Whether you’re considering becoming a landlord because you have some extra space, because you want passive income from a duplex, or because you just don’t want to deal with selling your old house quite yet, real estate may look like a sound investment to you. At its simplest, you put your money down on a place, rent it out, and collect a monthly check. But experienced investors will tell you that there’s a lot more to becoming successful as a landlord in real estate.
“Owning rental property is a business, and it has to be approached as a business investment. You have to have the right personality to do it; it’s not for people who are not risk-tolerant.”
Before you take the plunge, it’s important to educate yourself about the process and how it works. Here’s a step-by-step guide on how to rent your house.
Step 1: Assess your situation
Before deciding to jump into renting, assess your potential rental situation.
If you’ve got a spare bedroom, maybe you’re thinking of listing it on Airbnb or finding a roommate. This could lead to a loss of privacy if you have to share a kitchen or bathroom. The short-term renter or roommate could have different standards of cleanliness, be noisy, or come and go at odd hours. Before going this route, be honest about your tolerance levels when living with strangers.
In a duplex or multifamily unit, you’d have more privacy, but you’d still share some spaces. Your bedroom wall could be next to a tenant’s loud television. They could park on your side of the driveway. Buying a rental home entirely separate from your living situation is the most expensive (but often the least annoying) option for landlords.
If you already own the house you’re planning on renting, then you’ll want to make sure your mortgage loan and insurance are both set up for a non-owner-occupant to live in the house — and change them if they aren’t.
The type of room or house you’re renting influences many of your options, as well as the amount of cash you’ll need to start as an investor. If you don’t want to share your bathroom all the time, you can occasionally list a room as a vacation rental to make extra money. More serious landlords, with a duplex or separate property, might want to focus on longer-term renters.
Step 2: Crunch the numbers
To be a successful landlord, you must keep an eye on your expenses.
When Dearing is taking clients to look at possible properties, they start with the mortgage. “If they’re going to finance it, with taxes and insurance, how does it pencil?” she asks. At a minimum, your rental income must cover these basic expenses, but she also advises diving deeper.
Questions to ask include:
- Is it rentable?
- What’s my likely vacancy rate?
- What can I get per square foot in the current market?
- Will rents continue to grow?
When making decisions, look at the overall rental market as well as a specific property.
Plan on setting aside money for maintenance and repairs. Unfortunately, tenants can do a lot of damage. Dearing tells this story: A friend with a rental property lost her year’s income when she had to repair $20,000 in damage that a tenant had done. Most landlords plan on saving 10% of the property’s value each year for maintenance, but unexpected major repairs can hurt.
It’s a good idea to keep a cash buffer available to pay the mortgage during a vacancy period, or to pay for extra repairs.
Step 3: Talk to your insurance agent
Don’t forget to loop in your insurance agent before you rent all or part of your home. Even if you’re just renting a room, you’ll want higher liability coverage.
“If a tenant burns themselves on your stove, they’re more likely to sue you for that,” Dearing points out. Tell your insurance broker that you’re going to have tenants coming and going from your guest room, and ask what you need to do to protect yourself. They’ll know which riders you need to add to your home insurance, or where you need to increase your coverage.
Step 4: Determine how much you could earn
You’ll want to cover your expenses — but you can’t charge an astronomical rate, or you’ll never find any renters. It’s important to do some market research on rent rates before buying a rental property or listing a room. What you can get for rent will determine your profitability.
Search online for local apartment listings, using sites like Craigslist, Nextdoor, Facebook Marketplace, and more. Some property managers list rentals on the MLS, or you can look up local listings on Airbnb or short-term rental sites. Drive around the neighborhood and call the phone numbers or jot down the numbers listed on “For Rent” signs to gather data.
Don’t forget to consider how the number of bedrooms for rent, amenities such as a backyard or off-street parking spot, and the unit’s condition impact a unit’s rentability.
How does your offering measure up? Be honest! If it’s a lot nicer than what you see, then you can charge more … but if not, you’ll have to be more realistic.
