A Military Guide to Becoming a Landlord 

Veterans and service members often purchase rental properties to build long-term wealth. Others convert a primary residence into a rental after a PCS move. In either case, owning rental property can be a powerful investment tool, but it also comes with real responsibilities and risks.

This guide walks through the financial benefits of becoming a landlord, military-specific advantages such as VA loan strategies, how to decide on your level of involvement, what to look for in a rental property, and the core responsibilities of managing tenants and operating a property.

Financial Benefits of Being a Landlord

Owning a rental property can provide tremendous financial benefits. In particular, landlords can potentially collect profits from a property in four different ways:

Cash Flow

This is the simplest – and most immediate – form of profit. If a rental property’s monthly income exceeds its monthly expenses, you can pocket the difference as extra cash flow.

Loan Amortization

With an amortizing loan (like a home mortgage), a portion of every payment goes to paying down the principal – or balance – of the loan, with the rest going to loan interest. Every month, when your tenant’s rent pays your mortgage for you, your loan balance gets a little smaller. And, when your loan balance decreases, your ownership – or equity – in the property increases.

Property Appreciation

Over the long term, homes tend to appreciate, that is, increase in value. This increase certainly isn’t guaranteed. For instance, a major economic change in a region (e.g., a major employer leaving the area) could freeze or decrease local property values. But, on average, home prices go up over time, meaning that the longer you hold your property, the more valuable it will become.

Cash-out Refinance Proceeds

As you pay down your mortgage balance, you open up another profit vehicle: cash-out refinance proceeds. With one of these loans, you can borrow against your rental property and take cash out. Many real estate investors use this to purchase additional rental properties. And, unlike selling the property, this won’t trigger capital gains taxes, and you’ll still own the income-producing property.

Military-Specific Landlord Advantages

In addition to the above general financial benefits of owning a rental property, military and veteran landlords have another unique advantage: access to VA loans.

The VA loan exists to promote homeownership. Consequently, you cannot use these loans to purchase pure investment properties. But a variety of strategies exist for investing in VA loans. For example:

• “House hacking” with single-family homes
• Purchasing up to a four-plex and occupying one unit as a primary residence
• Primary residence to rental property conversion

With all of these strategies, eligible borrowers can use the VA loan to purchase a rental property with no money down, an incredible investment opportunity. 

Determining Your Level of Involvement as a Landlord

Before diving into life as a landlord, individuals need to determine their level of involvement. On one end of the spectrum, you can completely manage the property yourself. This means you’ll be responsible for finding, screening, and placing tenants; managing the day-to-day operations of the property; and addressing maintenance issues as they arise. While this saves you property management fees, it can also add significant stress and work to your life.

On the other end of the spectrum, you can hire a property management company to do everything. Think of this as the “set-it-and-forget-it” approach. You purchase the home, sign a property management agreement, and the company handles the rest. This level of property management makes owning a rental property as close to passive as possible, but it will also come at a price. Property management companies frequently charge 8% to 12% of monthly rent and often a one- or half-month commission for placing new tenants.

A middle ground between the above options also exists. For example, you can manage a property but also pay a local maintenance specialist to handle all repairs. This saves you the full property management fees while ensuring someone else handles those Sunday morning broken-toilet calls.

Ultimately, landlords need to balance their desired level of involvement and general life situation with the additional costs of a property management company.

Finding the Right Property

Once you commit to becoming a landlord, you need to actually find a rental property. And, unfortunately, not all properties will make sense. Here are a few factors to consider in finding the right rental property for your situation:

Your Post-Military Plans

If you’re in flight school in Pensacola, buying a rental property there may make sense at the time. But what about in the future? Where will you be stationed after flight school? Where do you plan on living after you separate from the military?

This ties back into your desired level of involvement. For instance, if you plan to leave the military and settle in Maine, buying a rental property in Florida to manage personally doesn’t make sense. But, if you view it from the onset as a hands-off, company-managed property, your post-military plans may not matter as much, as you’ll have a property management company handling the day-to-day operations.

Cash Flow Analysis

Many military landlords make this mistake when they convert a primary residence into a rental property. They think about how much they loved living there, so it’ll naturally be a great rental property, right? Not always.

Before buying or converting a rental property, you need to run the numbers with a cash flow analysis. Simply put, this means taking your future monthly rent, subtracting all of your monthly property expenses, and seeing if you get a positive or negative number. If negative, it means rents won’t cover costs – not a good situation for a rental property. And, with the advent of Zillow and other online platforms, you can fairly easily find market rent in an area.

For example, say you have a 2-bedroom, 2-bathroom townhouse with a garage that you’re considering converting to a rental. If you search Zillow for other 2-bedroom, 2-bathroom townhouses with garages for rent in your neighborhood, you can get a good sense of market rent. However, a word of caution: take a conservative approach and subtract 10% from these average rents. Listed rents on Zillow and other rental platforms tend to be slightly inflated, so taking a conservative approach will yield more realistic numbers.

“Tenant-Proof” Properties

It’s an inevitable fact of landlord life: tenants put wear and tear on properties. Between move-ins, move-outs, and general wear and tear, rental properties take a beating. As a result, landlords should “tenant-proof” properties as much as possible. That is, use durable, long-lasting materials where able. For example, instead of hardwood floors, consider a more affordable, scratch-resistant synthetic flooring. Or, use commercial-grade carpets instead of normal residential ones. These typically cost more up front but last much longer and require less upkeep.

Ideally, landlords can strike the right balance between durability, cost, and tenant appeal when outfitting a rental property. Simply put, you want a property that looks good and functions well but doesn’t require frequent, expensive maintenance.

