How To Form a Rental Property Business in Five Steps

A business plan covers how you will operate your business, including how you will raise money for it, your marketing strategy, and your financial projections. Lenders will ask entrepreneurs for their business plans before they consider giving out loans.

While a business plan can be brief or extensive, the main elements of a sound business plan include:

• Executive Summary – Business Overview

• Business Description – The type of business structure or entity and purpose of the business.

• Market Analysis – Analysis of your target market (renters), the housing market, and your competition.

• Management Team – Who are the property owners who are running the business, and what is their background?

• Marketing Strategy – Outline of how you will attract tenants.

• Operations – Description of how the business will work. Who is responsible for finding tenants, rent collection, and maintenance?

• Financial Plan – Your plan for buying investment properties and the cash flow needed for down payments, interest rates, property taxes, and costs for repairs and maintenance. You should also include financial projections for income based on rental rates and vacancy rates. Determine what rental prices you need to get to make a profit.

Within your financial plan, you should include upfront costs and costs for upkeep of your properties. Make a budget for your business expenses, including the following:

• Downpayment costs

• Mortgage payments

• Repairs and maintenance

• Fees to real estate agents or property managers

• Screening fees for potential tenants

• General operating expenses to maintain the properties

• Condo or HOA fees

• Property taxes or assessments

By creating a sound business plan, you may be more successful in getting money for your business.

You want to form a business entity such as a corporation or a limited liability company (LLC) to insulate your personal assets from the claims and liabilities of your business activities.

Limited liability companies (LLCs) have many advantages for the real estate investor. An LLC is a popular business entity for real estate businesses because of its personal liability protection and flexible tax structure. Members can pass through the LLC’s income or losses to their personal income tax return, so they don’t have to file a separate corporate tax return.

Many entrepreneurs form an LLC for each property they own, so their transactions are separate from those of their other properties. That way, if someone were to sue one property, they could only go after the assets of that LLC, not all the properties the real estate investor owns.

It is easy to form an LLC for your rental property business. You can do it through your Secretary of State’s office or you can let our trusted partner LegalZoom handle your business formation filing for $99 plus filing fees.

You should apply for an Employer Identification Number (EIN) with the IRS. It serves as a separate identification number for your business. You will also need a separate bank account for your business transactions. Apply for a bank account in your business name with your business EIN. Business owners should keep their business activities separate from their personal ones.

Business Licenses and Permits

To operate a rental property business, you will need the necessary business licenses and permits. A business license is usually issued by your state, allowing you to operate in the state. You may need a local business license as well, in addition to a landlord permit, zoning permit, or building permit. Multi-family units may require health and safety or fire department permits. Contact your town or city permit office to determine what you need for your business.

Business Insurance

You want to make sure you protect your business with business insurance. Find out what business insurance you need for operating rental properties. For example, a general liaibility policy covers claims for bodily injury, personal injury, and property damage claims. While property insurance covers your units and buildings from fire and other natural disasters.

It is a good idea to have a local lawyer create a lease agreement that you can use for multiple properties. They will know the latest rules and landlord/tenant regulations. Having a relationship with a lawyer is also helpful if you need to send a tenant a demand letter or start eviction proceedings.

After setting up your rental property business, your focus will be on attracting new tenants. There are many online options for listing your properties, and you can also post them on your social media accounts.

Starting a rental property business can generate passive income and potentially have your investment grow in value. However, rental property investors must do their due diligence by creating a solid business plan, forming a legal business entity, and obtaining the necessary licenses and permits to operate the business.