• Perhaps you’ve been temporarily transferred out of the area for work.
• Perhaps you owe more than your house is worth and can’t sell it but could cover the mortgage by renting it out.
• Or perhaps you’ve realized the incredible wealth-building opportunities that a rental property can provide for your financial future.
• While the bad stories receive the most press and attention, the fact is, every day millions of landlords are renting out houses to good tenants all over the world. There are ways to minimize the hassles and turn your home into a profitable venture.
Should You Rent Your House Out?
The first thing to consider is: should you rent or sell your home? I’d like to make the case for why renting out your house is the best decision. After all, the benefits of a rental property are numerous. Thus, here are some things to consider:
Your primary home, while a necessity in life, is not typically an asset or investment. An asset is something that makes you money, whereas a liability is something that costs you money. By renting out your home, you are able to transform your liability into an asset.
By renting your house, you can continue to hold onto your property while the tenant’s monthly rent pays down your mortgage. During this time, rental property values (hopefully) will climb and build wealth for your future. You may also begin to experience additional monthly cash flow if you can rent your house out for more than what your monthly expenses are. This should be the goal for all potential landlords.
Renting your house out may also help start your investment career with no additional costs—since you already own the home. This could be the first step in a tried-and-true method for building wealth. Many real estate investors start this way—renting out their homes as they upgrade to bigger or better properties throughout their life. This may also help fund your retirement, as you may end up owning multiple properties “free and clear” by the time you are ready to retire, providing monthly rental income or a lump sum if you sell.
Finally, by renting out your house, you retain the possibility of returning to that home. This is especially helpful if you’ve been forced to move quickly because of a temporary job relocation.
Finding Rental Tenants
When it comes to attracting tenants to rent your house, marketing is key. You will want to reach as many potential tenants as possible so you have the largest pool to choose from. The following are three easy ways for marketing a property:
Newspapers: Though a quickly fading and expensive marketing technique, your town’s local newspaper may be a great way to attract tenants. I recommend NOT putting the address in the newspaper, so people are forced to call (no text or email either) and talk with you first.
Craigslist: This is one of the internet’s largest resources and easiest places to find tenants. Perhaps the best part? Craigslist is free—unless you are in a few select cities. (Pro tip: Don’t list the address here, though. Just give a general vicinity for safety purposes.) You can also place your ad in other online rental submission sites, like Trulia, Zillow, or PadMapper.
Yard Signs: One of the oldest but most successful ways to market your rental is with a simple “For Rent” sign in the yard. The biggest drawback to a sign, however, is instant notification of a vacant house to anyone driving by.
Pre-Screening Rental Tenants
When you receive a call or message from a prospective rental tenant, always pre-screen ahead of time. The easiest way to do this is by setting rental criteria and explaining that criteria over the phone. My criteria prior to a typical rental application process looks like this:
• Applicants gross monthly income must equal approximately three times or more the monthly rent.
• Applicants must have a favorable credit score.
• Applicants must be employed and able to provide acceptable proof (i.e., pay stubs) of the required monthly income.
• Applicants must have good references concerning rental payment, housekeeping, and property maintenance from all previous landlords.
• Applicants must agree to the total number of occupants allowed (e.g., two per bedroom per state law).
You can read this list over the phone to the prospective rental tenant and ask them if they meet these qualifications. If they don’t, don’t rent the home to them or waste your time screening them further or booking a showing.
Should You Use a Property Manager?
Should you manage the property yourself or hire a property manager to look after it? Generally, a property manager will charge roughly 10 percent of the monthly rent plus 50 percent of the first month’s rent when a new tenant moves in.
In exchange for this fee, a property manager will typically:
- Advertise for finding new tenants
- Process rental applications
- Sign the rental lease
- Collect the monthly rent
- Keep track of the financials
- Schedule maintenance repairs
- Issue legal notices
- Enforce rental policies
- Understand and navigate landlord-tenant laws
- File evictions
For more information on hiring a property manager, see:
How Much Should You Charge Renters
In the world of rental homes and real estate, you do not necessarily set the rental amount—the market does. Your job is to discover what the market will allow for your house and attempt to get that amount, known as “fair market rent.” Discovering the monthly rent is not difficult. The best way to determine how much your house will rent for is by doing market research.
Monthly Rent
Your house will generally rent for about the same amount as other rental properties that are similar location, size, and condition. Here are a few resources to help you conduct market research:
- Craigslist
- Zillow
- Trulia
- PadMapper and other online rent services
Also consider:
- Driving around, looking for “For Rent” signs
- Calling property management companies
- Asking other local landlords
- Browsing local newspapersRelated: The Ultimate Guide to Fair Market Rents
Security Deposit
A security deposit is a sum of money paid by a tenant to ensure they fulfill the terms of their lease. Remember, though—this is a deposit, not a fee. This money should be held in a separate bank account and returned to the rental tenant when they move out, less any damages that need to be repaired.
Many states restrict the amount you can charge, so make sure to check to find any local limitations. I typically charge the equivalent of the monthly rent for a security deposit, though I may charge more than that if the rental tenant has anything in their background that worries me (more on this in a while).
