Running a rental business is more than just collecting rent; it’s managing your property carefully and professionally. Many investors, especially new investors, often take shortcuts to save time or money. However, making smart decisions when setting up your business can help everything run smoothly and avoid costly problems later on.
Here, I’ll discuss how to set up your rental business, manage your finances, comply with legal requirements, and manage your property effectively. I’ll also cover why reliable banking is important and how it can impact your business.
1. Set up the right business structure
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. Limited Liability Company
Choosing between these structures depends on your specific needs, goals, and the level of risk you can tolerate. Consulting a legal or financial advisor can help you make the best decision.
A sole proprietorship is the simplest form of business structure in which you and the business are considered one entity. Sole proprietorships are easy to set up and manage, have low costs and require less paperwork, but lack liability protection. This means your personal assets could be at risk if something goes wrong.
A limited liability company (LLC) offers liability protection and potential tax benefits and can be viewed as more professional. However, it involves more costs and paperwork. Running a real estate LLC requires keeping the property in good condition to avoid neglect, holding title to the LLC’s property, and operating the LLC as a business to maintain your corporate veil.
2. Handle funds 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 ensuring your funds are safe and easy to access.
Fintech banks and emerging smaller banks often promise innovative features and low fees. However, these institutions may come with risks such as limited customer service and less stability. If these banks experience financial issues or technical issues, you may experience delays in withdrawing your funds.
Some users have experienced lengthy delays in accessing funds, or even had their accounts temporarily frozen. For example, I recently encountered this situation with a financial app we used to track and pay our daughter for her chores—she couldn’t collect her hard-earned money for four weeks because the bank suddenly closed pocket money.
On the other hand, larger, stronger banks like U.S. Bancorp offer greater stability and reliability. They have robust systems in place to manage your transactions and provide customer support when you need it. While they may cost slightly more or have fewer bells and whistles, their reliability makes it worth it for managing the finances of your rental business.
When choosing the right bank, look for stability by choosing one that is reputable and financially stable. Consider customer service levels to ensure the bank provides good support and easy access to your funds. Check the fees and find a bank that meets your needs without charging exorbitant fees. Finally, evaluate features such as online access, mobile banking, and integration with accounting tools to meet your business needs.
3. Track your finances
Accurate accounting and bookkeeping are critical to managing rental business finances, as keeping detailed records aids in tax reporting, financial planning and monitoring business performance.
It is vital to keep complete records of all income and expenses, including rent, maintenance costs and other business-related expenses. Good records can streamline the year-end tax filing process, ensure you don’t miss deductions, help you regularly review and understand your business performance, and assist you in making informed decisions about reinvesting in your business or expanding your property portfolio.
To simplify accounting and bookkeeping for a rental business, there are a variety of tools and apps available. Popular options include:
- Quick books: Helps track income, expenses and generate financial reports
- identical: Provides real estate-specific expense and income tracking and document storage
- Construction: Designed for property management, with features like rent tracking, tenant communication, and financial reporting
- they left each other: 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 and be a great landlord
Complying with local rental laws and regulations is critical to avoiding legal issues and maintaining a good reputation as a landlord. It is crucial to understand and comply with various legal requirements, such as fair housing laws when marketing a property and drafting a clear, legal lease agreement. These agreements should outline the terms of the lease, including rent amounts, due dates, maintenance responsibilities, and rules regarding property use, noise, and other related issues.
Effective property management is more than just collecting rent. It involves maintaining your property and ensuring a positive experience for your tenants. Thoroughly screening tenants can help you find reliable tenants 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 they have no serious issues in the past.
If you need to evict a tenant, be sure to take the appropriate legal steps according to local regulations. Consider joining a local landlord association or consulting a property management professional to stay informed of changes in the law.
One of the best ways to protect yourself is to be a good landlord. Treat everyone fairly, follow the rules, honor the lease, and keep the property well maintained. Respond promptly to maintenance requests and perform regular inspections and preventive maintenance to avoid larger problems and keep tenants satisfied. This approach not only helps with legal compliance, but also promotes good tenant relations and a smooth-running rental business.
5. Grow your business
As your rental business grows, you will need to manage more properties and potentially expand your business. Reinvesting profits from your rental business can help you grow your investment portfolio and increase your income.
This can be achieved by finding new investment opportunities to purchase additional properties and investing in improvements to upgrade existing properties, thereby increasing property values and attracting higher quality tenants. Growth brings challenges, such as increased management responsibilities and increased operating costs. To effectively manage this growth, develop a strategy for expanding your business, which may include hiring additional help or using property management software to streamline operations.
final thoughts
Running a rental business isn’t just about collecting rent; it means taking care of your property in a professional manner. To be successful, you need to run your business correctly, manage your finances with a reliable bank, keep detailed records, comply with legal rules and take good care of your property. This approach will help your business run smoothly and build good relationships with your tenants, resulting in a well-managed, profitable business.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
