Your real estate investment can pay off with a lifetime of passive income if you play your cards right. But know that “passive” doesn’t mean hands-off. You’ll do most of the hard work upfront as you prepare to rent out your house, and then earn consistent revenue by maintaining the home and managing expenses.
Here are the steps to follow to get your new venture off the ground.
1. Consider Key Factors Before You Start
There’s a lot to consider before you rent out your house, and a mistake can get you in serious financial, and perhaps legal, trouble. Here are some things to think about:
At the very least, you’ll need to check with your homeowners insurance agent to see if your policy covers non-owner-occupied homes and homes that are vacant for 30 days or more. The agent might recommend a landlord policy, which provides slightly different coverage than regular homeowners insurance.
Unless you bought the house as a second home or investment property, your mortgage documents specify how long you must live there as your primary home before you can convert it. Until then, converting your primary home into a rental property might constitute fraud.
State and local jurisdictions regulate rental properties, and some require investment property owners to have a license. The license might be a standard business license or a license specifically for rental properties.
Federal, State and Local Regulations
In addition to honoring licensing regulations, you must comply with anti-discrimination law. Security deposits are also strictly regulated.
Local zoning and housing regulations might impose occupancy limits, fire equipment requirements and safety standards for your home. If you’re renting a home in a planned community, you’ll also be subject to homeowners association covenants, declarations, restrictions and bylaws.
2. Determine How Much You Can Charge
The best way to figure out a realistic market-value rent is to look at how much similar homes in the same area are going for. Check local real estate brokerage websites, Trulia, Zillow Rentals and local newspapers and neighborhood social media groups for listings.
Compare your home with a critical eye in terms of style, size, condition and amenities. And then err on the side of caution. Vacancies due to overpricing can cost you more than slightly undercharging tenants on rent.
Keep in Mind
It might be tempting to set your rent according to how much you need to cover your expenses. However, the cost of operating your rental property has no bearing on how much rent the market can bear.
3. Crunch the Numbers
You’ve already determined how much rent you can charge. Now you need to calculate your expenses:
- Mortgage principal and interest
- HOA/condo fees
- Routine maintenance like HVAC inspection and preventive service, pest control, yard maintenance
- Repairs and upgrades (ideally, bank 10% of incoming rent to stay on top of small repairs and build a reserve for large and unexpected ones)
- Licensing, if applicable
- Home warranty and/or appliance contracts
Also consider your start-up costs:
- Renovations and repairs needed before the home can be rented
- Cash reserve for first-year repairs
This is a good time to set up your accounting system. Although you can track expenses using a simple spreadsheet, accounting software provides tools to help you manage and analyze your business finances.
After running the numbers, does renting the house still seem like a viable option? Remember, even if rent doesn’t cover all your expenses, it’ll certainly offset them. In the meantime, the home might appreciate in value.
4. Decide Who’ll Manage the Property
Managing your own rental property keeps expenses down, but the trade-off is more work on your part. For a fee, a property management company can handle maintenance and repairs — and any other aspect of managing your rental.
5. Prepare the Rental Application and Lease
Next to insurance, an ironclad lease is the best way to protect your investment. Although you can purchase a lease template, a generic form won’t address your preferences or factors that are unique to your property or location. Your best bet is to hire a local real estate attorney familiar with your market to draft a lease on your behalf.
It’s also prudent to have an attorney prepare the rental application to ensure that your tenant screening procedures comply with privacy and anti-discrimination laws. The application should include names and ages of all occupants, employment and income information for everyone signing the lease and a clause indicating that by signing the application, the prospective tenants give permission for you to run credit and criminal background checks.
6. Market the Property
Advertise your rental house in the same places you researched comparable prices: Zillow Rentals and Trulia, local newspapers and social media groups. If your house is near a university, hospital or large corporation, you might also contact the human resources departments to let them know your home is available to relocating employees.
7. Evaluate Applications and Select a Tenant
Verify applicants’ income and employment with their current employers. In addition, run a credit check so you can evaluate whether the applicants are a good risk and determine their total debt payments. Ideally, a tenant’s rent payments and debt payments will total no more than 30% of their combined gross monthly income.
Once you’ve selected the tenant, meet with them to sign the lease and collect their rent deposit. You’ll have to open a bank account to use exclusively for security and other refundable deposits, as “commingling” that money with your own is against the law.
In addition, advise the tenant as to how to transfer utilities into their own name and get access to their mailbox.
8. Prepare for the Tenant’s Arrival
You can make sure that the tenant’s move-in day goes smoothly by:
- Having ample sets of keys, including mailbox keys, ready
- Verifying the transfer of utility accounts
- Having the home deep cleaned
- Performing a thorough video inspection showing all walls, ceilings, flooring, furnishings, plumbing fixtures, and insides and outsides of cabinets, closets and appliances
- Creating a checklist for the tenant to do their own inspection and attest to the condition of the property at move-in. Include the same items covered in your video inspection.
9. Complete Your Checklist for Move-In Day
Move-in day is the first day of the lease, even if the tenant isn’t actually ready to move in yet. Here’s what should happen on that day:
- Collect any outstanding rent and security, and promptly deposit the security into the new account you opened for that purpose.
- Turn over keys and mailbox keys as well as garage door openers and any other equipment that goes with the home.
- Give the tenant the inspection sheet to be signed and returned within 48 hours.
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