The American dream may be home ownership, but for many entrepreneurs, owning rental properties provides the keys to unlocking wealth, passive income, and financial independence. Renting out single-family homes and multi-family properties can generate cash flow and long-term capital appreciation.
The journey into property rental is not just about finding and purchasing a piece of real estate and our guide is here to help you take the next step by providing an overview of the business, steps to start, and answers to common questions..
A property rental business revolves around acquiring properties, such as houses or apartments, and then renting them out to tenants. This is an income-generating business: your primary income comes from the rents you collect. Periodically, you might also have opportunities to sell properties at a higher value than their purchase price, contributing additional income. However, the core of this business lies in the continuous inflow of rental payments.
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In the United States, the property rental industry is a substantial component of the economy. The market size of the apartment rental industry alone was valued at $258.4 billion in 2022.1
Forecasts predict industry growth due to increasing demand for rental properties, driven by affordability challenges in the housing market and the evolving preferences of millennials and Gen Z towards flexible living options. As more people opt for rental housing, the industry offers promising opportunities for entrepreneurs.
Steps To Start A Property Rental Business
Step 1: Write a Business Plan
When starting a property rental business, the first step is crafting a business plan. While this plan is typically more basic than those for traditional businesses, a bank or investor typically still requires something in writing to evaluate your project.
The core items that a rental property business plan should focus on include:
- Overview of property details – location, beds/baths, square footage, type of dwelling
- Planned updates and renovations with associated costs
- Projected monthly rental income based on market rates
- Estimated expenses, including mortgage, taxes, insurance, maintenance
- Net operating income and cash flow projections
Related: How to write a business plan
Step 2: Source Funding
One major challenge to breaking into the property rental business is securing the funds to purchase the first property, but there are a few options available.
A common option is to take out a loan from a bank. While not as difficult as a business loan since the property will act as the collateral, many lenders will require a 15% or more down payment and good credit. Also, some lenders are not interested in loaning on certain types of properties, such as Airbnb properties or vacation rentals. An SBA loan guarantee is normally not an option as the borrower needs to have commercial activity (having a tenant in business doesn’t count) in 51% or more of the purchased property. Also, know that a bank loan for an investment property will have a higher interest rate than a residential property occupied by a homeowner.
Another option is to seek out a private investor or hard money lender, though it can be hard for an unknown real estate investor to get an investor on board. Approaching family and friends is common, though a strong business plan is important to show you are serious about this venture.
Last, some home sellers will do a contract for deeds, where they act as the bank. The value to the homeowner is they are able to get some interest income, and if the buyer defaults, they get the property back.
Step 3: Register the Business
Before you purchase a property and place a “For Rent” sign on the front yard, you’ll need to make sure your business is registered and completely legal. The requirements vary by location, but here’s a general overview of what you need to do:
Decide on a business structure: The first task is setting up the business structures. The four main types are:
- Sole proprietorship: The simplest to start and has the lowest setup costs. But, if any legal problems arise, your personal assets could be at risk.
- General partnership: If you’re starting this with another person. Profits, liability, and management duties are shared.
- Corporation: This structure separates your personal assets from your company’s, providing personal liability protection. But it’s more complex to start and manage.
- Limited Liability Company (LLC): It combines the advantages of the above structures. Your personal assets are protected, and it’s simple to set up and manage.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!
Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!
Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain business licenses and permits: Depending on the city or county your property is located in, you may need a general business license, a landlord or rental permit, a seller’s permit, an Employer Identification Number (EIN), and/or building and housing permits. Check with your local government office for the exact requirements.
Understand your local landlord-tenant laws: Each state has its own set of landlord-tenant laws that you must comply with. These laws cover security deposits, lease agreements, eviction procedures, property maintenance, and more.
Comply with housing and rental laws: As a landlord, you’re also subject to federal fair housing laws, which prohibit discrimination based on race, color, national origin, religion, sex, familial status, or disability. Familiarize yourself with the Fair Housing Act and other relevant laws to ensure you’re treating all potential tenants fairly and legally.
Step 4: Set Up Operations
Now that you’ve secured funding and registered your business, it’s time to focus on the operational aspects of your property rental business. Some of the common tasks in this phase include:
Property insurance: This can include property insurance to cover potential damages to the property, liability insurance to safeguard against injuries or damages claimed by tenants, and loss of rent insurance to protect against loss of income in case the property becomes uninhabitable due to certain causes like fire or severe weather.
