliances
• Community gatherings with other tenants
• Referral program for new tenants
• Laundry services
• Cleaning services
• Smart security systems
• Proximity to community amenities
  
• Near public transportation hubs 

Choose a Location

Buying a property without a plan is not a wise strategy for building an investment property business. You need to be strategic when selecting properties to attract tenants and generate passive income. A huge part of that strategy depends on the location of the property. Here are a few factors to consider.

• Local real estate market – The condition of the real estate market the property resides in will impact prices, desirability, and competition with other buyers.
• Availability of community amenities – Tenants will be attracted to properties that put them close to useful amenities in the community, such as schools, attractions, stores, restaurants, or transportation services.
• Neighborhood value – The condition of the neighborhood your property is in will directly impact property value and tenant acquisition. A real estate agent can help with this research.
• Available lenders – The location of your property can determine what mortgage lenders you can work with to secure financing.
• Local contractors – Owning a rental property business means taking care of the premises, and you will need access to reliable contractors for these services.

Look for Properties for Sale

It is time to start looking for rental properties to buy. Whether you’re in the market for residential or commercial properties, finding the right one to build your business with is crucial. As you search for real estate to buy, consider the following factors:

• Business location – As mentioned before, location affects price, tenant acquisition, and access to lending options.
• Real estate agent – Working with real estate agents can help you find properties that fit your preferences and get offers more quickly.
• Compare properties – Finding a good deal is the key to turning a profit, so ask your real estate agent to compare prices of similar properties to ensure you’re paying a fair price.
• Consult inspection reports – When buying a rental property, the inspection report can reveal the value of your purchase and be used to negotiate for a better price.
• Analyze market trends – Understanding the real estate market trends in the area will ensure you find rental property that’s reasonably priced and attractive to tenants.

Consider Equipment

Rental properties need to be taken care of to attract tenants. That may mean additional investments upfront to ensure it has everything needed to convince tenants to move in or rent the space temporarily. Some equipment considerations to remember may include:

• New fixtures – Some elements, such as faucets or lighting features, may need updating, or you need to add them for the first time.
• Appliances – Old appliances may turn away potential tenants, while an upgraded kitchen or laundry room could attract more clients.
• Maintenance tools – You or the property manager are responsible for taking care of the property, which might require purchasing lawnmowers, shovels, plows, hand tools, and more.

Determine Pricing

Choosing the right price to charge for rent is the key to making a profit from your rental properties. There are many factors to consider when determining price, and you need to find the right balance that will attract tenants while still paying the bills and generating profit.

• Net operating income – The total amount of income generated by the property before expenses.
• Capitalization rate – The expected rate of return on a rental property (NOI divided by asset value).
• Appreciation – The slow increase in property value over time. Learn more about investing for property appreciation.
• Market rental rates – Rates should be comparable to similar properties in the market.
• Amenities – If your property offers something others do not, it can fetch a higher rental price.
• Cost of the rental property – Your mortgage rate should be the primary factor in calculating rent.
• Utilities/property taxes/insurance – Along with the mortgage, the rental payments should cover all ongoing costs of owning the property.

Get Financing

Most people do not have enough assets to buy a rental property outright, so they need to borrow money to start. You must consider other expenses as you budget for a property purchase, such as insurance, property taxes, maintenance, etc. There are several options for borrowing money to invest in a rental property.

• DSCR loan – A loan that is given based on projected rental income rather than the borrower’s personal finances.
• Rental loan – A mortgage specifically for single-family homes that the borrower will not occupy themself and instead collect rent from tenants.
• Commercial loans – As a rental property business, you can secure commercial loans to help finance properties or equipment, including small business loans, conventional commercial loans, small-balance commercial loans, and hard money loans.
• HELOC – A home equity line of credit on your current home is cash taken out of the property’s equity that can help finance a rental property and get you started as a real estate investor.
• Conventional home loan – You can also take out a conventional mortgage to finance a new investment for your rental property business.

Define the Services You’ll Provide

As a business owner, insurance is a necessity. You need to protect your assets in the event of unforeseen circumstances, and the right business insurance policy can secure a future for the company. The type of policy you need will depend on the structure of the business, but here are some factors that need to be part of your insurance plan.

• Workers’ compensation – Any business with one or more employees must pay for workers’ compensation if an employee becomes sick or injured.
• Property insurance – Since your rental property business depends on the condition of real estate, this insurance will protect your investment in the event of property damage.
• Loss of income insurance – If the property becomes uninhabitable due to a covered event, this policy can protect you when rental income is unavailable.
• General liability protection – If you’re ever sued for property damage or injury, this insurance will protect your business from significant losses.
• Umbrella insurance – If your base liability protections are not enough, an umbrella policy can increase the protection layer for your business.

Sort the Administrative Work

Rental property investors’ work does not end once they own a property. There are a lot of logistics to navigate to ensure your business is operating legally and correctly. Here are a few administrative considerations to sort out before you start collecting income:

• Employer identification number – For tax purposes, you must register with the IRS and obtain a tax identification number, or EIN.
• Business bank account – Keeping real estate business finances and personal finances separate is crucial to protect yourself, so you’ll need a separate bank account and a business credit card.
• Business license – Some states will require you to have a business license for each property you own. Either way, research your state’s guidelines for business license requirements.
• Business name registration – You can file your real estate business name with the US Small Business Administration.
• Permits – Operating rental properties may require permits depending on the location of the assets.

Hire Employees

The more your rental property business grows, the greater your need for hiring employees. Tasks like maintenance, lease agreements, property management, and more may be too much for you to handle as the owner. There are multiple options for hiring employees that will depend on what work they will be doing and the extent of that work.

• Part-time – Employees who are only needed for a specific number of hours per week, which could be anywhere from 5 to 30 hours.
• Full-time – Any workers needed for more than 30 hours are considered full-time.
• Contract work – A contractor is a worker who has the right to control only the result of work, not how it’s done, which is a useful distinction for small businesses that cannot hire permanent employees.

Establish a Marketing Strategy

Your top priority as a rental property business owner is to fill your units with tenants. Otherwise, you will be paying the mortgage and other upkeep expenses without bringing in any income, which can quickly bankrupt you.

To bring in new tenants when you have vacancies, you will need a strong marketing plan. Property management companies could help with this aspect of the business as well. Here are a few channels you could leverage to advertise your property to prospective tenants:

• Social media – Platforms like Facebook, Instagram, and LinkedIn are great for sharing images and videos that display your property’s amenities on high-traffic social media sites.
• Email marketing – Emails with catchy subject lines improve your outreach initiatives and follow up with potential tenants who have expressed interest in your property.
• Rental listing sites – Listing your property vacancies on large platforms like Airbnb, Zillow, or Apartments.com can vastly increase your reach and lead to more online organic traffic.
• Flyers – Print campaigns can be very effective for a rental property owner, and handing out flyers is a great tool to detail the property’s amenities while sharing images of the interior/exterior.
• Content marketing – Content is king in marketing circles, and if you can create content that communicates value to potential tenants, they will be more likely to check out your offering.
• Website SEO – Setting up a website for your properties lets potential tenants view your listings and unique services, and optimizing the site for search engines can increase the amount of traffic to your website.

Manage and Maintain Your Rental Properties Business

Now, the real work begins. It takes a lot of work to get set up as a business, buy property, prepare it for renters, and acquire tenants. From that point forward, your main objective is to successfully manage and maintain the properties so tenants are happy and vacancies are filled quickly. Property management may include the following tasks:

• Tenant acquisition – Onboarding new tenants for the property and working out lease agreements.
• Collecting rent – Accepting rental payments and following up with tenants who have not paid ensures consistent income.
• Property marketing – Consistently advertising your property so that vacancies are filled quickly.
• Maintenance requests – You need a proper response system for when tenants have maintenance issues on the property.
• Unit preparation – Before tenants move in, the unit must be cleaned and potentially upgraded.
• Property upgrades – Preserving the value of the property as a whole may involve upgrades like a new roof, new siding, new paint, and structural improvements.
• Hiring a property manager – A property management company allows owners to take a more hands-off approach while the property managers handle day-to-day tasks.
• Using property management software – If owners choose to manage the property themselves, they can use software to make their jobs easier.

Now that you know how to start a rental property business, you can work toward your dreams of generating greater income and having a brighter financial future.

Resources: [1] Brookings