What Are the Basics of Operating a Household Rental Business?
You will need to know how to advertise and attract good tenants, keep them, decide the rent amount you would like to charge, collect it on time, budget for possible expenses, make repairs, keep detailed and accurate records, and interact with many different people.
Being a landlord is just like operating any other business; you’ll need to keep good records of everything. This includes rental applications, lease or rental agreements, rent payment schedule, and notices to your tenants. You should also keep all the receipts for any expenses you incurred, such as repairs and maintenance, purchases, advertisements, professional services, or any other expenses related to your rental property. All your rental income and expenses should be reported according to tax laws to the IRS. It goes without saying that you are also need to comply with any applicable local and State licensing and permitting laws, some of which may require you to maintain some type of insurance.
The following are just some of the key tips you might have not considered before becoming a landlord:
- Track Income and Expenses: There’s no way for you to claim tax deductions if you don’t keep good records. Some landlords will use cheap journals and ledger bills found in office supply stores to record the revenue and expenses. Other landlords prefer to go digital when building an accounting system for their business, using programs like Microsoft Excel and Intuit Quicken. You can also purchase software packages designed for property management or use a free mobile app like Tellus to track receipts as you get them.
You may want to retain the services of a tax accountant to prepare your taxes. Tax laws for rental property are more complicated and include additional requirements for interest paid on the mortgage, rental income, and property depreciation. If you decide to hire a tax professional, you should employ a certified public accountant or some other accounting professional with the expertise and experience in tax preparation for rental properties.
- Keep an Emergency Fund: Unexpected events are just part of owning a rental property, and you need to plan for them as much as possible. You don’t want to lose your property because you weren’t able to pay your mortgage. For example, there may be times when you are unable to find suitable tenants or when your tenants stop paying rent. Even during the eviction process, which can sometimes take months, you may not be able to collect rent. Hardships in your business do not mean you get a break from the bank. For this reason, keep money in reserve (at least three months of expenses) to help you continue paying your mortgage and other expenses for times when your income dries up. In some jurisdictions where the eviction process can take longer or where it’s hard to find good tenants, you may want to keep more in savings.
It’s important to budget for major repairs like replacing a furnace or roof. Since your tenants rely on you to keep the property habitable, you can’t put off repairs just because you don’t currently have the money. While you might be able to predict when some maintenance will be required, you should be prepared to deal with emergencies.
Seek Legal Advice: If you need to get legal advice, you should choose someone who specializes in landlord and tenant law. Even before starting to rent out a property, it’s not a bad idea to consult a lawyer to ensure that you comply with all local, State, and Federal laws.
Lawyers can also
Review your lease to ensure it protects you and does not contain illegal terms
Help protect your assets if a tenant is suing you
Help you avoid costly errors during the eviction process, saving you both time and money.
In short, be prepared to deal with lawyers at least once during your experience as a landlord.
When you hire a lawyer, consider signing a written agreement that clearly states what the lawyer will do for you and how much the lawyer will charge for their service.
When you operate your business, keep in mind that you should keep good accounting records, prepare emergency funds, and seek legal advice if necessary.