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Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on December 13, 2021
Investment range
$28,650 - $114,100
Revenue potential
$36,000 - $72,000 p.a.
Time to build
1 – 3 Months
Profit potential
$32,000 - $65,000 p.a.
Industry trend
Growing
Commitment
Flexible
Important elements to think about when starting your rental property business:
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Every business, including a rental property business, has pros and cons that you should consider before deciding if it’s right for you.
Some 35% of US households are rental properties, according to iProperty Management, an advisory website for landlords.
Trends in the rental industry are:
Challenges in the rental industry include:
Startup costs for a rental property business range from $25,000 to half a million or more. The main cost is obviously the property itself, so your initial investment will depend on the type of property you decide to buy. Lenders generally require a 20%-25% down payment.
| Startup Costs | Ballpark Range | Average |
|---|---|---|
| Setting up a business name and corporation | $150 - $200 | $175 |
| Licenses and permits | $200 - $300 | $250 |
| Insurance | $100 - $300 | $200 |
| Business cards and brochures | $200 - $300 | $250 |
| Website setup | $1,000 - $3,000 | $2,000 |
| First property down payment | $25,000 - $100,000 | $62,500 |
| Renovation of first property | $2,000 - $10,000 | $6,000 |
| Total | $28,650 - $114,100 | $71,375 |
Your income will of course depend on the rents you charge, minus your mortgage payment. A general rule for real estate investors is to make at least $150 per month per unit. Keep in mind that you will see more financial benefits at tax time and in the long run, as your properties appreciate and rents increase.
Subtracting the chunk of rent that will cover your mortgage payments, after expenses, such as maintenance, you should expect a profit margin of around 90%.
If you start with a 20-unit building and net $150 per month per unit, you’ll bring in $36,000 in annual revenue and around $32,000 in profit, assuming that 90% margin. If in a few years you’re able to add 20 more units, you’d have annual revenue of close to $72,000 and nearly $65,000 in profit.
The biggest barrier to entry into the rental property market is the hefty investment cost. You’ll have to purchase and develop a property that you can rent out, whether an apartment building or single-family homes.
Other barriers to entry are the government regulations that you have to comply with, tax payments, and legal requirements.
Now that you know what’s involved in starting a rental property business, it’s a good idea to hone your concept in preparation to enter a competitive market.
Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.
Research rental properties in your area to examine their price points and customer reviews. You’re looking for a market gap to fill.
You can capitalize on the rising demand for single-family home rentals and build a portfolio with long-term value while generating significant rental income.((https://www.usnews.com/news/business/articles/2021-11-24/housing-market-trends-fuel-single-family-home-rental-growth)) In the third quarter of 2021, construction began on 16,000 build-to-rent homes, the highest number since 1990, according to the National Association of Home Builders. So, while larger residential buildings still do present an opportunity, the rising number of single-family home rentals points to another, potentially larger long-term income stream.
You can invest in an apartment building, single-family rental units, vacation homes, serviced apartments, and more. The highest share of US renters (35%) live in buildings with more than 10 units, but the share of renters in single-family homes (26%) is on the rise.
You might also consider offering environment-friendly features. Rental properties with pools, gyms, and other amenities are also in demand.
Home-stay rentals like Airbnb and VRBO are also booming, so you may want to keep that in mind as an option, assuming your area allows it. You can learn more in the Step By Step article on How to Start an Airbnb Business.
Rising house prices are also pushing rents up and pricing many US households out of the housing market. In May 2022, the national median monthly rent surpassed $2,000 for the first time.
You’ll have to consider your maintenance costs, overhead expenses, and target profit margin in determining how much you’ll ask for rent. Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Your target market depends on which properties you invest in. If you invest in urban apartments, your demographic will tend to be younger, so you can find them on sites like Instagram, rather than Facebook.
You might consider investing in a rental property in either an urban or suburban area. Rentals are split almost evenly between these, but the latest shift is toward the latter. This is due in part to the greater number of people working from home post-pandemic, who no longer need to live in pricier urban areas to be close to the office.
As to your office, you may want to run your business from home in the early stages to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out a commercial space. You can find commercial space to rent in your area on Craigslist, Crexi, and Commercial Cafe.
When choosing a commercial space, you may want to follow these rules of thumb:
Here are some ideas for brainstorming your business name:
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool below. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Here are the key components of a business plan:
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.
Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to rental properties.
If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your rental property business will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
Choose Your State
The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
The IRS website also offers a tax-payers checklist, and taxes can be filed online.
It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.
Securing financing is your next step and there are plenty of ways to raise capital:
Bank and SBA loans are probably the best option, other than friends and family, for funding a rental property business.
Starting a rental property business requires obtaining a number of licenses and permits from local, state, and federal governments.
Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.
If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Before you start making money you’ll need a place to keep it, and that requires opening a bank account.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your rental property business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
You can use industry-specific software, such as TenantCloud, Buildium, and Propertyware, to manage your properties and tenants, oversee maintenance, set a schedule for rent payments, and more.
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.
You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.
They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.
Here are some powerful marketing strategies for your future business:
Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your rental property meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its strong USP: “Fresh, hot pizza delivered in 30 minutes or less, guaranteed.” Signature USPs for your rental property business could be:
You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a rental property business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in rental properties for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in rental properties. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a rental property business would include:
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
Most of us have been renters at some point in our lives, and wouldn’t it be better to be the landlord? You can provide safe housing for people and, at the same time, create a valuable real estate portfolio that can provide a steady source of income for a long time.
About a third, or 35%, of households in the United States are renters, and you can capitalize on that market with your own rental property business. In 10 years, think of what it will be worth! Now that you’re armed with insights into the business, you’re now ready to start your journey into the entrepreneurial world of being a landlord.
Contrary to what some companies may try to tell you at their seminars, realistically you need a down payment of 20% – 25% to buy a property. You also need to pay for any licenses or permits that may be required, and insurance, at the very least. Your investment in a rental property business, however, will be well worth it in the long run.
In short, a rental property business has risks, and without personal liability protection, your personal assets could be threatened. Choosing to form an LLC is not a requirement, but it offers many benefits for you as a business owner, such as personal liability protection. If a tenant ever sues you, that liability protection will keep your personal assets safe.
Realistically, to make a good income you need to have multiple units. A rule of thumb is to net at least $100 per month per unit. The real value you get from a rental property business comes from tax advantages and the long-term appreciation of your properties. In 10 years, you could build something that’s worth into the 7 figures!
You should look at what you can buy it for, how much your mortgage will be, and what rent you can get for it based on market rates. Generally, you should aim to net at least $100 per month per unit. You should also look at the location to see if properties in the area are appreciating since the property value is what you will really benefit from in the long run.
The rental property that makes the most money can vary depending on factors such as location, market demand, property size, and rental rates. Generally, properties with high rental yields and potential for appreciation tend to generate higher profits. This can include properties in desirable locations with strong rental demand, such as apartments or homes in popular urban areas or vacation destinations.
The most common type of rental property is residential rentals, such as apartments, houses, and condominiums. Residential rentals cater to individuals and families seeking long-term accommodation.
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