Owning rental properties can be a great way to generate passive income and build wealth over time. But it's not as easy as buying a few properties and collecting rent checks. There's a lot of work involved in managing tenants, maintaining properties and staying up-to-date on the latest laws and regulations.
In this comprehensive guide, we will walk you through the fundamental steps of starting a rental property business. Learn everything from creating your business plan to build your business website and spreading the word about your new venture.
What is a rental property business?
A rental property business is a business venture in which an investor purchases and manages one or more income-producing properties. These properties can have one or more units leased out to tenants in exchange for monthly rental fees. Rental property businesses can be operated by individuals, or they can be more complex operations involving multiple properties and team members.
Is your rental property a business?
Whether or not your rental property is considered a business depends on a number of factors, including:
Your level of involvement in the management of the property. If you're actively involved in managing the property, such as by handling maintenance requests, showing the property to prospective tenants and collecting rent, then your rental property is more likely to be considered a business.
The number of properties you own. If you own multiple rental properties, then your rental activity is more likely to be considered a business.
The amount of income you generate from your rental properties. If you generate a significant amount of income from your rental properties, then your rental activity is more likely to be considered a business.
If you meet all of the following criteria, then your rental property is likely to be considered a business:
You rent the property to earn a profit.
You work at the property regularly and continuously.
You provide significant services to your tenants, such as maintenance and repairs.
You have a significant investment in the property.
If your rental property meets all of these criteria, then you may be able to deduct certain expenses related to the property from your personal income taxes. You may also be able to claim certain tax credits, such as the qualified business income (QBI) deduction.
If you're not sure whether your rental property is considered a business, you should consult with a tax advisor.
Why should you start a rental property business?
Approximately 10.6 million in the U.S. declared rental income when filing taxes, with the average landlord bringing in $61,920 annually. Along with the financial benefits, there are many reasons to start a business in rental property and enter the real estate market.
Firstly, it allows you to create passive income with minimal daily involvement by generating consistent rental payments. You also have the potential for long-term wealth accumulation through property appreciation and the combo of cash flow and equity growth. On top of that, owning rental properties enables you to diversify your investment portfolio, providing stability and acting as a hedge against stock market volatility. There are also various tax advantages to consider, such as depreciation, mortgage interest deductions, property tax deductions and eligible expenses.
How to start a rental property business
To set yourself up for success, follow these steps to start your rental property business:
01. Define your business goals
Determine your investment goals and strategy. Consider factors like property types (residential or commercial), location preferences, target tenant market and desired return on investment (ROI). Establish a clear vision for your rental property business.
02. Conduct market research
Thoroughly research your target market to identify areas with strong rental demand, favorable vacancy rates and potential for property appreciation. Analyze rental rates, property prices, local regulations and economic indicators. Evaluate the competition and your unique selling proposition to assess the viability of your rental business in the chosen market.
03. Create a business plan
Develop a comprehensive business plan that outlines your investment strategy, financial projections, marketing strategies, executive summary, property management processes and risk management strategies. A well-crafted rental property business plan serves as a roadmap for your rental property business and helps you attract potential investors or secure financing.
04. Secure financing
Determine your financing needs and explore how to raise money for your business. These may include traditional bank loans, private investors, partnerships, crowdfunding or using personal funds. Prepare a solid financial plan, including cash flow projections, expenses and potential return on investment, to present to lenders or investors. Once you’ve secured financing you’ll be able to register your business to make it official.
05. Identify and acquire properties
Once you have secured financing, start searching for suitable properties that align with your investment goals. Consider factors such as location, property condition, potential rental income and market appreciation. Conduct property inspections, perform due diligence and negotiate purchase prices.
06. Set up property management systems
Establish efficient property management systems to handle tenant relations, rent collection, property maintenance and legal compliance. Consider using property management software or hiring a professional property management company to streamline operations.
07. Market and advertise your rental properties
Develop a marketing strategy to attract potential tenants. List your properties on rental listing websites, utilize social media platforms and try networking with local real estate agents or relocation services. Create compelling property listings with high-quality photos, detailed descriptions and competitive rental prices.
How to write a rental property business plan
To write a rental property business plan, you need to consider the following sections:
Executive summary: The executive summary is a brief overview of your entire business plan. It should include your business goals, target market and competitive advantage.
Company description: The company description section provides more detail about your business, such as your business structure, ownership and services offered.
Market analysis: The market analysis section provides an overview of the rental property market in your area. It should include information about the demographic makeup of your target market, the supply and demand for rental properties, and the average rental rates.
Marketing strategy: The marketing strategy section describes how you plan to attract and retain tenants. It should include information about your target market, your marketing channels and your pricing strategy.
Management and operations: The management and operations section describes how you plan to manage your rental properties. It should include information about your team, your maintenance procedures and your tenant screening process.
Financial projections: The financial projections section provides an overview of your expected revenue and expenses. It should include information about your startup costs, your monthly operating expenses and your cash flow statement.
Exit strategy: The exit strategy section describes how you plan to exit your rental property business in the future. It could include selling your properties, passing them down to your heirs or exchanging them for other assets.