Related: Landlord Security Deposit Laws: Use, Refund, & Restrictions
Rental Application Process
Always give an application to each prospective renter who is interested in your rental home, even if you are not interested in them. This is a measure to ensure you will not be charged with discrimination. The actual rental application should include a variety of information. At a minimum, include:
• Names of all potential renters
• Date of birth
• Social security number
• Phone number
• Alternate phone number
• Previous addresses (last five years)
• Current employer (name, hire date, income, contact info)
• Past employers (name, hire date, income, contact info)
• Emergency contact information
• Release of information statement
• Signature for all rental tenants
Always—I repeat, always—require payment of an application fee. The rental application fee covers the cost of the background check, etc. But before bothering with the components of screening that cost you money, first scan the rental application to ensure candidates meet your initial criteria. The obvious things to look for are those you read to the prospective tenant over the phone:
• Applicants’ gross monthly income must equal approximately three times or more the monthly rent.
• Applicants must be employed.
• Applicants must have good references concerning rental payment, housekeeping, and property maintenance from all previous landlords.
• Applicants must agree to the total number of occupants allowed (e.g., two per bedroom per state law).
Conducting Background and Credit Checks
There are various tenant screening sources you can use to run a background or credit check on a rental tenant. Deciding what kind of “background” or “credit score” you’ll allow is largely dependent on your location and the strength of your real estate market. The things to look closely at on the background and credit reports are:
• Felonies
• Prior evictions filed
• Prior evictions carried out
• Bankruptcy
• Judgments
• Other criminal or bad financial history
Related: Tenant Screening—The Ultimate Guide
Verifying Income & Checking Rental History
Your rental application should include a “release of information” signature from your prospective rental tenant to allow you to properly check up on their claims. Begin with their job. The rental application should include the name and phone number of their current employer, so call and speak with the manager, owner, or human resources manager.
Many times, you will be required to fax over the release-of-information signature. Then, the important questions to ask are:
• How much do the renters currently earn?
• How long have the renters worked there?
• Is this job considered temporary?
Next, call their previous landlords for at least the past five years. Be sure to do the renters’ pre-screening (i.e., background check and credit check) to see if any other addresses appear that might indicate they conveniently “forgot” to include a landlord that they rented from.
When talking with previous landlords, consider asking the following questions:
• How long did the rental tenant rent from you?
• What was their monthly rent?
• Did the rental tenant give proper notice when vacating?
• Was the rental tenant refunded their security deposit?
• Would you rent to this rental tenant again?
Accepting or Denying a Rental Applicant
To avoid discrimination complaints, always process rental applications on a first-come, first-served basis. Process each rental application until you discover the applicant does not qualify.
When you deny a rental applicant, it is important that you clearly document your reasons for why you are denying the renter to avoid discrimination complaints. Always inform the rental tenant with written notice.
When you find a rental applicant who meets all your requirements, you can verbally let your future tenant know that they are approved.
Rental Lease Agreements
You can get a state-specific lease agreement from a number of sources, such as EZLandlordForms.com, USLegalForms.com, a local paper supply company like Staples or Office Depot, or your attorney. If you’re considering a free online lease, keep in mind that each state has different rules and laws that govern landlord-tenant policies.
Most landlords choose a one-year lease in an effort to keep their tenants in the rental home as long as possible aka minimize turnover. While rental agreements generally vary in length and content, most leases contain the following information:
• Names of rental tenants
• Address of the rental property
• Lease agreement term length
• Monthly rent amount
• Security deposit amount
• Late fee definition, penalties, and fees
• Landlord-tenant laws
• A move-in condition report
• Rental policies
• Provisions for or against pets, utilities, smoking, and more
Signing the Lease Agreement
I find it helpful to go through the lease agreement ahead of time and mark all the areas that require a signature or initialing with Post-It Notes or a highlighter. That way, nothing will be forgotten or missed. When you meet with the rental tenant, walk them through each provision in the lease, step-by-step, and ask them to sign as you go. This may be time-consuming, but it will help protect you months down the road when the tenant says, “I didn’t know that.”
Inspecting the Property
By this time, the monthly rent and security deposit have been paid, and the lease agreement has been signed. It’s now important to do one final thing before handing over the keys to the renter: the move-in condition report.
The move-in condition report is simply a paper that the rental tenant signs that documents, in detail, the condition of the rental property upon taking possession.
Allow the renter to take some time walking through the rental property and inspecting it. Encourage them to take notes of the condition of each room.
I also recommend taking photos (or a video) of the property before handing over the keys. This will be further evidence in the future when the rental tenant moves out.
In addition, requiring that renters carry renters insurance is a good idea. Renters insurance is akin to homeowners insurance, but it will protect the renter’s stuff should the unfortunate happen, such as fire and theft.
Now, the paperwork may be done, but your journey is just beginning. As a landlord, it is your responsibility to ensure monthly rent is paid on time, late fees are charged when needed, repairs are performed when required, and bookkeeping is kept up to date.
Good luck!
Original Post – Bigger Pockets
Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Business Management, Flipping Houses, Mortgages & Creative
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https://www.biggerpockets.com/blog/2013-01-04-how-to-rent-your-house?