Primary Landlord Responsibilities – Finding Tenants

Next, landlords need to understand their primary responsibilities. Broadly speaking, we group these responsibilities into two categories: 1) finding tenants, and 2) operating the property. And while the list below isn’t exhaustive, it outlines the major tasks landlords can expect to perform.

Advertising a Property

When you have a vacant property, you need to advertise it to potential tenants. A variety of techniques exist, but the internet has made this far easier. Websites like Zillow, Craigslist, and MilitaryByOwner provide landlords with a quick and efficient way to advertise their properties.

Show a Property

Not everyone who sees an online listing will want to view your property. But, for interested parties, you’ll need to show your property. In the COVID era, many landlords transitioned to virtual showings, walking someone through a property virtually via Zoom. However, before signing a lease, most potential tenants will want to walk through a property at least once physically.

Vetting Potential Tenants

After a showing, you have to decide whether someone is a good fit for the property. Do they make enough money? Do they have a criminal history? Have they ever been evicted before? Fortunately, online platforms offer convenient tools to run credit and background checks. And, you can – and should – require that potential tenants include prior landlords as references. This lets you call and ask what sort of tenant he or she was in the past.

NOTE: To avoid discrimination, equal housing, and other legal issues, landlords must apply the same rental criteria to all potential tenants. If you have questions or concerns, you should speak with a real estate attorney in your area.

Signing the Lease

After you find a tenant and confirm their application, you need to sign a lease agreement. This provides both the landlord and the tenant with legal protection in the event of disagreements. You can download a boilerplate lease agreement for your state or ask a real estate attorney to draft one for you. But if downloading one, we recommend at least paying an attorney to review it to ensure it meets your state’s requirements and protects you as a landlord.

Primary Landlord Responsibilities – Operating the Property

After signing the lease, you’ve successfully placed a tenant in your rental property. Now, you need actually to operate the property. Note that some of these tasks will vary depending on whether you hire a management company.

Collecting Security Deposits and Monthly Rent

It seems obvious, but people can forget about rent collection on the first of the month. By using online rent collection platforms, you can ask tenants to automate payments, making the process far smoother for all parties.

And, make sure to collect a security deposit. This protects you in the event of tenant damage and helps you vet potential tenants. That is, if someone can’t pay for a security deposit up front, there’s a good chance he or she can’t afford rent.

Enforcing Lease Rules

Successful landlords tend to A) clearly outline the rules to their tenants, and B) strictly enforce them. This provides both the tenant and the landlord with clear expectations for behavior, helping to avoid future conflicts. Typically, when tenants know that your rules apply to all tenants, they’ll be far more willing to follow them.

Minimizing Liability

Landlords should take key steps to minimize their liability at a rental property. In other words, be proactive about avoiding lawsuits. Make sure your home is up to code. Keep the walkways free of ice. Get your smoke detectors inspected annually. If you have a pool, make sure it’s properly gated. Comply with your local landlord-tenant laws. Once again, if you have questions about possible liability, you should seek the advice of a real estate attorney.

Keeping Detailed Records

As a landlord of a single-family home, you don’t need to pay a CPA to generate annual financial statements for you. But you absolutely do need to maintain detailed records of all income and expenses for a property. You can do this with a basic Excel tracker.

For tax purposes, you’ll want to keep track of all rent payments, deductible expenses, and capital improvements (as these final items will affect your annual depreciation expense). If you have questions about standard landlord tax deductions, there is a wealth of online resources. And, as a rule of thumb, if you plan on deducting something, make sure you have a receipt to support the deduction in case of an IRS audit. Using a service like Google Drive is a convenient way to digitally save and organize property-related receipts.

For general investment analysis, you’ll want to keep track of all cash inflows and outflows, regardless of tax status. This provides you with the long-term ability to analyze the investment performance of a rental property.

Handle Repairs

Satisfied tenants are good tenants. If (when) a maintenance issue arises, address the repair immediately. This is A) the right thing to do as a landlord, B) a solid business decision, as responsiveness to tenant needs generally increases tenant retention.

Additional Landlord Considerations

Landlords should also plan for some rare contingencies.

Prepare for the Worst

Unfortunately, even with a solid vetting and application process, you may need to evict a tenant. No landlord wants to go through this process, but if you own rental properties for long enough, you’ll likely need to at least once. Accordingly, you should understand how to evict a tenant before you need to.

Evictions require strict legal compliance; otherwise, you can find yourself in significant legal trouble. This is another scenario where you can work with a real estate attorney to confirm the necessary steps in the eviction process for your area. Bottom line, you should prepare for a worst-case scenario and hope you never have to deal with it. That way, if an eviction arises, you have step-by-step procedures for legally handling it.

Reserve Transfers

Some rental property repairs don’t occur regularly, but they cost a lot of money. For example, you won’t replace an HVAC system or roof annually, but you’ll need to pay a lot when you do.

To prepare for these infrequent but expensive repairs, landlords should establish a monthly reserve transfer. Basically, this transfers a set amount of money each month from your operating account to a separate reserve bank account. That way, when a significant expense comes up, you don’t need to put it on a credit card or draw on your personal savings – you transfer the necessary funds out of your reserve account.

Final Thoughts

Without a doubt, owning rental properties can be an outstanding strategy for building long-term wealth. But, becoming a landlord also comes with a unique set of challenges and considerations. Before diving headfirst into the world of rental real estate, potential landlords must determine whether the advantages of a rental property outweigh these items.