Buying Property in Florida to Rent Out: Investors, Read This First

Buying Property in Florida to Rent Out: Investors, Read This First

Posted on Aug 04, 2022

According to Pew Research, about 6.7% of all individual tax filers reported having rental properties. Becoming a landlord is a fairly common step in the homeownership process - sometimes as a way to generate an additional stream of revenue, sometimes to recoup money if plans change sooner than expected, and sometimes both. 

Owning property can provide a buffer of sorts. Even if a landlord loses their primary job, sometimes the profit from their rental properties can pay for their own mortgage while they search for their next job.

And being a landlord does pay. Landlords earn an annual income 49% higher than the median household income in the U.S., according to Rent.com.

Are you thinking about investing in rental property in Florida? It’s a good way to generate income - but it’s not without risks, and it is a role that requires both financial savvy and management skills. Here are the steps to renting out an apartment or house.

Crunch the Numbers First

If you’re paying a mortgage for your home, the first step you should take is checking with your lender whether you’re allowed to rent the property out - and if so, when. If you bought your home as a primary residence, your rate is inherently tied to this usage. Lenders will often require buyers to live in their home 6 months, 12 months, or more before they can rent it out. 

If you’re planning buy rental property in Florida without living there first, you will likely receive a rate that is .5% to .75% higher than you would receive for a primary-residence home. This is because a rental property is viewed as a riskier investment for the lender. 

It can be tempting to list a rental property as your primary property to access a lower rate, but mortgage fraud risks your entire investment. Mortgage representatives have been known to knock on the door and ask whether the occupant is the loan holder.

Once you’ve gotten that squared away, it’s time to crunch the numbers. 

The big numbers to consider are:

  • Your costs (mortgage, insurance, maintenance, taxes)
  • Utilities not covered by the lessee (water, garbage, HOA, etc)
  • Local rent prices
  • Your new tax rate (Any net income your rental property generates is taxable as ordinary income on your tax return)
  • Licensing expenses (rental licenses are $56 per unit in Philadelphia, for example)
  • Vacancy costs
  • Desired cash flow (profit)

By knowing these numbers, you’ll be able to determine how much rental income you need in order to break even (and by extension, how much you’ll need in order to be profitable).

If your total costs will be $1,800 a month, but research shows that similar apartments in your area rent for $1,700, you may need to either reconsider whether renting is a sound financial venture - or whether there are ways to invest in the property and bring up the potential rent price. 

Many experts suggest that listing your home at 1-2% of its purchase price is typically enough to generate good profitability (so for a $200,000 apartment, that's $2,000-$4,000). There is no right answer as to "how much" profit you should aim for after you account for all expenses. For some, it will be enough to know that someone else is paying off their mortgage and they can eventually sell the home and profit. For others, having additional passive income can help pay down additional mortgage or other expenses.

Keep in mind that at any given time, about 15% of American renters are behind on their rent. You might end up in the difficult position of having to go through the eviction process - which will require you to pay for several months of rent with no help from the lessee. 

Even if all goes well and your renter pays on time, you should anticipate that the apartment may be empty for a month or two once their lease is up - which means you need to account for that potential vacancy cost as well.

How to Buy Rental Property in Florida

It's in your best interest to talk to a Realtor about what you're looking for in a rental property. It's the seller of the house who pays the commission fees to both agents - so why not make full use of their knowledge? 

Once you have the right budget in mind, you'll want to find a home that is rental friendly. Important info to know is:

  • The local (neighborhood) vacancy rate
  • The home's average rate of appreciation
  • Local amenities (nearby grocery stores, cafes, restaurants are a good thing)
  • HOA rules (some HOAs have restrictions on renting)

Talk to a local agent

Have a Management Plan in Place

Although rent is often referred to as “passive income,” in reality it’s often a very “active” income that requires you to react quickly in response to problems or concerns. If the air conditioner for your rental property breaks, you can’t just give them a fan and deal with the problem when you get back from vacation. Your renters will expect prompt assistance - even if all that’s required of you is calling a service technician and paying them, you will need to do that.

Some landlords opt to take care of these issues themselves, while others opt to pay for a management company. Management companies can handle maintenance issues as well as finding and screening occupants for the apartment, communication with tenants, and cleaning (at the end of the lease). 

