Running a rental business is about more than just collecting rent; it’s managing your properties carefully and professionally. Many investors, especially new ones, often cut corners to save time or money. However, making informed decisions when setting up your business can help everything run smoothly and avoid expensive problems down the line.
Here, I’ll discuss how to structure your rental business, manage finances, comply with legal requirements, and handle property management effectively. I’ll also go over why reliable banking is important and how it can impact your business.
1. Get Your Business Structure Right
The first step in organizing your rental business is choosing the right legal structure. This decision will affect everything from your tax obligations to your personal liability.
Sole proprietorship vs. LLC
Choosing between these structures depends on your specific needs, goals, and the level of risk you are comfortable with. Consulting with a legal or financial advisor can help you make the best decision.
A sole proprietorship is the simplest form of business structure, where you and the business are considered one entity. A sole proprietorship is easy to set up and manage, low cost, and involves less paperwork, but it lacks liability protection. This means that if something goes wrong, your personal assets could be at risk.
A limited liability company (LLC) provides liability protection and potential tax benefits, and can be seen as more professional. However, it involves more costs and paperwork. Running a real estate LLC requires keeping the property in good repair to avoid negligence, holding the property title in the LLC, and operating the LLC as a business to maintain your corporate veil.
2. Handle Money and Choose the Right Bank
Managing your rental business finances effectively is crucial, and this includes choosing the right bank to handle your transactions and ensure your money is safe and accessible.
Fintech banks and newer, smaller banks often promise innovative features and low fees. However, these institutions can come with risks such as limited customer service and less stability. If these banks encounter financial problems or have technical issues, you might face delays in accessing your money.
Some users have experienced lengthy delays in accessing funds, or even had their accounts frozen temporarily. For example, I recently faced this situation with a financial app we use to track and pay our daughter for her chores—she couldn’t access her hard-earned allowance for four weeks due to an abrupt bank closure.
On the other hand, bigger, established banks like U.S. Bank offer greater stability and reliability. They have robust systems to manage your transactions and provide customer support when you need it. While they might have slightly higher fees or fewer bells and whistles, their reliability can be worth it for managing your rental business’ finances.
When choosing the right bank, look for stability by selecting one with a solid reputation and financial stability. Consider the level of customer service to ensure the bank offers good support and easy access to your funds. Check fees to find a bank that meets your needs without excessive charges. Finally, evaluate features like online access, mobile banking, and integration with accounting tools to fit your business needs.
3. Keep Track of Finances
Accurate accounting and bookkeeping are essential for managing your rental business finances, as keeping detailed records aids in tax reporting, financial planning, and monitoring your business’ performance.
Maintaining thorough records of all income and expenses, including rent payments, maintenance costs, and other business-related expenses, is crucial. Good records simplify the end-of-year tax filing process and ensure you don’t miss out on deductions, help you regularly review and understand how your business is performing, and assist in making informed decisions about reinvesting in your business or expanding your property portfolio.
To simplify accounting and bookkeeping for rental businesses, various tools and apps are available. Popular options include:
- QuickBooks: Helps track income, expenses, and generate financial reports
- Stessa: Offers real estate-specific expense and income tracking, as well as document storage
- Buildium: Designed specifically for property management, with features like rent tracking, tenant communication, and financial reporting
- Baselane: Their all-in-one platform handles everything from expense tracking to rent collection
Using these tools—or similar ones—can save you time and reduce the risk of errors in your financial records.
4. Follow the Rules to Be a Great Landlord
Compliance with local rental laws and regulations is crucial for avoiding legal issues and maintaining a good reputation as a landlord. Understanding and adhering to various legal requirements, such as fair housing laws when marketing your property and drafting clear, legally sound lease agreements, is essential. These agreements should outline the terms of the rental, including rent amounts, due dates, maintenance responsibilities, and rules regarding property use, noise, and other relevant issues.
Effective property management goes beyond just collecting rent. It involves maintaining your properties and ensuring a positive experience for your tenants. Screening tenants thoroughly helps you find reliable renters who will pay on time and take care of your property. This includes assessing their credit history, contacting previous landlords to verify their rental history and behavior, and conducting background checks to ensure there are no serious issues in their past.
If you need to remove a tenant, it’s important to follow the proper legal steps according to local regulations. Consider joining local landlord associations or consulting with a property management professional to stay informed about changes in the law.
One of the best ways to protect yourself is to be a great landlord. Treat everyone fairly, follow the rules, adhere to the lease, and keep the property well-maintained. Respond promptly to maintenance requests, and conduct regular inspections and preventative maintenance to avoid larger issues and keep tenants satisfied. This approach not only helps in complying with the law, but also fosters good tenant relationships and a smoothly running rental business.
5. Scale Your Business
As your rental business grows, you’ll need to manage more properties and possibly expand your operations. Reinvesting profits from your rental business can help you grow your portfolio and increase income.
This can be achieved by looking for new investment opportunities to buy additional properties and investing in improvements to upgrade existing properties, thereby increasing property value and attracting higher-quality tenants. Growth brings challenges, such as increased management responsibilities and higher operational costs. To manage this growth effectively, develop a strategy for scaling your business, which may include hiring additional help or using property management software to streamline operations.
Final Thoughts
Running a rental business is more than just collecting rent; it means taking care of your properties with professionalism. To be successful, you need to set up your business properly, manage your finances with a reliable bank, keep detailed records, follow legal rules, and take good care of your properties. This approach will help your business run smoothly and build good relationships with your tenants, leading to a well-managed, profitable venture.
Get More Time to Scale
Find trusted property managers and get everything you need to make confident hiring decisions.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
