How to Start a Property Rental Business
Starting a property rental business requires a high initial investment because buying property (condos, homes, or commercial space) is costly. However, property rental businesses will always be a lucrative industry. Home buying is not for everyone—resulting in a market with a constant demand for rentals.
A property rental business owns one or more properties that are leased to other occupants for a set term. Usually, the terms last for 1 – 5 years, depending on the rental contract. The properties can be residential and commercial spaces rented to home occupants or businesses.
In a typical property rental business, the business purchases property with cash or a loan. After the property is acquired and owned by the business, it can be rented out to individuals or businesses who pay a monthly or annual fee to use the space.
The business is ultimately responsible for paying on loans and repairs, whereas the occupant is responsible for paying the rental fee and, in most cases, the utilities.
Before a home or space is ready to be leased, the business may need to update or repair the space. To account for these costs, property rental businesses may adjust the rental fee to get back money spent on repairs.
The U.S. has over 3 million businesses operating in real estate, renting, and leasing. In fact, the number of businesses offering rental or leasing services has grown consistently over the last five years by an average of 3.5%.
Real estate, rentals, and leasing businesses have seen consistent growth. In 2022, real estate, rental, and leasing businesses generated over $1 trillion in revenue.
Although this figure is almost 1% less than the year before, real estate and rental businesses have earned over $200 million more than 10 years prior. In addition, this industry has seen an overall average growth of nearly 1% each year over the past five years.
The property rental industry has been an industry that has reliably had a steady demand. However, this demand level does ebb and flow based on overall home-buying trends and economic changes.
In a high-demand rental-heavy market, rentals are more competitive, leading to higher income for the business. Other times, when competition is low, rental income still exists, but at a lower level.
Current trends show that property rental businesses may be entering a high-demand season. An indicator of this trend is the interest rates on home mortgages. Although some people rent by choice, others rent because they need to. For instance, high interest rates on home mortgages drive buyers away from purchasing homes, and buyers are instead opting for rentals.
Rising interest rates also make single-family units less accessible and multi-family units more appealing, which in turn, boosts the demand and competition for affordable residential rental units.
The target markets for property rental businesses are individuals and families who are not homeowners. In addition, your market may include small businesses if you lease commercial space. Although these categories are broad, here are some specific markets within the larger market:
Young adults. College students and young adults commonly rent an apartment or home in their 20s and 30s because it allows them to share rent between roommates and save money. Renting also appeals to this age group because their location may be short-term—the flexibility afforded by renting is appealing when you move frequently.
Frequent movers. Other frequent movers include individuals who enjoy a flexible lifestyle or have jobs that require them to move often. Either way, many individuals seek the flexibility of a rental.
Short-term renters. Depending on the types of units in your portfolio, short-term rentals may be another great way to make money on your properties. Short-term rentals do well in metropolitan or touristy areas and appeal to individuals such as business travelers, travel nurses, and people on vacation.
Other small businesses. Small businesses are another market when you have commercial space available. Many small businesses opt for leasing commercial space instead of buying due to affordability. Some small businesses looking to rent commercial space include small retail shops, restaurants, coffee shops, salons, or franchises.
Checklist for Starting a Property Rental Business
Are you ready to go and launch your property rental business? If so, there are a few things you need to do first before getting. This checklist will help you get organized and make sure you have everything you need before launching.
Step 1: Write a Business Plan
Any business, whether it’s a small property rental business or a large corporation, should have a business plan. The real estate investing industry is very competitive, and this document is not only used to get funding, but also serves as a roadmap to provide a clear route to achieving long-term goals.
A few sections that are a must-haves in a property rental business plan. These include, an overview of the ideal target market, marketing strategies to reach the target market, and most importantly, solid financial projections. The plan should also outline your strategy for acquiring and managing properties.
Related: How to write a business plan
Step 2: Form a Business Entity
A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a property rental business, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: Guide to forming your LLC
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!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 3: Apply for Business Licenses and Permits
There are a few common property rental licenses that landlords may need, in addition to a couple general business registrations required before being able to rent a property. These include:
Certificate of Occupancy – Issued by a municipal agency such as a local building or zoning office, a Certificate of Occupancy is a document that ensures a property meets all state and local requirements to be occupied by a tenant.
Housing Business License – In addition to the Certificate of Occupance, many cities require landlords to obtain specific housing business licenses. License requirements will vary depending on where the property is located.
Property Management License – In most states, property managers are typically required also have a property management license or a real estate broker’s license.
In addition to property management specific licensing, there may also be some general business licensing requirements as well.
Business License – Many cities require every business to hold a general business license in order to operate legally.
Sales Tax Permit – Most states impose a sales tax on property rentals, and as such, the business will need to obtain a state sales tax permit.
Step 4: Find Financing
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.
One option is to take out a loan from a bank, however, this can be difficult, however, as many lenders require a 15% or more down payment and collateral, and some are not interested in loaning on certain types of properties, such as an Airbnb property 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 property being purchased. 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,d and if the buyer defaults, they get the property back.
Step 5: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 6: Get Business Insurance
When renting out a property, it’s important to have the right insurance in place to protect you and the business. There are a few different types of insurance that property rental businesses should get, and is often sold as a landlord insurance policy:
Property insurance: Also referred to as dwelling coverage, this insurance protects buildings in the event of damage from a peril or disaster. If the property was purchased using a bank loan, the lender will usually require property insurance.
Liability insurance: If someone is injured on your property or if you’re found liable for damage caused to someone else’s property, liability insurance will be invaluable.
How much does it cost to start a property rental business?
The amount you spend to start a property rental business largely depends on the value of the properties your business purchases. According to the National Association of Realtors, the 2022 median home price in the U.S. was $379,000. Of course, condos sell for less than single-family homes, but overall, your highest cost will be acquiring properties.
Here are some of your other expenses:
Business formation costs. Your business formation costs include getting your business license, permits, and insurance.
Since the business licenses and permit costs vary by state, check your state’s website for small businesses. In most cases, the fees remain below $1,000.
Similarly, insurance costs vary. Insurance is essential to protect you from liabilities and your properties from loss. The coverage amounts and the risk level determine an insurance policy’s price. So, the higher the value of your property, the higher the insurance may cost. To determine the cost, you need to contact an insurance agent or an insurance company for a quote.
Wages. Wages are another typical cost for property rental businesses with employees. For example, the average salary for a property manager in the U.S. is approximately $54,000, whereas a maintenance employee generally earns $77,000.
Repairs and maintenance. Properties will need repairs and maintenance from time to time, so it’s wise to allocate funds for them. You may also need to budget for newly acquired properties that need updating before tenants can move in.
A good place to start is saving at least 1% of the property’s value for repairs or maintenance. So, if your property is worth $100,000, you should budget $1,000 for repairs and maintenance.
How profitable is a property rental business?
The average rent in the U.S. is around $1,300 per month for a two-bedroom apartment. The average rent is even higher for single-family homes and three- or four-bedroom units.
Expenses, such as monthly payments on loans, wages, insurance, taxes, or repairs, take from the profit. But eventually, the loan will be paid off, and a more significant portion of the money will go to your net profits.
So, if your business has a two-bedroom apartment, you could reasonably assume that your business would earn $15,600 per year on that single unit. And, with more units, your annual income grows exponentially.
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 risk aware 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.
Certainly, success in real estate and property rentals requires an investment of funds, time, and risk. Nevertheless, you can make money. Years of evidence prove that real estate and property rental businesses have consistent demand and earn a satisfying income.