Management fees will typically range from 8-12% of the monthly rent, so whether or not it’s worth it to you may depend on how much you value your time, and how stressful you find it to take care of yourself. If your reason for renting the apartment is due to moving out of the area, a management company might prove easier than asking a relative or friend to drop in when there are issues.

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Get the Appropriate Paperwork for Renting

Renting is more complicated than simply announcing that your home is open for business. Because you are essentially running a business, there is paperwork involved. You also need certain forms on file to document the transaction for legal purposes. If your tenant ever stops paying, for example, or wants to break the lease early, you’ll want to be able to point to your agreement with them in order to determine next steps. 

  • Rental Application: an important document because the applicant gives you written permission to check their references and background. Pay the necessary fees to run credit and criminal checks - you can ask for an application fee if you like to cover the costs. Ideally, you’ll want applicants with a credit score of at least 600, but this may depend on the area you’re renting in. You also need to use your judgment: is it better to have a renter with a score of 580 but no evictions on record, or a tenant with a score of 660 with an eviction on record? Having a conversation might clear up some of the “why” these things happened, but there isn’t always one right answer.
  • Lease: the lease is where you spell out the rental terms, and is a legally binding agreement - so it’s important to double and triple check this document to make sure it has all the language you want. Make sure to clearly outline the lease term, how long the tenant has to pay rent until it’s overdue, any responsibilities and/or restrictions the tenant has, etc. It may be a good idea to have a lawyer or housing expert look over your lease in order to ensure legality - for example, did you know that local laws often limit how much landlords can charge in late rent fees?
  • Rental lease: in all likelihood your city requires you to have a Rental Lease in order to house tenants. This ensures that the city knows which homes are being rented and can hold you accountable for the laws you’re required to follow. Lead safety certification is often required, and your building will need to be up to code - every building, for example, needs to have two points of egress, or exit, in case of emergency.
  • Contact your mortgage provider: if you don’t let your lender know that you’re renting out the home, you could be in violation of your loan terms. If the lender were to find out, they could revoke the loan - requiring you to pay it back immediately or lose your home. 
  • Move-in condition report: wear and tear are often a contentious issue between landlord and tenants. Thoroughly document the state of the property before the tenant moves in so that you know whether any future damage was already there, or was tennant-caused. 

How to Rent Out a House: Find Tenants

If you’re finding tenants yourself (rather than through a management company), you have several options for listing your property. Oftentimes, the most popular sites will vary by region. In some areas, Facebook marketplace reigns supreme; in others, Zumper, Zillow and/or Hotpads (and many other, similar sites) will be how you can get in touch with the most potential tenants.

When you list your property, include as much information upfront as possible, because most potential tenants are comparing your property to dozens of others - they won’t want to wait to hear the rent price or whether or not they’re responsible for electric. Having clear, high-resolution photos of your property is also key. If possible, take photos of the home while it’s empty and free of furniture - this will help it look spacious and clean to potential renters.

Note: Florida law requires that notices from landlords to tenants must be in writing and must be either hand-delivered or mailed, even if the rental agreement is oral.

Fair Housing Laws 

As a Florida landlord, your obligations are different from what you may have experienced as a renter yourself. Tenants, for example, can specify the type of roommate they would like to have in listings, whether that’s a preference for gender, race, sexual orientation, non-parents, etc. 

As a landlord, though, you need to adhere to Fair Housing Laws which prohibit discrimination. You can’t use different qualification standards or make housing unavailable to someone purely based on their race, religion, disability, etc.

Essential reading: the Florida Residential Landlord and Tenant Act

Guarantee Insurance

Many people have heard the horror stories of renters who game the system and deliberately stay in homes, without paying rent, for as long as possible. Of course, as a landlord you're far more likely to encounter a less nefarious situation where renters simply fall on hard times. Still, it's an extra mortgage that you'll need to pay completely out of pocket until they're back on their feet.

Some insurance companies now offer rent guarantee insurance, which will cover up to six months of rent (depending on the insurance plan), allowing landlords to begin the eviction process. The price will vary depending on the plan, but you can expect to pay somewhere from 3-7% of the total rent.

For people who are only renting out one home or apartment, rent guarantee insurance can provide a much needed safety net.

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