If you own real estate, it can be a good source 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.
While rental real estate can be a great source of lifelong income, the costs, responsibilities and obligations involved in being a landlord vary depending on where you live.
Here are the steps to follow to get your new venture off the ground.
Preparing Your House for Rent
There’s a lot to consider before you rent out your house. Not only do you have to make your listing as appealing as possible to renters, you’ve got to protect your interests, both financially and legally. Here are some things to think about:
Cleaning and Upkeep
Before you list your property, you’ll want to clean it thoroughly and make sure it doesn’t need any serious repairs. Not only will this make your listing attractive, it can also protect you from the liability that a damaged property creates. If you have a loose step on a staircase and a tenant falls through it, for example, you will be financially liable. Part of your process should be to ensure that your property meets current safety standards.
You should also consider adding touches or features that can make your listing more desirable. If you can upgrade the hardware in your shower or bath, for example, or add smart technology to your home that can control your lights or perform other nifty technological duties, you may be able to charge more for your listing.
Insurance
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.
Mortgage
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.
Rental License
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.
Setting the Right Rent Price
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.
You’ll also want to make a list of all of the expenses related to the rental before you determine the price. This is so that you have a realistic estimate of just how much money you will make from renting it out.
Here are some of the most important expenses to consider:
- Mortgage principal and interest
- Taxes
- HOA/condo fees
- Insurance
- 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
- Marketing
- Vacancies
Also consider your start-up costs:
- Renovations and repairs needed before the home can be rented
- Cash reserve for first-year repairs
After running the numbers, does renting the house still seem like a viable option? Remember that there’s generally a ceiling to how much you can charge for the rental, given equivalent options in the market. However, even if the rent you charge doesn’t cover all your expenses, it will at least help offset them. In the meantime, the home might appreciate in value.
How To List Your House for Rent
If you want to successfully rent your property, you’ll want to present your listing in the most attractive fashion on the most rental platforms as possible. Here are the steps to take:
- Step 1: Create an attractive listing. A well-described listing, complete with an eye-grabbing headline, extensive photos and a listing of all of the relevant details will go a long way towards getting your property seen by the most potential buyers.
- Step 2: Choose the right listing platforms. Depending on the type of tenant you’re targeting, you may consider using a variety of online sources, such as Zillow, Redfin or even Craigslist. You could even consider listing your property in your local newspaper.
- Step 3: Write a clear and compelling description. Generally speaking, potential tenants want quick access to the most relevant details about your listing. The key is to strike the balance between presenting all the pertinent information and being too wordy.
- Step 4: Take high-quality photos of your property. In many cases, it’s the photos that will attract renters to your listing, so upload the most high-quality photos you can. If you don’t have a knack for photography, hiring a local specialist who knows how to make the most out of a listing can be money well-spent.
Marketing Your Rental 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. Targeting the right audience in this manner can help you find the right renters for your property.
If you’re looking to maximize your exposure, consider hosting one or more open houses. Although you will likely get your fair share of looky-loos, a home that presents well in person can also draw in more potential buyers.
Screening Tenants
In your eagerness to get your property rented, don’t overlook the importance of background checks of your potential tenants.
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.
When it comes to rental applications, your gut can be a good guide. If an application seems too good to be true, or if there is some information that doesn’t seem to add up, it’s likely best to err on the side of caution. Keep an eye out for additional red flags, such as a sudden, unexplainable increase in income, an inability of the applicant to provide direct answers, or difficulties in getting bank and financial information from the potential tenant.
Drafting a Rental Agreement
As a rental agreement is a binding legal document, it’s important to get it right. In addition to including all the financial necessities, such as the rent amount, lease terms, and deposits, you’ll want to protect yourself by including all necessary limitations, regulations and penalties in the agreement. For example, if you want to charge a penalty for late payments, restrict the number of tenants or include or exclude pets, you’ll have to put that all in writing.
You can find sample leases online at numerous sources, but you’ll want to ensure that they cover all your legal basis and include any special instructions you have. For this reason, particularly if this is your first time as a landlord, you may want to consult with a real estate attorney to make sure all your i’s are dotted and your t’s are crossed.
To get the lease signed, you can either meet with your new tenant in person or have them sign electronically. But you’ll also want to set up a way to receive the rent and the security deposit. This can happen in any number of ways, including via a check in person or via wire or electronic transfers. In most cases, you’ll want to open a bank account to use exclusively for security and other refundable deposits, as “commingling” that money with your own is a bad practice and in some cases may even be against the law.
In addition, advise the tenant as to how to transfer utilities into their own name and get access to their mailbox.
Managing the Rental 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. However, this comes with an expense that will eat into your income and potential profit.
Part of managing a rental property means having certain systems and processes in place. For example, you’ll want to set up a system for collecting rent, along with a way to deal with delinquent payments. You’ll also want to set up a way to communicate with your tenants and resolve issues, such as maintenance requests, damage to the property or any other violations of the lease.