Once you have written your rental property business plan, you should review it with a trusted advisor, such as a lawyer or accountant. This will help you identify any potential problems and make sure that your plan is sound.
Here are some additional tips for writing a rental property business plan:
Be specific. Don't just say that you want to "make money." Instead, set specific goals, such as "I want to generate a 10% return on my investment within five years."
Be realistic. Don't overstate your income potential or underestimate your expenses.
Be flexible. Your business plan should be a living document that you can update as needed.
Seek feedback from others. Ask a lawyer, accountant or other experienced real estate investor to review your business plan and provide feedback.
With a well-written rental property business plan, you will be well on your way to success.
How much does it cost to start a rental property business?
The cost to start a rental property business can vary depending on a number of factors, including the type of property you buy, the location of the property and the condition of the property. However, there are some general costs that you can expect to incur, including:
Down payment: Most lenders will require you to make a down payment of at least 20% of the purchase price of the property.
Closing costs: Closing costs can range from 2% to 5% of the purchase price of the property.
Repairs and renovations: You may need to make some repairs or renovations to the property before you can rent it out.
Appliances and furniture: If the property is unfurnished, you will need to purchase appliances and furniture.
Marketing and advertising: You will need to market and advertise your property to potential tenants.
Landlord insurance: Landlord insurance will protect you financially in the event of a lawsuit or other covered event.
In addition to these upfront costs, there are also ongoing costs that you will need to budget for, such as property taxes, homeowner's association fees and maintenance and repairs.
According to a recent survey by the National Association of Realtors, the median down payment for a rental property purchase was 23% in 2022. The median closing costs were 2.1% of the purchase price. And the median amount spent on repairs and renovations was 1.2% of the purchase price.
Based on these estimates, you can expect to spend around 25%-26% of the purchase price of the property on upfront costs. So, if you are buying a $300,000 rental property, you can expect to spend around $75,000-$78,000 on upfront costs.
Of course, the actual cost of starting a rental property business will vary depending on your specific circumstances. It's important to do your research and create a budget before you start investing in rental properties.
Can a rental property business be profitable?
The profitability of a rental property business can vary significantly based on factors such as property location, market conditions, rental rates, expenses, and financing terms.
The "1% rule" is a general guideline often used by real estate investors to quickly evaluate the potential profitability of a rental property. It says that a rental property's monthly rental income should be at least 1% of the property's total acquisition cost. This is used as a quick initial screening tool to determine if a property might be worth the investment.
Here's how the 1% rule works:
1% Rule:** Monthly Rental Income ≥ 1% of Property Acquisition Cost
For example, if you're considering purchasing a rental property for $200,000, the monthly rental income should ideally be at least 1% of $200,000, which is $2,000.
Keep in mind that the 1% rule is a simplified guideline and shouldn't be the sole determining factor for making an investment decision. It's important to consider other factors such as location, market conditions, property management costs, financing terms, potential for appreciation, and the overall financial feasibility of the investment. The 1% rule can provide a quick initial assessment, a thorough analysis that takes into account all relevant factors is necessary to make informed investment decisions in the real estate market.
Properties that meet the 1% rule often have a higher likelihood of generating positive cash flow, where rental income exceeds expenses like mortgage payments, property taxes, insurance, and maintenance costs. However, markets with higher property prices and lower rental rates may make it challenging to find properties that meet the 1% rule while still being viable investment opportunities.
How to manage a rental property business effectively
Managing a rental property business requires effective systems, strong communication and ongoing attention to detail. More specifically, you’ll want to pay special attention to:
Tenant screening: Implement a thorough tenant screening process to ensure you select reliable and responsible tenants. Screen applicants' credit history, employment status and rental history, plus conduct background checks to minimize risks.
Lease agreements: Develop clear and comprehensive lease agreements that outline tenant responsibilities, rent payment terms, property rules and lease duration. Consult a legal professional to double-check that your lease agreements comply with local regulations and protect your interests.
Property maintenance and repairs: Regularly inspect and maintain your rental properties to keep them in good condition. Promptly address maintenance requests and conduct repairs as needed. Establish relationships with reliable contractors or property maintenance teams to ensure efficient service.
Rent collection and financial management: Establish streamlined rent collection processes. Clearly communicate rent payment methods and due dates to tenants. Utilize property management software or online platforms to track rent payments, generate financial reports and monitor cash flow.
Legal compliance: Stay informed about local and national rental regulations, fair housing laws and landlord-tenant rights. Make sure that your rental property business complies with these laws to avoid legal issues or disputes. Speak with legal professionals or local housing authorities when needed.
Regular communication: Foster good tenant relations through clear and open communication. Respond to inquiries or concerns promptly, provide regular updates or newsletters and address issues professionally and efficiently. Good communication builds trust and reduces conflicts.
How to promote your rental property business
As you’re looking to market your business, you’ll need to make sure that your brand's look and feel is professional. Consider things like how to name a business effectively so that your audience remembers you. If you’re struggling, you could use a business name generator. You’ll also need to design an eye-catching logo. Use a logo maker and/or check out these construction logo ideas for a little inspiration. Once you’re happy with your branding, it’s time to get promoting.
