10 Tips to Know Before Renting Out a House
If you are in the market to become a real estate investor, you will at some point rent out a house. You could buy a property to rent out or some investors rent out their own home to start.
Renting out the home you currently live in or own, provides not only an additional source of income, but also the foundational skills you will need before jumping into larger real estate investments.
Renting out a house, however, can be tricky if you are not careful. This guide provides the top 10 things you should know before starting.
#1 Research Your Local Market
Before you rent out your home for investment purposes, learn the dynamics of your local rental market. Picture your rental as a business, and understanding the market as simply researching who the customers are, who your competition is, and what they are currently offering. In your search, you will want to find out:
- Who is renting in your neighborhood?
- Are there more renters than rentals available?
- Are there specific events, businesses, or areas in high demand for rentals?
- What are the average rents for a home like yours?
- What is the makeup of existing rentals?
- Are they apartments, homes, or condos?
- What amenities do these current rentals offer?
- Will potential tenants expect these?
Analyzing the market gives you a better understanding of who your potential customer may be, what type of rental housing or accommodations they are looking for, and what needs your rental may be able to meet.
#2 Define Your Product
The next important step when planning to rent out a home is to define your product. Determine what type of rental you want to offer? There are an infinite number of ways to generate income from your home. You can rent out the entire home, or an entire guest house. You can rent out bedrooms to individuals, or even multiple beds in each room, called co-living. In certain areas, you can even rent out your garage.
Additionally, you will want to determine whether you want to offer your home for a yearlong lease, as a short-term rental, or on a standard month to month basis.
Furthermore, depending on your competition and target renter, define the amenities and accommodations your home will provide, such as appliances, any furniture, AC, or Smart TV.
This step is important because if your property is located in a major city with little to no housing and high rental demand, you may be able to list it for higher monthly price and provide only barebone amenities. On the other hand, if the home is in a smaller, more suburban area you may want to offer a fully furnished rental to entice potential tenants.
#3 Know the Law, or Hire Someone Who Does
Housing is a heavily regulated industry. Therefore, before you rent out your home as an investment property, know what laws apply to you. There are many federal, state, county, city, and even local regulations that outline your rights and obligations as a landlord, the rights of your tenants, the rights of applicants, as well as standard procedures for the handling of security deposits, and more.
Become especially well-versed in the Fair Housing Laws, as these will apply to you even before you even have a tenant, and check your state housing department to find rule on evicting tenants, rental agreements, terminations, etc.
Furthermore, if the home you are looking to rent out is a condo or a Planned Unit Development (PUD), request a copy of the HOA guidelines and Covenants, Conditions, & Restrictions (CC&Rs). These are the rules, essentially, that you agreed to when you purchased the home, and will outline whether or not your unit can even be rented out at all.
Lastly, if your home is a single-family residence, confirm with your local planning and building department that it can be rented out. Certain jurisdictions may require the property to be inspected or registered, prior to soliciting renters.
In general, the last thing you want to do is jump into renting out your home, only to find out later that you have broken the law and are now liable.
#4 Check in with your Accountant
Before renting your home to others, consult with your CPA or applicable tax advisor. This is especially the case if you are converting a personal property into an investment property, as there may be significant tax consequences. The biggest example is when you convert a home into an investment property you may lose the ability to not pay capital gains tax on the sale of the property.
On the plus side, investment property owners do gain access to a buffet of other tax benefits, such as more write offs and 1031 exchanges.
Everyone’s situation will be different, so sitting with an accountant to gain a full, personalized picture as far as what you should be aware of tax wise, will be well worth the consultation fee.
#5 Pencil Out the Numbers
In order to become a financially successful investment property owner, assess how much it will cost you to run your home as a rental, and analyze the numbers behind your business. Calculate all the different expenses that come with renting out your home, such as insurance, repairs and maintenance, monthly property management fees, vacancy allowances, WiFi fees, background checks fees, credit check fees, payment processing fees, property taxes, registration fees, and income taxes.
Once you have a clear picture of the entire cost structure of your rental, you immediately gain a minimum starting point for what to charge for monthly rent. If this happens to be higher than the average rents in your area, then you may have to go back to the drawing board (#2) and further refine what your rental ‘product’ will be.
