Traditionally, purchasing a house meant you were going to be living in it for the foreseeable future – at least the next few decades. But more and more people are now turning to the idea of renting out their homes if they suddenly have to move, to help pay off their mortgages and other loans, or to turn it into an investment property. If you’re interested in this idea but unsure where to start, here’s your landlord guide to renting out a house for the first time.
First time landlord? You are not alone.
If you are embarking on becoming a first time landlord, plenty of Americans are joining you. An article by the National Association of Realtors (NAR) states that around 35.5% of rental dwellings are one unit properties. This means one home or apartment as opposed to something like a duplex or triplex which has two or three distinct complete living spaces (units) separated by walls, doors, etc. 72.5% of those one unit properties are owned by individuals just like you. 39.2% have a mortgage and likely have the same questions you may have. Like, “What if the tenant moves out and I have to pay the mortgage before another one moves in?” Renting out a house for the first time is definitely a decision that requires thinking about what may be involved and doing some homework ahead of time.
Things to consider before renting out a house for the first time
It can be both an exciting and nervous experience if you’re about to rent out your home for the first time. However, there are some important factors to consider before doing so. The homework you need to do involves questions you need to ask of yourself, gaining knowledge of relevant local rules and regulations, and understanding what is involved financially. Here are five things you need to know if you’re about to rent out your home for the first time:
1. How Much Rent Should I Charge? Researching how much other homes in your area rent for can help you set a price range. A site like Zillow can show you how much homes are renting for in your area. You want to look at houses similar to yours in the same part of town, similar neighborhood characteristics, and similar prospective tenants to get a good comparable rental price. If you have a mortgage, you also want to make sure your rent covers monthly mortgage payments as well as any expenses that you will continue to pay instead of the tenant. You also need to have a contingency amount budgeted for unexpected costs.
2. What Will Be Your Tax Impact if Your Home Is Rented Out? A tax professional can help you figure this one out unless you are brave enough to do the modeling on your own! Things to consider include deductions for expenses, mortgage related deductions if you have debt on the property, depreciation, etc., and not just taxable rental income. Some people are scared of anything that could possibly move them into a higher tax bracket, but you need to consider all the factors to make an educated decision.
3. What Type of Agreement Do You Need? First of all, you need a written agreement which in many cases is called a lease. The agreement is NOT verbal, and NOT scribbled on a napkin or piece of paper. The agreement outlines what tenants are expected to pay (rent and in addition to rent), when to pay, how long the agreement lasts, how they must maintain the property, if they can make any alterations to the property, what happens if the tenant is in default of the agreement, and other items depending on how detailed the agreement is. Many times, you can use a format adopted by your local realtor association. It’s important that the lease follows landlord tenant law in your state. The agreement protects the rights of both you and the tenant. If you don’t have a proper agreement, it can come back to bite you later, and mostly financially.
4. What Insurance Do I Need When Renting Out My Home? As with tax implications, it’s best to speak with a licensed agent to understand your options. To simplify the thought process, consider the risks, and even how much you want to pay out of pocket as a deductible if something happens. Generally, you want to have insurance that covers the dwelling (the property) and liability insurance in case a tenant gets hurt. Having coverage for rental income loss is great too.
5. Do I Want to Manage the Property Myself? Answering this question will determine if you get called or someone else gets called if there is an emergency or issue with the property at 4:00 AM in the morning! It’s still your house. The answer also depends on how far away you live from the property. If you have moved away to a different state, it may not even be feasible to manage the property yourself. Many first time landlords hire a property manager to be the person that handles everything with the tenant from the initial application to dealing with issues, collecting rent and evictions. Read this article for a more in depth discussion on property managers and why some landlords choose them.
Finding a tenant while renting out a house for the first time
If you’re renting out your first house, one of your primary concerns is likely to be finding tenants. Unless you’re renting out your property to friends or family, you’ll need to market it to find tenants. Although there are some similarities, marketing for rentals is often done differently than selling a home. For both a traditional sale and a rental, you can use an agent, take pictures, place ads on-line with Zillow and Craig’s list, and put a sign in the yard. The differences lie in what you communicate in your advertising. Instead of a house with an updated kitchen which is important for home buyers, your prospective tenant may care about how much deposit is required, if utilities are included, or if pets are allowed. Think about other selling points like whether or not the property is close to any major businesses, public transit, or popular retail destinations.
What to do after you have found your tenant
When you find your ideal tenant, try to get all of their information (full name, address, phone number and email) in writing right away. Make sure they have an up-to-date driver’s license or state ID with them. A tenant application form should have all the key pieces of information that you need including social security number, proof of income and references. Check these references thoroughly; if you’re uncomfortable with something that was said on a reference check, trust your gut instinct. Process applications in a first-come, first-serve order to demonstrate fair practices. After you screen and have a tenant that you can accept, have them sign the lease agreement. It is common to collect the first month’s rent and security deposit prior to the tenant moving in. If you choose not to hire a property manager and have decided to manage the unit yourself, there are some on-line software apps like Rentredi that can assist with getting tenants to fill out applications on-line as well as services to screen tenants.
Protecting your property from damage
One of the main reservations people have with renting out a house is the fear of someone damaging the property and leaving them holding the bag with expensive repairs. How do you ensure that your property stays in good condition? Are there any issues or situations you should prepare for? First, properly screening tenants and checking references is your first defence to protecting your property. Second, you have the lease agreement and the tenant’s security deposit. Your lease agreement should have language that allows the security deposit to be applied to any damages incurred. This should also be allowed under state laws, but make sure you check for any conditions. The agreement should also give you or a representative access to the property to perform inspections and/or repairs. Inspections are your best way to identify repair and maintenance issues before they become a larger problem. Tenants may not always communicate issues until they are severe. You may also be able to add an addendum to the agreement to charge tenants for damages incurred during the term of the lease should they arise. Here is an example of an inspection list that may be helpful.
How to deal with bad tenants
No matter how well you screen, there’s always a chance that you might get a few bad tenants. This can affect both your bank account and your property, so here are some steps to take when dealing with the bad apples. Keep these tips in mind: 1) set clear expectations up front when going over the lease agreement, 2) treat it like business; 3) take photos before tenants move in (you can use your marketing photos), and any pictures of tenant damage after they move in; 4) inspect the property at least once a year; 5) be consistent with charging late fees; 6) send prompt notifications to tenants regarding any issues with payments or lease non-compliance; 7) keep good records; 8) evict tenants quickly if the lease is breached; 9) remember it will pass; 10) find the next tenant as quickly as possible and learn from any mistakes you made with the last tenant.
In Conclusion
If you’re considering renting out a house for the first time, you are not the first or the last person to make that decision. You can be just as successful as thousands of other first time landlords if you take your time, do some research, and follow the right steps. We hope this first time landlord guide has been helpful. Everyone’s journey is not the same, so talk to some other landlords in your area to gain from their experience as well as realtors and property managers to get viewpoints from multiple angles. Finally, stay positive and feel good about making the choice that’s right for you.
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