Many people in today’s economy are forced to rent their homes in order to relocate to where the work is. These are not your usual landlords so there are many important steps that are done wrong or not done at all. If you don’t know what you’re doing, you can make some costly errors or get stuck with less than desirable tenants that you can’t get rid of.
A few years ago, I relocated when I received a promotion within my company. While my circumstance was much different than those who are forced to leave their homes and seek work, the principle is the same. Due to the declining home prices, I wasn’t able to sell my home like people had done in years past. I was forced to become a landlord – something that I was not familiar with and had to learn fast. I made several mistakes when I rented my home out for the first time and I ended up evicting the first tenants I ever had.
Don’t pay a listing agency to locate tenants for you. It’s not a hard process at all unless you don’t have the time to show your home to people. I recommend listing on Craigslist, Rentals.com and various social networks. There are hundreds of other sites and many of them are free, so in this case, it’s all about quantity. If the service is not free, the prices are moderate and worth it when you need to collect rent to pay your mortgage. Craigslist will generate the most leads by far, but make sure they are quality leads.
Determining your asking amount is pretty simple. Explore the same sites that you plan on listing your home. When listing on the free sites like Craigslist, set your price high initially so you can negotiate when needed or reduce it each week if you don’t get any interest. Delete your ad and create an entirely new one so your listing will appear at the top again.
Once your home is rented, don’t leave your price fixed just because you have a tenant. You have to continuously monitor current trends and alter your asking amount if needed. Rent prices have risen about 8% per year for the last 3 years so don’t be afraid to increase the monthly amount once a lease has expired and the tenant must renew.
Based on what I’ve learned, you MUST run a credit check. It will cost about $15, but is well worth the money. Some owners will even bill the applicant regardless of whether or not they are selected.
I wouldn’t turn somebody down based on a unsatisfactory credit score or bankruptcy, but you have to know who you’re dealing with. A lot of renters these days have below than average credit because of the terrible economy coupled with the housing crash, so having scarred credit as the result of a foreclosure is not as bad today as it was decades ago. If you choose to rent to someone in this position, ask for three months rent as a down payment because this is the estimated time it will take to evict them.
Don’t forget about social networks. Sites like Facebook, Google+ and even MySpace provide perfect tools that renters did not have in the past. Unfortunately, I decided to do this after I selected my first renter. When I read that the person’s favorite book was High Times magazine, I knew I had a problem.
Look online to develop a rental agreement template. Once you customize the template to your liking, having a professional review it. You don’t want any outrageous terms or outdated laws to nullify parts of your contract. I can’t give much more advice in this area because state laws vary greatly. Some states will side with landlords while others grant the tenant most of the rights.
No matter where you are, always stick to your contract and don’t be too forgiving. If you let a tenant slide on late payments and a pattern is established, it becomes harder to charge late payments down the road or evict the tenant for not paying. I would recommend that you start the eviction process 2 – 4 weeks after a tenant has not paid unless you’ve worked something out with them. The longer you wait to evict someone, the more money you are losing.
Even if the court awards a judgement in your favor, it is extremely hard to collect the past due rent. You can always hire a collection company to pursue the delinquent account but their fees are a ridiculous percentage that I would never pay.
I’ve constructed the tree to the right to present the eviction process basics. This was created by following the GEORGIA guidelines. Please check the procedure of your state and alter the steps if needed. You may find that it is very similar or entirely different.
If you can help it, don’t build your rental property to the standards that you would have for your primary residence (granite, hardwood, upgraded fixtures, etc.). When you have no choice but to rent your home, this is obviously something you can’t control.
Also, be leery of high maintenance tenants. These are ones that contact you about the smallest things. I once had a tenant call me to complain that there were ants outside on the tree leaves. Sometimes you just have to put your foot down and tell them that their complaints are completely unjustified and there are things they have to live with or take care of themselves.
Check on your home at least every six months to make sure it’s being maintained properly. If you don’t have to time to inspect your home or you live out of state and are not able to maintain basic amenities, you may have to hire a property management company. Typically, they will charge 8% of the monthly rent and will often provide an on-call handyman. I would be suspect of any company that charges less than 6% or more than 10%.
For the majority, rental income is considered passive unless you are a real estate professional. As the home owner, you are able to offset the rental income received with expenses incurred as a result of owning the home.
Your house is now an asset and each year it will depreciate. The declining value helps offset the income you receive from your tenants. In addition to depreciation, you’re can write-off maintenance as well. If you pay HOA dues, this would qualify as a monthly expense so it too can be deducted. Make sure you keep records of the expenses you’ve paid for.
Please consult IRS Publication 925 or a trusted tax advisor of you have questions related to tax deductions or credits.
Don’t let the work that goes into being a landlord deter you. Owning property and having someone else pay down your loan principle is a great position to be in right now. Rates are at an all time low and housing prices are not far behind. This may be a historic buying opportunity that will not come around again for generations.
Readers: Have any of you rented out your home because you had to? What have been your experiences so far?
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