With an average rate of return that is high and stable, owning an investment property is a great move toward financial stability. In fact, some recent statistics say that the average ROI for owning a rental property is now above 9 percent. Real estate can definitely be a lucrative opportunity, but there is much more to it than purchasing in the right area at the right price, realizing some tax benefits and creating monthly income.

“Monthly income” is the piece where most first-time landlords could use a little help. Managing tenants and handling property maintenance are a big part of your new role. In order to be successful, I recommend focusing on some key areas.

Laws and Regulations

Every rental property is governed by a specific set of landlord-tenant laws established by your state.  Additionally, depending on where your property is located you may need to adhere to local city and county laws that will impact your rental property.

Landlord-tenant laws are state driven rules that will protect the owner, the property and the tenants in all rental transactions.

Landlord-Tenant Laws include items like:

• How to much you’re allowed to charge for a security deposit

• The amount of notice you are required to give tenants before raising the rent price

• Whether you are allowed to charge a non-refundable pet deposit

• Who is responsible for snow-removal: landlord or tenant

• Whether a tenant is allowed to withhold rent due to a cockroach infestation

If you have yet to check out the landlord-tenant laws in your state, you’ll find that there is a rule for almost every scenario that could arise between a landlord and renter interaction. Landlord-tenant laws provide the guidelines for how you will create a lease agreement.

Failing to follow landlord-tenant laws can result in a lawsuit and lost income.  For example, if you are evicting a renter for non-payment of rent, but forgot to follow one of your state’s landlord-tenant laws the judge could end up siding with the tenant and you could owe him or her money!

Every new landlord should find an attorney who is familiar with landlord-tenant laws in the state. Arrange a meeting to go over any questions about owning a rental property, and have him review your lease agreement and any legal forms you will use in your rental business.

Tenant Screening

Once you have a good understanding of your rights and responsibilities as a rental housing provider, then you are one step closer to actually having an occupant in your property. In order to find the right tenant, employing solid tenant screening practices is a vital step in the process.

Your investment will only be profitable if you find tenants who pay rent on time, follow lease terms and maintain the property according to the lease (i.e. do not cause any damage). Examine credit reports, criminal reports, and eviction history to determine if they will be a good renter.

Benefits of a common Tenant Screening Reports:

• Credit report reveals a renters financial responsibility, bill-paying habits and debt-to-income ratio.

• Criminal report will show you if a renter has a dangerous criminal background that would put your property, your community, your other tenants, you or your business in danger.

• Eviction reports show you if a renter has had any evictions in his past.

Additionally, a good landlord will ask for past landlord references, job references, pay-stubs, and other supporting documents to prove that the applicant can meet the income requirements and has qualities of a good renter.

Laws have recently changed surrounding tenant screening requirements, due in part to the Equifax breach of last year. New regulations now stipulate that all landlords and property managers must now complete a site inspection for any type of credit report. This means that a licensed inspector visits your office in person to make sure it is secure and that the public doesn’t have access to sensitive consumer data, which is a provision of the federal Fair Credit Reporting Act. As a landlord, I advise that you make yourself familiar with both the Fair Credit and the Federal Fair Housing Acts.  

Tenant screening is the best way to protect the profitability of your investment property. The more qualified your renter is, the more likely you will have a positive landlord-tenant relationship that is free of evictions, property damage or vacancy – things that all significantly eat away at a landlord’s cash-flow.

Maintain a Backup Fund

Keep a reserve fund to pay for property maintenance. This includes all planned and unplanned maintenance for your property, especially emergencies.

Even if property damage is caused by a tenant, and they are technically at fault, you might still have to pay for the out of pocket expenses to return the property to a habitable condition.

Your reserve fund should cover emergency property expenses and can also act as a savings account for big-ticket property maintenance like replacing the roof, repainting the exterior or replacing a furnace.

Most experts say that you should set aside 1 percent of your home’s value each year for maintenance. So if your home is worth $200,000, then you should anticipate $2,000 of annual maintenance expenses.

• Learn more about Maintenance Expenses for Your Rental Property

Understanding landlord-tenant laws, following tenant screening best practices and having an adequate reserve fund are a few of the most important steps every landlord must take in order to set themselves up for a profitable investment.