Buyers and sellers alike have taken a front row seat as the housing market has boomed since the start of the pandemic, and while the buyer-frenzy has slowed, the landscape continues to present opportunities to invest in rental property.
As once-interested homebuyers face high mortgage interest rates, inflation, and rising concerns of recession, they have halted homebuying, opting instead for rentals. A shift in demographics as Baby Boomers reach retirement age has also increased demand for properties, and technology has made it increasingly easier for investors to manage and profit from rental properties with the rise of property management software.
Before you break ground on your next rental property investment, Smith + Malek wants to offer up a blueprint of best practices to ensure your success. Here are the 6 best practices to follow before renting out a property in Washington State.
1. Put it in writing: Protect yourself by always having a written lease agreement ready. While Washington State only requires a written lease agreement for terms over 12 months, having an agreement in place is an important protective measure for you as a landlord, especially in a tenant-friendly state like ours.
2. Know your landlord-tenant obligations: Rental property ownership requires you to know, abide by, and stay up to date on the changing laws and local ordinances of your city and county, along with any other zoning or HOA-imposed restrictions. The Washington Residential Landlord Tenant Act (RCW 59.18) defines the minimum obligations of landlords and their tenants, some of which include a landlord’s requirement to:
- Keep the premises up to code.
- Maintain structural components like a roof, and walls.
- Keep common areas reasonably clean and safe.
- Provide reasonably adequate locks.
The Residential Landlord Tenant Act Washington State act also outlines the landlord’s requirement to complete repairs to restore lost heat and water or repair major plumbing fixtures during set timeframes. Landlords are required to disclose information about health hazards like mold exposure and measures for its control, make a lead paint warning statement if the building was built prior to 1978, and identify who their landlord is on the property or in a lease agreement.
3. Take personal inventory: Investing in a rental property is no easy feat, and neither is managing one. It is a multilayered investment that requires your time, delegation skills, financial preparedness, and legal awareness. Consider whether you can commit ample time to do things like a market analysis of the going rate for rental properties in your area, along with staying up to date on the ever-changing local ordinances for landlords and tenants.
4. Decide to lead or delegate: You’ve determined you have the time, finances, and overall wherewithal to take on a property rental. Now it’s time to determine whether you’ll be leading or delegating. Depending on your personal inventory, you may opt to hire a property management company. Conversely, you may take on the management task yourself. A property management company may initially put added financial demands on your investment, but be aware of the long-term cost of managing it yourself. Consider your learning curve, the process of screening applicants, management tasks like repairs, rent collection, and communication with your tenant, which will all fall on you to do as the manager. New property management software could be a way to streamline your role.
5. Be aware of the tax implications: Many look to rental property as a way to offset the cost of their own mortgage. Be mindful that any rent collected is viewed by the IRS as income. Generally, any expenses related to the unit or space being rented can be reported as a tax deduction. You will need to allocate separate expenses between the rented space and any common areas.
Keep thorough records of all your rental activities, including income and expenses. In the case your return is audited, that information will be critical.
If you’re considering short-term rentals of less than 30 days, there are additional costs to consider including the required retail sales tax on rental charges and the business and occupation tax. You may also be subject to lodging and convention taxes, as well as trade center taxes.
Longer term leases are not subject to these taxes.
6. Prepare your property and go to market. Keeping the landlord-tenant obligations top of mind, you can prepare your rental property for market. Preparations generally include performing any necessary repairs or replacements of fixtures and appliances and a thorough property cleaning. When marketing your property, follow all federal, state, and local non-discrimination laws. Once you have found a potential tenant, be sure to screen their financial, rental, criminal, and employment background.
In a housing market full of dizzying change, a rental property merits more than a few questions.
Get in touch with our team to see how we can help you enter into your next real estate investment with clarity and ease.