Step 5: Make any repairs or upgrades that are necessary
Fix anything that could be a danger to your tenants or that’s against occupancy codes. To make your rental more competitive, standardize updates to be at least standard with other rentals. If you have to choose, focus on repairs necessary to safely and successfully rent rather than cosmetic improvements, and you never want to “over-upgrade” a rental.
If you’re buying and fixing up a rental property, Dearing advises that you “be careful not to over-personalize the home. You want to make the property safe and attractive, and have everything in working order — but you’re not going to buy a Wolf range for the kitchen.”
Choose generic appliances, pick hard flooring over carpet, which gets dirty quickly, and choose a neutral palette that renters can customize to their tastes.
Landlords planning on renting to vacationers must also furnish the unit. Look at the local market and the decor that appeals — in New Mexico, Dearing says that vacation renters want a Southwestern vibe. Choose furniture that’s durable and will stand up to wear and tear.
Step 6: Decide who’s taking care of what
Do you want to field 2 a.m. calls about a clogged toilet? If not, think about hiring a property manager. Property management companies handle everything from repairs to collecting rents so that you can be a hands-off owner. But you will have to pay for their services.
The fee structure for property management companies varies. Some charge a flat per-door fee to manage each unit, while others charge a percentage of the rent price. Additional fees could include a full month’s rent for finding and placing new tenants, mark-ups on repairs, and lease renewal fees.
Before choosing a property manager, ask for a list of their fees. Examine the contract, and find a lawyer to look over it. It can be difficult to exit a multi-year contract if you’re unhappy, not to mention expensive if you have to pay fees for delinquent tenants.
When you hire a property manager, you’re entering into a business relationship, and one that could directly impact your profits and losses. Check their references and take the time to interview multiple companies before signing their contract.
Step 7: Dig into some legal research
Landlord-tenant relationships are legally protected at local, state, and national levels. You can learn about landlord-tenant law on the HUD website. Pay particular attention to the Fair Housing Act, Fair Credit Reporting Act, and local housing laws.
The Fair Housing Act prohibits discrimination on the basis of race, color, religion, disability, and more. The Fair Credit Reporting Act governs what you could report to credit bureaus and other reporting agencies if your tenant defaults on their rent, and it also details the data you can collect. And local housing laws extend further protections to renters related to collections, security deposits, and evictions.
As a landlord, you must abide by these laws. If you’re required to get a landlord’s license, you may have to prove that you understand the laws. It’s your responsibility to educate yourself about them; ignorance of the law is no defense in court.
Contact your local housing authority to get a sense for how renting works locally. In Dearing’s area, there are short-term rental ordinances designed to protect full-time residents. These ordinances “don’t allow two rental properties to be next door to each other unless they’re owned by the same landlord,” she explains, “So if you’re looking at a property that you think is going to be great because next door is a rental with a great occupancy rate, you could buy it and find out you can’t get a permit to rent.”
Even if you’re only going to rent a room, many municipalities have begun cracking down on Airbnb and other short-term rental options. Some are restricting the number of days per year that you can rent part or all of your home, or requiring you to register with the city and obtain a permit, or both. Failing to comply with local ordinances could land you in hot water, leading to fines and legal costs.
Local agents who frequently work with investors will know many of the local rules, and they can help you find the perfect rental property.
Step 8: Write your rental policies and lease
Now that you know what’s legal, you can decide what you want your policies to be and write it all out in your lease. Consider addressing the following;
- A pet policy: Pets or no pets? Do you want to impose breed and size restrictions?
- Common areas: Who takes care of what areas? Who mows the lawn or shovels snow?
- Behavior: Drug use and illegal behavior could allow law enforcement to seize your property. Your lease should spell out prohibited behavior and its consequences.
- Late fees and lease breakage: What happens if rent is late? What penalties and fees will you charge, and when will you begin eviction proceedings? If a tenant wants to move out early, what will you do?
It’s imperative that you have a lawyer look at your lease. This document protects both you and the tenant. If enforcement becomes necessary, you need it to stand up in court.
