What is a Landlord?
REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
Why Do People Become Landlords?
A landlord is a person or entity that owns real estate and leases it to a tenant for payment, called rent.
Not every landlord becomes a landlord intentionally. Many people inherit properties or are left with a vacant home after they move to another city, and rather than selling the property for cash, they decide to repurpose the property for an income-generating rental property.
When people do intentionally become landlords, they typically do it for one or more of the following reasons:
- The ability to generate ongoing cash flow, usually monthly, from the property
- The anticipated increase in value (known as appreciation) and accumulation of equity
- The tax advantages inherent in owning income-producing real estate
- The ability to leverage other people’s money (OPM) to own 100% of the property with only a small percentage of the overall investment requirement
Another term for a landlord is lessor, and other terms for the tenant are lessee or renter.
Landlord and Tenant Responsibilities
The responsibilities of the landlord and tenant are established by a written contract called a lease or rental agreement. This contract lays out the rent price, the start and end date of the lease term, consequences for late or missed payments, each party’s responsibilities for maintenance and upkeep of the property, and the notice time required before either party terminates the agreement, among other things.
In most residential lease agreements, the landlord is responsible for ongoing maintenance and repairs to the property, and the tenant is expected to keep the property in a clean, safe, and sanitary condition.
Many property owners will hire a professional property manager to handle the ongoing tasks involved with renting a property out to a tenant. These tasks include things like:
- Advertising properties For Rent
- Showing rental units to prospective tenants
- Preparing and signing rental agreements
- Scheduling move-in dates
- Screening tenants (credit and background checks)
- Collecting rent payments
- Handling property maintenance and repairs
- Evicting tenants as needed
Not all property managers are created equal, so it’s important for a landlord to look in the right places and ask the right questions of a property management company before enlisting their services.
Standard Lease Provisions
Not every landlord-tenant situation requires a lease, but a lease is typically good to have for both parties because it specifies the rights and duties of both the landlord and the tenant. A lease usually contains the following:
- Name of landlord and tenant(s)
- Address of the property
- Term of the tenancy
- Rent amount
- Late fees
- Guest policy
- Subletting policy
- Landscaping responsibility
- Pet policy
- Security deposit policy
- Landlord access for inspection and emergency
Once both the landlord and the tenant or tenants sign the lease, it becomes a legal and enforceable document.
Fair Housing Act
The Fair Housing Act prohibits discrimination by landlords to tenants. Landlords cannot treat some applicants differently from others based on protected classes.
The protected classes under federal law are the following:
- National origin
- Familial status
- Physical or mental disability
Landlords have the right to set criteria for their applicants, such as a minimum household income or passing a background check, but they must apply the same criteria to all applicants.
General Landlord-Tenant Law
Each state and sometimes certain jurisdictions within states have specific landlord-tenant laws, such as provisions dealing with security deposits or how to end a tenancy. Landlords should familiarize themselves with the particular policies for their state and jurisdiction.
There are also general landlord-tenant policies that pertain to all states, such as the following:
Covenant of Quiet Enjoyment
The covenant of quiet enjoyment ensures that tenants can live in the property they rent undisturbed. Landlords should understand that although they own the property, by accepting rent, they give up the right to enter the property at will or to take control of the property during the tenancy period, as long as the tenant abides by the tenancy terms. Landlords, however, still maintain the right to enter the property during an emergency situation or with proper notice.
If a tenant stops abiding by the tenancy terms, such as not paying rent or subletting the property if that is not allowed, then the landlord can evict, meaning taking back the property. Most states do not allow self-help evictions, a landlord physically removing a tenant; landlords generally must evict through a court procedure by suing the tenant and then winning an eviction order.
Implied Warranty of Habitability
The implied warranty of habitability ensures the tenant has a safe and livable place in which to reside. Landlords are typically required to provide a property that has the following features:
- Hot and cold running water
- A safe structure
- A pest-free environment
- Doors and windows that lock
Landlords must perform regular maintenance and repairs as needed, but tenants are responsible for routine household tasks, such as cleaning and general upkeep of the property.
Advantages of Being a Landlord
Landlords are able to capitalize on many of the benefits commonly available to real estate investors.
Financial Leverage: Perhaps the largest benefit is the landlord’s ability to use borrowed money to earn 100% of the rental income, appreciation a property has to offer.
Tax Advantages: Landlords also benefit from some key tax advantages, by writing off all related expenses and phantom costs (see depreciation) associated with the property.
Appreciation and Equity: Over time, if housing values increase, a landlord can potentially build significant equity through appreciation. Even if no appreciation occurs, the owner still has a good chance to build equity as the amortizing mortgage payments are paid down and the loan balance decreases with time. Ideally, most, if not all, of those mortgage payments will be covered by the rental income generated by the tenant, not paid out-of-pocket by the landlord.
Cash Flow: For most landlords, their primary motivation to owning a rental property is their ability to generate ongoing, consistent cash flow. Most buy and hold real estate investors are looking for properties that generate enough rent revenue to cover all related debt service, all ongoing holding costs, and put money into the landlord’s bank account each month.
Disadvantages of Being a Landlord
Tax Disadvantages: Even though there are significant tax advantages for a landlord, they are still required to pay taxes on any rental income their property generates. They are also required to pay capital gains tax on any appreciate made when the property is sold (assuming they choose not to roll the money over into another property through a 1031 exchange).
Risks, Liability, and Compliance: Rental properties also carry certain risks and liability. Property damage caused by tenants or natural causes are not uncommon, and there is always the risk of lawsuits from residents who are injured on site. Granted, there are plenty of viable solutions to deal with these risks (e.g. – hazard and liability insurance along with corporate entity protection), but there are still moving pieces and issues to mitigate as a landlord – issues that don’t exist with many other investments. There are also a number of compliance issues that need to be overseen based on the state or city’s tenant-landlord laws. Especially if a property is rented to tenants under Section 8 or another government program, the property will require a good deal of ongoing oversight to avoid problems. While any legitimate property manager can handle these tasks, it’s another added task of managing properties.
Time and Lack of Liquidity: For a landlord who plans to buy and hold a property for a long period of time, it can take many years to realize the full financial benefit. Cash flow from most single-family rental properties and even multi-family properties (e.g. – duplex, triplex, fourplex) is not enough to generate anywhere close to a full-time income. Real estate is also a highly illiquid asset that takes time to sell and convert to cash, whereas many other investments can be turned into cash very quickly.