Perhaps you’ve tried to sell your home but the market’s too sluggish and you’re tired of paying the mortgage. Or maybe you’re moving to a new area but want to hold on to your old real estate property and rake in some income on the side. Or you might think it’s a savvy idea to hold rental property in a rising market as a real estate investor.
Whatever the reason, it’s a good time for you as a homeowner to consider becoming a landlord.
The real estate rental market is hot: A 2022 study from the Joint Center for Housing Studies of Harvard University found that the rental market roared back in the second year of the pandemic. The number of rental households across the country soared to 44 million. Depending on your real estate market, the desirability of your house, and your monthly mortgage and other expenses, you may be able to at least cover your mortgage, if not make a small profit.
When you add the tax advantages of having a residential real estate investment, plus the potential upside of property appreciation, converting your home into an investment property could be one of the smartest financial moves you could make.
Rent for the right amount
At a minimum, most new landlords would like their cash flow from rental income to cover their mortgage payment, as well as taxes, insurance, and other expenses. Times may have changed since you bought your house, so you want to be clear on what the real estate rental market will bear. Check homes for rent for the going monthly rent rates in your area.
“Look for comparable properties in similar areas, with corresponding bedroom and bathroom counts,” says Ed Laine, partner/broker of Miller Laine Properties in the Seattle area. “That will give you a per-square-foot rental figure that you can then apply to your own property.”
Prepping your home to be a rental property
Before you bring in tenants, you’ll need to make sure your home is ready to rent. To attract top-notch tenants, here’s a list of to-do’s before you put up the “For Rent” sign.
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- Inspect your home. Give your home a thorough once-over and repair any major issues. Address potential problem areas including roof leaks, sagging or clogged gutters, driveway cracks, leaky faucets or pipes, electrical outlets, and burnt-out light bulbs.
- Be aware of safety. Install smoke and carbon monoxide alarms. Consider putting a fire extinguisher somewhere in the home.
- Clean your home. It seems obvious, but you should provide a blank slate for your tenant. Clean the floors, windows, and blinds. Shampoo any carpets to remove stains. Repaint walls with a neutral color to make the rooms seem cleaner and brighter.
- Evaluate any furnishings and appliances. If you have valuable furnishings or fixtures you don’t want stolen or damaged, remove them prior to attempting to rent. If you’re providing a furnished home, make sure everything you provide is in working order. If you’re providing appliances to your tenant, ensure they are in working order and are clean inside and out.
- Contact your mortgage and insurance companies. If you’re still paying a mortgage on the home, your lender has certain rights to the home to protect its security interests. You should also switch your homeowner’s insurance policy to a landlord property insurance policy to cover any losses due to tenant’s negligence, natural disasters, fire or water damage.
How to screen tenants
“Picking the right tenant can make all the difference, and is one of the top ways to make your experience as a landlord a good one,” Laine says. You’ll want to have the tenant fill out a rental application so you can check their employment history, do a credit check, and verify income (via pay stubs or tax returns), as well as get references from past landlords about their renting history if possible.
To add an extra layer of security as a landlord, you can do statewide and federal background checks on tenants at places like the National Tenant Network They have been screening renters since 1980, to make sure potential tenants don’t have a checkered history elsewhere.
Decide whether to manage your property yourself
It may be tempting to manage your rental property yourself when you consider that property managers typically charge 4% to 12% of the monthly rent. But that might be a small price to pay for avoiding landlord-tenant headaches and hassles with the maintenance and repairs of real estate rental property. According to a survey from property management company Buildium, 63% of rental home owners use a property management service.
Managing a rental property is a job, and the cost and the calculation aren’t as simple as rent – mortgage costs = profit.
Property managers don’t simply screen prospective tenants and collect rent. They give advice on rental issues such as long-term leases vs. month-to-month rentals, and they fill out the lease agreement and have both you and the renters sign it. They can also smooth the transition to new tenants, help keep rental vacancy rates low, and even deal with evictions if necessary.
“I often suggest that my clients manage the first one themselves, which gives them a great education on their property and on being a landlord,” Laine says. “It also proves to them that management fees are nothing compared to a 3 a.m. call from a renter about a tree limb coming through a window.”
Pick the right property manager
Picking a property manager isn’t just about finding the one with the lowest fees. Fees are important, but don’t let cash be your sole deciding factor.
For instance, what are the management company’s hours? If they’re available only during weekday business hours and a pipe bursts on the weekend, you may be stuck with coming to the aid of your tenant yourself.
Will your property manager pursue the matter if your tenants don’t pay on time? If not, you may get stuck chasing down your money, which defeats the purpose of having a property manager at all. If your tenant or property cause you enough trouble, you could even decide to sell, just to avoid the headaches of renting.
Many real estate agents either handle property management or have someone in the office who does. Shop around for a manager and ask colleagues and research online reviews.
Also make sure that the property manager—and you yourself—are committed to keeping up with local laws. Laine cites a recent case when the local municipality enacted laws that hold landlords liable for bedbugs.
“We updated our leases immediately,” he says. “The liabilities are too great to take a risk just to save a few bucks.”
Responsibilities of a landlord
Landlords are required to offer a dwelling in habitable condition. On the most basic level, this means a sound structure with hot water, heat, working locks, and working plumbing and electricity.
Aside from the basic responsibilities, rental laws and landlord obligations vary by state. For example, in California all rooms require a window, but that’s not the case everywhere else. It’s your responsibility to read up on your local landlord-tenant laws.
Major and minor repairs are a landlord’s responsibility
As a landlord, you’re responsible for major repairs, which can include the following:
- Busted pipes
- Broken windows
- Water heater or furnace issues
- Broken toilet (particularly if it’s the only toilet)
- Inoperable security features
- Pest infestations
As long as major repairs aren’t your tenant’s fault, you have to foot the bill. However, if the tenants broke a window when moving furniture or put a hole in your wall, you can send them the bill.
There are also minor repairs. These include items like stained carpets, holes in screen doors, creaky floors, and noisy pipes. If a repair isn’t endangering the tenants’ health or safety, you don’t have to jump on it immediately. But you will want to tend your requests in a timely fashion to keep them satisfied and keep the relationship positive.
Paying for repairs
If you prefer, you can have your tenants make some repairs and credit the money toward their rent. Say a new deadbolt needs to be installed and it will cost $45. If your tenant agrees to make the repair, you’d deduct $45 from their rent that month. Draw up a document that states the amount billed and have them sign it to protect yourself from future disputes.
Some repairs may become the tenants’ problem if they neglect to inform you. For example, if they fail to report a leak in an upstairs central air unit, which causes water damage to the ceiling downstairs, they could be responsible for the subsequent damage.
If you’re serving as the landlord, you should encourage tenants to report any maintenance issues as they arise.
Security responsibilities of a landlord
You have to offer your tenants basic security. The rules vary by county and state, but these are the most common security features:
- Interior deadbolts
- Lockable windows
- Entry door peepholes
- Working smoke and/or carbon monoxide detectors
In some parts of the country, a landlord is required to provide additional security features if requested. Check your local laws if you have any questions.
Outdoor maintenance of your rental property
Landlords aren’t responsible for all outdoor maintenance on single-unit dwellings. You don’t have to mow the lawn or shovel snow, although you’ll want to keep your property looking sharp.
If you happen to own a rental in a homeowners association community, be sure to enforce your community’s rules for maintenance. If your tenants don’t abide by the rules, then you—not the tenants—will face a fine.
You may or may not have to provide trash removal for single-family units. In some counties, trash removal is rolled into sewage and water service—so if you’re not paying that, you don’t have to pay for trash removal.