Landlords renting a room or vacation property through a web portal should still take the time to read the fine print. You’ll be bound by Airbnb’s or VRBO’s agreements and the rental policies you include on your listing. These policies could include an agreement to submit to mediation in the case of disputes, refund policies, and assumptions of liability.
Step 9: Find applicants
If you don’t hire a property manager, you’ll have to find renters on your own. List your house on the MLS, online listing portals, classified websites, put out some yard signs — everywhere you went looking to do your research!
Take high-quality, sharp photographs to accompany your listings, particularly if you’re trying to rent to the luxury vacation market. After you list, prepare to field phone calls and emails. You’ll need to set aside time in your schedule to answer messages through online portals, as well as to show the unit.
Depending on your local rental market, finding a qualified applicant can take a matter of hours or weeks.
Step 10: Screen potential renters
Once you’ve started receiving interest in your rental, you’ll need to screen potential tenants. Renters should fill out an application; you can charge an application fee, if you like, which should cover the costs of a credit check and other expenses. Tenants must give you permission to run a credit check, so include that document with your application.
Request the following from applicants:
- The names and date-of-birth information for all occupants in the unit, including children
- Social Security numbers for all adult tenants
- At least three references
- Past five years of job history
- Emergency contact information
Once you’ve received the application, confirm all the information that tenants provided. Call and verify employment and income. A good rule of thumb is that tenants’ net monthly take-home income should be at least three times your rent.
Run a background check for evictions and past criminal history, and also call past landlords. Sometimes landlords will agree to let non-paying tenants surrender the keys and move out rather than incur the costs of an eviction. A tenant can have a clean record but still represent a risk of non-payment.
If you’ve hired a property manager, they’ll perform all this due diligence on your behalf. They’ll also know what you can legally ask former employers, references, and landlords.
Step 11: Choose a tenant and reject the other applicants
Process applications on a first-come, first-served basis to avoid accusations of discrimination, which could run you afoul of anti-discrimination laws. To further protect yourself, make sure that any ads you post list your approval requirements.
When you reject a tenant, document your reasons why, whether it’s due to credit score, income requirements, or criminal history. This also protects you against discrimination lawsuits.
Once you’ve selected a tenant, and they’ve accepted the unit, you’ll need to sign the lease. The agreement should include everyone’s names, the property address, the lease term, the rent and security deposit amounts, as well as any other items suggested by your lawyer. Make copies of any adult tenant’s driver’s licenses — keeping track of documentation like this can be helpful down the road if you need it for the legal system.
If you’ve hired a property manager, ask to inspect the files they keep on your tenants every now and again. An incomplete file can make it harder to evict or get a judgement for non-payment should the tenant stop paying their rent. Until you’ve been working with them for a while, and trust has been built, you should still keep an eye on your investment.
Step 12: Take photos of the home before move-in
You’ll want documentation that everything looks the way you remember it!
Before the tenant moves in, take detailed photos of the unit’s condition. Be comprehensive, and include both the pros and cons.
On the day of move-in, or shortly thereafter, complete a property condition report with the tenant. Have them point out the cracked toilet lid and the loose closet door. Go through the home room by room, and at the end, have them sign off on the condition report.
This report will become extremely important should the tenant damage the unit. If they crack any windows or put a large hole in a wall when moving a bureau upstairs, the condition report supports any deductions from their security deposit.
What if a tenant’s damage exceeds the security deposit? You can take them to court, but in the meantime, you may have to cover repairs out of your own pocket.
Step 13: Keep tabs on the security deposit
The security deposit doesn’t belong to you — and you will have to keep it available to return to the renter at all times. Until they move out, and you’ve deducted any damage, the money is still theirs. In some cities or states, you’re required to place their security deposit in an escrow account, which must earn interest.
Throughout the time the tenant lives in your unit, keep careful records of the money and the interest it earns.
There’s no foolproof way to guarantee success as a landlord, but taking the time to learn about the process increases your odds. Talk to experts in your area, and pick an experienced agent to guide your homebuying, and you’ll be better prepared to rent your house.
Header Image Source: (Jason Pofahl / Unsplash)