Rental contracts: Create leases spelling out rental rates, due dates, grace periods, security deposit terms, maintenance policies, tenant responsibilities, causes for eviction, and other terms. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.
Property management: Determine whether you want to manage the property yourself or hire a professional property management company. If you have a large number of properties or live far from them, a property management company can be extremely beneficial. They would handle tenant interactions, maintenance, rent collection, and other administrative tasks on your behalf.
Tenant screening: A thorough tenant screening process involves credit checks and background checks to evaluate a tenant’s financial stability and character. It helps ensure that you select reliable tenants who can pay rent regularly and respect the property rules.
Bookkeeping: Decide on a system (software or manual) for tracking income, expenses, and other financial transactions relating to your rental business. This will make tax filing easier and provide you with an accurate view of your business’s profitability.
Property advertisement: To attract potential renters, you need an effective marketing strategy. Advertise your property through various channels, such as online property portals, local newspapers, social media platforms, and property agencies. High-quality photos and detailed information about the property features and amenities can help attract more interest from potential tenants.
Step 5: Purchase a Property!
With the money sorted, business registered, and operations in place, it’s time to pick up a property!
Common Questions When Starting A Property Rental Business
How much does it cost to start a property rental business?
Starting a property rental business usually requires a substantial initial investment. The total cost for getting started can range from around $100,000 to several million dollars, depending on factors such as property location, size, and type. Here is a breakdown of the costs you can expect:
Property acquisition: The most significant cost when starting a property rental business is the purchase or development of the property itself, and can be anywhere from $100,000 to over $1,000,000.
Renovation and remodeling expenses: Once you’ve acquired a property, you may need to invest in renovations and remodeling to make it suitable for renters. These costs can range from $10,000 to $100,000, depending on the extent of the renovations needed.
Business registration: Registering your business is another essential cost to consider. While this cost is relatively minor compared to others, it’s a necessary step in establishing your legal business entity. The cost of business registration varies by state, but you can expect to pay around $50 to $500.
Insurance: Before renting out your property, you’ll also need to secure insurance coverage. The initial cost of these policies can range from $500 to $1,500.
Marketing: This could involve listing your property on rental platforms, advertising in local newspapers, or hiring a real estate agent to find tenants. Initial marketing costs can range from $100 to $1,000.
How profitable is a property rental business?
Given the broad range of the property rental market, the profit potential for a rental business can vary widely. However, we can arrive at an estimated figure using industry averages and making some assumptions.
– Assume an average monthly rental income of $2,000.
– Assuming full occupancy, the annual revenue would be $2,000 x 12 = $24,000.
Common expenses include maintenance, property management fees, property taxes, insurance, and miscellaneous costs. Estimating these expenses as a percentage of annual revenue gives us:
– Maintenance and repairs: 10% of annual revenue
– Property management fees: 8% of annual revenue
– Property taxes: 3% of annual revenue
– Insurance costs: 2% of annual revenue
– Miscellaneous expenses: 5% of annual revenue
Subtract the total expenses from the annual revenue to estimate the profit.
For instance, if the total expenses amount to 28% of the annual revenue (10% + 8% + 3% + 2% + 5%), the expenses would be 28% of $24,000 = $6,720. Thus, the estimated profit would be $24,000 – $6,720 = $17,280 annually.
It’s important to note that these are general assumptions, and we haven’t included any loan repayments in the calculations.
What skills are needed to run a property rental business?
A property rental business requires several skills to keep each part of the business organized and operating smoothly.
Employee management: While your business is small, you may be able to manage the properties independently. However, as the business grows, you may need to hire property managers, repair and maintenance employees, and accountants. Therefore, healthy employee management skills help keep you and your employees happy and your business running efficiently.
Financial discernment: Managing multiple rental properties will require you to keep track of loan payments, insurance, repairs, and other bills. Financial insight allows you to balance your business’s debt to income and ensure that your income exceeds your expenses.
Risk-aware: Being aware of risks means knowing the difference between properties that are assets and properties that are liabilities. A property that is a liability means it takes more money than it brings in. However, taking on liability for the potential income it will bring in later may be beneficial. So, knowing what risks to take (and which to avoid) helps you make wise business decisions and property purchases.
Handiness. Although you can hire others to help with repairs, maintenance, and updates at your properties, it does benefit you to know how to fix things—even on the most basic level. For instance, minor repairs may be easier and more cost-effective to do yourself. And you will have a better understanding of how much repairs should cost.