Create a professional website: Make a website for your rental property business. You can use website builders like Wix to showcase your properties, provide property details, highlight amenities and allow prospective tenants to contact you easily. Note that in 2022, renters used mobile devices (74%) to research rental properties, so you’ll want to ensure that your site’s mobile-friendly.
Optimize online listings: List your rental properties on popular rental listing websites like Zillow, Apartments.com or Rent.com. Optimize your listings with high-quality photos, detailed descriptions and competitive rental prices to attract potential tenants.
Leverage social media: Utilize social media platforms like Facebook, Instagram or LinkedIn to promote your rental properties. Create engaging content, share property photos or virtual tours and interact with potential tenants. Consider running targeted ads to reach your desired audience.
Network with local real estate agents: Build relationships with local real estate agents who can refer potential tenants to your rental properties. Offer incentives or commissions for successful referrals to encourage collaboration.
Offer incentives and referral programs: Attract tenants by offering incentives like move-in specials, discounted rent for the first month or referral programs. Encourage satisfied tenants to refer their friends, family or colleagues to your properties.
Showcase tenant testimonials: Collect testimonials from satisfied tenants and showcase them on your website, social media platforms or promotional materials. Positive reviews and testimonials can instill confidence in potential tenants.
Enhance curb appeal: Maintain attractive and well-maintained exteriors for your rental properties. Enhancing curb appeal through landscaping, exterior upgrades or fresh paint (see our guide on how to start a painting business) can attract potential tenants and create a positive first impression.
In summary, here are the top benefits of starting a rental property business:
Cash flow: Rental properties generate rental income that can provide consistent cash flow. With proper management and strategic property selection, you can ensure a positive cash flow that covers expenses and generates profit.
Appreciation: Real estate properties have the potential to appreciate in value over time. As the value of your properties increases, so does your equity, allowing you to build wealth through appreciation.
Equity build-up: Each mortgage payment made by tenants helps to build equity in the property. Over time, as the mortgage balance decreases, your ownership stake increases, leading to increased wealth and financial stability.
Control and flexibility: As the owner of rental properties, you have control over property selection, rental prices, tenant screening and property management. This provides you with flexibility in decision-making and the ability to shape your business according to your goals.
Challenges of running a rental property business
While starting a rental property business has its advantages, it can come with its fair share of challenges. Here are some common challenges to be aware of:
Initial capital investment: Acquiring rental properties requires a significant upfront investment. Costs include property purchase, down payment, closing costs, property improvements and potentially renovations or repairs. Securing financing or having access to sufficient startup capital is crucial.
Property management: Managing rental properties involves various responsibilities, such as screening tenants, collecting rent, property maintenance, addressing tenant concerns and ensuring legal compliance. Effective property management requires time organization and problem-solving skills.
Tenant relations: Dealing with tenants can present challenges, including late rent payments, property damage, tenant turnover and potential conflicts. Building good tenant relationships and addressing issues promptly are key to maintaining a successful rental property business.
Market fluctuations: Real estate markets can experience fluctuations and cyclical patterns. Economic downturns, changes in demand or local market factors can affect rental rates, property values and vacancy rates. Staying informed about market trends and business cycle and adjusting your strategies accordingly is essential.
Features of successful rental properties
Successful rental properties typically have the following features:
Location: The property is located in a desirable area with good amenities, such as schools, shopping and public transportation.
Condition: The property is in good condition and well-maintained.
Price: The property is priced competitively and offers good value for tenants.
Target market: The property is appealing to a specific target market, such as families, students or professionals.
Management: The property is well-managed, with a system in place to handle maintenance requests, tenant screening and rent collection.
In addition to these general features, there are some specific features that may be more important for certain types of rental properties. For example, vacation rentals may need to have certain amenities, such as a pool or hot tub, in order to be successful. Commercial rental properties may need to be located in a high-traffic area with plenty of parking.
Here are some additional features that can make rental properties more successful:
Energy efficiency: Energy-efficient properties save tenants money on their utility bills, which makes them more attractive.
Security features: Security features, such as alarm systems and security cameras, can make tenants feel safer and more secure.
Pet-friendly policies: Pet-friendly rental properties are in high demand, as many people have pets.
Outdoor spaces: Outdoor spaces, such as patios, balconies and yards, are a valuable amenity for tenants.
Smart home features: Smart home features, such as thermostats and door locks, can make rental properties more convenient and efficient for tenants.
By investing in a property with these features, you can increase your chances of success as a landlord.
Example of rental property businesses built on Wix
Need a little extra inspiration? Check out these rental property businesses on Wix.
TurnkeyRents has been managing rental homes in Columbus, Indiana since as early as 1994. The company offers newly renovated homes, and provides its application docs and Airbnb calendar right from its Wix site.
Rent DIICO provides a simple landing page for viewing all of its available properties in Southern California. Rental units include apartments, studios and bungalows in some of the hottest parts of town.
Looking to start your business in a new state?
If you're eager to launch your rental business in a particular state, check out these helpful articles:
Or, if you’re looking to learn about other business types, check out these related posts: