A rental property business is an operation in which an investor owns and manages (either directly or via hired property managers) one or more properties rented out to tenants who pay the investor monthly rental fees.
Can I start a rental property business without experience?
The short answer is yes. Of course, prior experience is highly advantageous, but anyone eligible for the applicable licenses, permits, registrations, and financing can become a landlord.
Join a real estate investor group
Real estate investor groups provide invaluable insights to investors of all experience levels, particularly those starting out. Meeting with seasoned investors is not only an excellent opportunity for newbies to gain industry knowledge but also the potential to partner up with an experienced investor, thus splitting the costs and the risks of a first investment.
Partnering up with a seasoned investor can be a great way to access fast-track business knowledge. There is so much to consider, from structuring finance and business models to handling trouble tenants – what security systems for apartment complexes are best? What insurances are necessary? How should rent amounts be set? An experienced investor can answer all these questions and many more, so it’s well worth considering.
How to start a rental property business
There are many steps to starting a rental property business. Here is a guide to the most fundamental steps required to hit the ground running.
Starting any business requires the formation of a legal business entity. The main options for a rental property business are a Sole Proprietorship, a Partnership, a Limited Liability Company, and, less commonly, a Corporation.
Considerations when determining a business structure include personal liability risks and tax structures; the most common rental property business structure is an LLC because they protect the investor from being held personally liable if things go wrong.
It’s worthwhile seeking professional advice from an accountant before finalizing a business structure.
When registering a business, owners must choose a business name. Business names can then feature on websites, business cards, and other sales, marketing, and official documentation.
Strong business names are clear, simple to spell and say, memorable, and, of course, relevant to the type of business. Business name generators can be helpful, and it is important to check for the availability of matching website domain names and social media handles before committing to one.
We all know that location is vital to the value of a property, and this consideration must factor significantly into your investment choices. To set up a rental property business, however, the first locational consideration will be where the company will be based and whether it will be necessary to lease commercial office space.
Choose a market and a niche
There are advantages and disadvantages to niching down in the property market. On the one hand, niching enables investors to develop expertise in a particular property type, allowing for well-informed business decisions that can lead to greater success.
Niching options in the rental property sector include:
- Single-family homes
- Multi-family units
- Short-term/vacation properties (i.e. Airbnb)
- Luxury properties
On the other hand, niching in the property sector can also have drawbacks. For example, should an investor’s specialized market experience a slump, it will inevitably be harder to navigate without the backup of a more diverse portfolio.
Diversifying investment portfolios is no new strategy for mitigating risk, but it can also create investors that are a ‘jack of all trades – master of none.’ The decision to niche boils down to personal preference and experience in what works best for the individual.
Unique Value Proposition (UVP)
In rental property business terms, a UVP relates more to how the investor runs their business and what they offer to their prospective tenants. A UVP could be expertise, niching, convenience, a more personable approach, etc. Considering how to stand out from the crowd is essential in any business approach.
The specific services investors may offer their tenants can form part of their UVP. For instance, perhaps there are additional rent inclusions or superior customer service approaches – these details form a significant part of the marketing approach and must be considered before reaching out to new clients.
Determine your financing options
There are many options available to investors for financing a rental property. These include:
- Conventional loans
- Federal Housing Administration (FHA) financing
- Veterans Affairs financing
- FHA 203(k) loans
- Home equity loans and lines of credit
- Portfolio loans
- Self-directed individual retirement accounts (SDIRA)
Other options include blanket mortgages, owner financing, and group investing.
Of course, investing in a property typically relies upon eligible financing, and all options should be researched and considered before entering into business. In addition, there is more to real estate financing than traditional home-buying, such as the benefits of diversifying capital across an investment portfolio. Therefore, funding options are another area that should be explored with the assistance of an expert accountant.
Open a business credit card and business bank account
It is essential to open and operate a business banking account to keep personal finances separate from professional ones – this is especially important for tax purposes and makes the whole process exponentially easier.
It’s also a good idea to have a business credit card in place to assist in balancing cash flow funds, again keeping all business spending separate from personal spending.
Registrations, permits & licenses
The rental property market is heavily regulated, and it is crucial to get all registrations, permits, licenses, and other paperwork in order before commencing the business. The most important places to start include:
- Registering the business name through the Small Business Association (SBA)
- Obtain a business license – each state handles this differently, so it’s essential to check with the relevant state for guidelines
- Register for an Employer Identification Number (EIN) – an EIN provides employers with multiple benefits and is the equivalent of a Social Security Number (SSN) for a business.
Ongoing operational considerations
Before commencing a rental property business, it is important to consider how it will operate once it is up and running. Considering all aspects of daily operations, such as security, will create a clear idea of how you will spend your time as an investor, how scaleable the business will be, and some more informed number crunching figures to assist with financial projections. Questions to ask include:
Will you hire a property manager or take care of all aspects of the business yourself? What marketing avenues will you choose to attract tenants? What screening systems will you use to ensure you only enter agreements with quality tenants? Who will carry out the maintenance on your rental properties?
How to write a rental property business plan
Once the above considerations have been well thought out, it’s time to put this information into a solid business plan. For rental property ventures, a comprehensive business plan helps investors to stay on course for success and growth and is a vital document to provide to lenders and other investors when proposing an investment opportunity.
A solid rental property business plan will include the following:
What the company does and why it will be successful – to include information regarding any team, financials, the business location, any niche positioning, and a growth plan.
This section will include more in-depth information relating to the team, including individual roles and qualifications, and an overview of the business’s legal structure.
Industry & competitor analysis
Considerations regarding the current state of the property market, and relevant insights from local research – where are the prime investment opportunities, are there any direct competitors, and how will this enterprise stand out?
Management & operations
Will a property manager handle the day-to-day running of the business? How many staff members will there be? This section includes breaking down who will be responsible for marketing, tenant screening, legalities, maintenance issues, and other tenant activities.
This section should provide the reader with a comprehensive overview of the proposed marketing strategy. Strategies for attracting tenants, advertising available properties, and standing out from the crowd help lenders or fellow investors feel confident in the venture.
Is a rental property business a good investment?
The property market can be volatile. While long-term property investment is historically profitable, it still requires shrewd investment know-how to navigate the highs and lows that will inevitably come.
Experienced real estate investors respect the importance of doing due diligence, crunching the figures, and never acting on impulse – trusting your instincts is one thing. Still, investment decisions should always be backed up by sufficient market research.
Suppose you’re a determined, business savvy, patient, methodical, and organized person who can handle the pressures of navigating market slumps and mitigating risk. In that case, the rental real estate business may well be for you.