Guide on How To Become a Rental Property Owner | Cottage
Not sure how to become a rental property owner on a budget? Learn why renting out an ADU could be the best way to begin your landlord journey.
Updated Jan 01, 2018
Becoming a rental property owner is the best way to generate passive income for yourself and your family in perpetuity. With the right rental properties, you’ll always have money coming in between move-in and move-out. Steady passive income can help you enjoy your golden years. In fact, purchase the right properties early, and you may retire years ahead of schedule.
But becoming a rental property owner can be tricky if you don’t know what types of properties to purchase, build, and eventually add to the rental market. Today, let’s break down how to become a rental property owner and examine the advantages of renting out an ADU or accessory dwelling unit.
What Types of Rental Properties Are There?
There are many different types of rental properties you can choose to purchase and rent out to prospective tenants. Different units have different advantages, property values, and other factors.
Accessory Dwelling Units (ADUs)
Accessory Dwelling Units, or ADUs, are small and independent residential dwelling units. They always share lots with stand-alone single-family homes. Some ADUs are detached (so they may look like small cottages or homes on the same lot as a larger single-family home).
Or, they may be attached to the primary single-family home (as in the case of converted ADUs like garages or attics). They can also be built on the lots of multifamily homes.
ADUs are advantageous for many renters because of their affordability—in most cases, ADUs are cheaper to build compared to larger structures like houses or apartments. They also come with other benefits described below. They may have low property taxes for investment properties, plus low mortgage payments.
Of course, you can also choose to rent houses. Rental houses come in many different sizes, types, and inhabitant capacities. Single-family homes are those only designed to be occupied by one family or group of individuals. Many landlords rent out single-family homes that they do not live in.
Houses also come in the form of duplexes or multiplexes. These are larger structures that have enough space for multiple families to live simultaneously in them. Such rental properties often have partitioned areas, separate front doors, and other elements that make it possible for all the families in those structures to maintain privacy.
Houses are great rental properties, but they require higher initial down payments (as they are more expensive than most accessory drilling units). Furthermore, some rental housing markets are challenging to break into if all the available homes are currently owned.
In addition, vacancies can quickly result in a subpar real estate investment for a lender and homeowners alike. Owning a constantly-empty home is more of a financial burden than owning an empty ADU, for example.
Many other landlords rent out apartments to new tenants. Apartment buildings are expensive but can be purchased through acquiring financing or a loan from an institution like a bank or credit union, paying off the loan through rent payments over time.
Apartment buildings are favored by many landlords because they allow you to rent out many units at the same time, increasing your short-term rent collection. For example, if you have an apartment building with ten apartments, you’ll get ten rental checks every month once the building is filled with tenants. This can help you avoid increasing interest rates on loans by allowing you to pay them off quickly.
That said, apartments do have some downsides. They require more upkeep, are more expensive, and require you to spend more time and money getting unit occupants before you start earning significant income. Like with many forms of rentals, state laws dictate the parameters around increasing rental prices — so be sure to keep an eye on that.
In addition, tenant screening following rental applications and making sure you adhere to landlord-tenant laws can take time and effort. Luckily, contracted management companies can lighten the logistical burden.
Then there are condominiums or condos. Condominiums are somewhat similar to apartments. They are individual units that reside in a community or single building with other units. However, condominiums are owned by their residents rather than rented by default, like apartments. This means the residents can make renovations and changes to their units as they please.
Still, first-time home buyers can purchase condos and rent them to occupants. Condos can be desirable if they are located in fashionable areas or if they come as part of good communities.
Keep in mind that some condominium boards restrict the number of units they allow to be rented out. In terms of paying taxes, the IRS will deem your condo unit as rental income if it’s rented out more than 15 days or more a year.
Townhouses are similar to condominiums. These are attached homes owned by their residents. One or more of the walls of a townhouse are shared with adjacent townhomes. They offer a bit more privacy compared to what a resident can expect in a condo, but not as much as a single-family home.
Why Rent Out an ADU?
As you can see, there are plenty of different properties you can rent as an aspiring landlord. However, you may wish to rent out an ADU rather than other property types.
There are several good reasons for this:
Easy Access to Your Rental Property
For one, renting out an ADU gives you easy access to your rental property whenever you like.
For example, if you build an ADU on your own home’s lot, you can easily:
Observe the tenant’s activity on the property
Check in on the tenant as needed–for example, to pick up rent
This easy access to the rental property is a significant benefit for landlords who plan to manage their rental properties (see more below).
ADUs are desirable for a variety of reasons, such as:
For renting out long-term to other individuals for extra income
For allowing in-laws or relatives to stay in their own private spaces without having to take a guest bedroom in one’s house
For hosting parties or out-of-town guests
Flexibility for whatever you want – have a personal gym, unlock work-from-home space, and more
In many cases, building an ADU on your property often results in a higher sale price for your home if you ever decide to move.
Custom-Build Your Own Rental Space
Then there's the fact that you can custom-build your own accessory dwelling unit rental space from the ground up. If you purchase and rent out an ADU on your property, you can make that ADU exactly as you like it rather than having to purchase an existing rental property and work around its limitations.
This is doubly true when you partner with a service like Cottage. With Cottage, you can be involved in the process from start to finish and have input on the design of the eventual structure.
If you rent out an ADU, you’ll further have the opportunity to be your own property manager. Many landlords rely on property managers or property management companies to oversee, maintain, and collect from their rental properties. This is especially true for landlords who have multiple properties spread across town, like multiple apartment complexes or several single-family homes.
While property management companies can be advantageous, they cost money every month and can eat into your bottom line.
If you have an ADU, you can take care of most of the labor of property managers, like:
Maintaining the property
Handling repair tasks for things like plumbing
Collecting rent from your tenant
Answering requests from your tenant
Many landlords appreciate the increased level of control renting out an ADU affords them.
Generally, property management companies are only typically needed if:
You own and rent many apartment units
You own and rent many single-family homes
You own and rent many condominiums or townhouse units
If you only rent out one ADU or one single-family home, for example, odds are you can handle most of the property management later yourself and save some money.
Building an ADU: How Does It Work?
Renting out an ADU could be an excellent idea, but you need to build the right one for your needs. Here’s how the process works with Cottage:
Work With Design Experts
When you sign up with Cottage, you’ll work with industry experts in the area of accessory dwelling unit design. With these experts’ help, you can develop a customized floor plan for your ADU based on your property’s space limitations, your personal preferences, and the features you want in your rental ADU to attract tenants.
Furthermore, you’ll be able to select the finishes, features, and other elements of your ADU before construction begins.
Use Your Space to Its Fullest Potential
More importantly, Cottage allows you to build an ADU by utilizing your available space to its maximum potential. For example, if you want to convert your existing two-car garage into an ADU, Cottage will help you make the most of all that square footage by creating a functional yet attractive design.
Plus, Cottage can help you by handling permitting. Cottage experts will secure architectural sets, engage the right professionals to complete required reports, and submit other correspondence so construction can begin ASAP.
Build With a Budget
When you build an ADU, you need a set budget in mind. This budget will help you select materials that don’t overload your finances and let you construct an ADU that will work for your long-term financial goals.
If you partner with Cottage, we can also direct you to partners who handle financing to help your project get funded.
Don’t Cut Corners
No matter how ambitious you are, remember not to cut corners or speed through the ADU construction process. Cutting corners can result in a subpar accessory dwelling unit, which can make it harder for you to find tenants in the future.
Remember, ADUs are not low-quality homes. They might be smaller compared to traditional single-family homes, but they are often as spacious as apartments or condominiums.
The best ADUs can bring you tons of rental income (plus increase the sale value of your home). To that end, be sure to only partner with licensed, respected contractors and services that can help you build the ADU of your dreams (and an ADU that you'll have no trouble renting once it is fully constructed).
A Final Word
All in all, building and renting out an ADU could be the best way to become a rental property owner on a budget and without having to find the perfect single-family home or apartment complex for your needs. Even better, partnering with a service like Cottage allows you to build an ADU perfectly tailored to your needs and finances.
Earning passive income—and having some extra space on your property to do with as you wish—is easier than ever with Cottage.