At the end of the day, sitting down and fully penciling out your numbers provides you a tool to monitor your investment, and ensure it is bringing in more money than it costs, and is therefore generating the highest return possible.
#6 Select a Property Management Company
Assuming this is your first time renting out a house, invest the time in researching, interviewing, and selecting a reputable property management company. Hiring a property management company enables you to produce an additional source of income, without compromising your full-time job, holidays, vacations, and quality time with your friends and family. Incorporating them into your business will truly elevate your rental to a passive income investment.
That said, if you happen to be on a lean budget, and traditional property management companies seem too costly, look into the cost-conscious alternatives that are out there like managing it yourself.
For short term rentals, there are many technology-based property management companies that can handle specific tasks. Additionally, there are companies that will handle just the screening of applicants, or the marketing, or just maintenance and repairs.
Becoming a landlord does not have to be a new full-time job with the right help.
#7 Prepare the Unit
Before you jump into the arena of being a landlord, you will have to properly prepare your home for potential renters. No matter how appealing your home may be to you, from the perspective of a renter there may be repairs and aesthetic changes that will need to be made to make it more appealing. Don’t worry if you are low on funds, check out our article on the 26 ways you can renovate your home on a budget.
In any market, the key is finding a balance. You don’t want to overdo it in repairs, and see an unequal return on the investment. At the same time, you don’t want to skimp out on repairs and turn away potential tenants.
#9 Market Your Listing for Free
In today’s age, marketing a rental listing for free is very possible. Don’t be tempted by real estate agents and marketing companies that promise to bring you the best qualified tenants if you pay them a fee.
Rather, use the multiple online sites and apps, to post your home for rent. There are the major marketplaces on Facebook, Craigslist, that still act as the go to for renters in their search for housing. Additionally, there are multiple rental listing sites that make it convenient to add your home, and find potential
#9 Attract the Ideal Tenant
The next critical and potentially one of the most important things to know before renting out your home is how to select the ideal tenant. Once a listing is out there, you may get bombarded with calls, emails, and messages. At that point it may seem difficult and even overwhelming to know the right tenant to choose, especially when they all have sufficient income and pass the credit and background checks.
In order to attract the right tenant for your rental, tell the story of how your ideal tenant will use your home. For example, if you are in a college district, but are looking to attract more long-term renters, describe how your home is ideal for a graduate student looking for a reader’s nook, and ideal writing spaces.
You can also use the application to find the right tenant for you, by asking not only financial questions, but also questions like:
- What do you enjoy doing with your spare time?
- Are you an early bird, or a night owl?
- What features of the home do you like the most?
- Are there any things you would love to see in the home?
- What is your dream home?
- How would your friends describe you?
- Do you know how to fix things around the house?
- Do you own any tools?
- How do you like to spend your evenings?
Questions like these, may seem strange, but will give you much better insight into whether an applicant views your home as their own, or as a commodity.
CAUTION: Do not ask any questions related to age, race, familial status, gender, sexual orientation, or any of the protected classes under the Fair Housing Laws. Do not even ask ‘subtle’ questions that what help you identify people based on these, or you will open yourself up to potential lawsuits and fines.
#10 Draft the Lease Agreement
Finally, before renting out your home, make sure to draft an iron clad lease agreement. When it comes to real estate whatever is in writing is gold. No matter if you pull an agreement from the internet or use the contract your property management company provides, take the time to read it thoroughly to make sure it outlines:
- The monthly rental amount
- The term of the lease (whether it is a month-to-month basis or on a fixed basis)
- The repairs and maintenance, you, the landlord will be responsible for
- The repairs and maintenance the tenant will be responsible for
- Pet policies
- Causes for eviction
- Notice requirements for late rent, entry, termination, etc.
- Prohibition of illegal activities
If anything goes wrong, the judge will look at what was in the agreement, making it imperative to make sure you are protected.
Now, Get Renting!
Above all else, get excited! The process may seem scary at first — interviewing potential tenants, becoming a landlord, taking on the responsibility of another person’s actions — but in the long run it will put you on the path to financial independence and wealth generation.