You can make a ton of money by starting a rental business, whether you’re going to rent out equipment or real estate. But a rental business is a lot of work, and there are some pretty big responsibilities (and liabilities) that come with being the owner. Here are a few things you should know before you open a rental company.
You’ve Got to Plan Ahead
Before you launch your rental business, you need to develop a very detailed pricing strategy. Your pricing strategy will affect which assets you purchase and how you’re going to charge for renting them.
Let’s say, for example, that your company is going to rent out a fleet of vehicles. You’re probably going to need to buy several vehicles that you can lease to customers, which could cost you tens of thousands of dollars. Ask yourself:
- How much am I going to owe per month on each vehicle?
- How much would I need to charge to cover auto loans and wages?
- How often would I need to rent vehicles in order to cover auto loans and wages?
- How high will the market allow me to charge?
In other words, you’re going to have to do a lot of math. But it’s essential that you do this math if you want to earn enough money to stay in business.
So far as real estate goes, there are only a few different types of properties you can buy:
- Condominium/apartment building
- Commercial office space
Like with any other asset, how much you charge is highly dependent upon market factors. If the property is located in a high-value neighborhood, you’ll likely be able to charge more. If the property is located in a lesser-value neighborhood, you might have to charge less.
The most successful real estate renters carefully study the market and plan their property transactions based on market forecasts. For example, smart companies will buy property in neighborhoods that will soon undergo redevelopment because those properties will typically soar in value.
For real estate renters, you may also have to decide whether or not a lease is the best way to make profit. If you have a lovely home that’s in a popular tourist market, you might be able to make more money by renting it out as a vacation rental. Travel is as popular as ever, so there’s lots of money to be made by renting out to travelers—and vacation rental websites make it easy and safe to find customers. Another benefit of vacation rentals is that you can more adjust the price throughout the year in accordance to demand.
Don’t Quit Your Day Job
When you launch your rental business, you might be tempted to quit your day job and go all-in with your new company. But you might want to reconsider taking this approach. As you might have realized from the last section, you’re going to be faced with lots of debt when you purchase assets to rent out.
The best thing to do is start small: only buy one or two properties, or one or two rentable items. This will keep your debt low, make it easier for you to cover costs, and give you a better idea on how you need to budget and set prices. Unfortunately, starting small means you won’t be making significant profit right away, so it’s better to keep your day job so you have financial security and an income to lean back on if your business falls through.
Prepare to Have Big Responsibilities
Your rental business could have lots of legal responsibilities, besides paying taxes. If you’re going to be renting out equipment or vehicles, then you may be liable for any damages that faulty equipment may cause. For instance, you may have to pay damages if your rental vehicle malfunctions and causes an accident. You may have to pay even larger damages if it’s determined that your company didn’t properly inspect or maintain the equipment. Sometimes, these damages may be so substantial that the legal costs bring your business to an end.
There are two ways to protect your company. First, consider electing to be a limited liability company (LLC). This won’t protect your company from lawsuits, but it will protect you, the business owner, from having to use your personal finances and assets to cover costs. Second and most importantly, create an effective procedure on which to inspect and maintain your equipment so you’ll know your assets are always in good condition. Be sure to keep track of these inspections and keep them in your records.
If you’re going to be renting out property, then you’ll assume all the responsibilities of a landlord. It’s the landlord’s responsibility to handle all maintenance requests by the tenant, including things having to do with plumbing, HVAC, and electrical malfunctions. A landlord is legally obligated to make a home safe and livable for the people living in it. In some states, tenants may be legally entitled to withhold rent if you consistently delay in handling maintenance requests. Think you can just evict them for withholding rent? Think again. Eviction is expensive, time-consuming, and sometimes difficult to have enforced—especially in states like California. Make sure you’re up to the task of being a landlord, or else hire a property management company to do it for you.
Recruitment is a Full-Time Job
Small business recruiting is difficult because smaller companies generally have less money to work with, and they might also have difficulty attracting a wide talent pool. In order to get the best possible job candidates, it’s imperative that you go digital with your job listings and use online job boards like Indeed, Monster, and Glassdoor. LinkedIn also has a job board, and it can be particularly useful in finding great employees who have skills that are verified by other professionals in your network.
Real estate rental companies are tasked with another kind of recruitment process: finding tenants or renters. If you’re trying to find renters for a vacation rental, most vacation rental websites will handle this for you—you can also use sites like Craigslist and Angie’s List. If you’re trying to find tenants, you should use online real estate sites like Apartments.com or Zillow.
Whether you’re trying to hire a good employee or a good tenant, it’s important that you always, always, always run a background check and a credit check to ensure they have no violent criminal record or a history of poor financial decisions.
Now you won’t be caught off-guard by all the nuances of owning a rental business. Best of luck in your endeavors!
Samantha Rupp holds a Bachelor of Science in Business Administration and is the managing editor for 365businesstips.com. She lives in San Diego, California and enjoys spending time on the beach, reading up on current industry trends, and traveling.