You’ve heard the landlord horror stories: costly evictions, destroyed properties, professional tenants from hell. These stories may get attention, but every day millions of landlords successfully rent to great tenants. You may not be able to eliminate all problems, but if you follow the tips and techniques in this guide, you will definitely minimize them. Planning ahead and being savvy helps you avoid serious challenges later on.
- Why Rent Your House?
- How to Rent Your House to the Best Tenants
- The Application Process
- The Rental Lease Agreement
How to Rent Your House: Questions To Ask Yourself First
It’s a big decision to hand the keys to someone who is essentially a stranger. Before you begin, ask yourself:
Why Rent Your House?
If you’re on the fence about renting vs. selling, you may be unaware of the many advantages renting out your house can bring. The benefits are numerous, as are the potential disadvantages:
|It turns a liability into an asset. For most, homes cost money each month. An asset makes you money.||You may get involved in conflicts with tenants, which is time-consuming and could involve legal fees in certain situations, such as evictions.|
|Renting can pay down your mortgage. Ideally, you’ll rent for more than the monthly expenses – the goal for all landlords.||You will need to factor in certain expenses, such as taxes and fees.|
|You can jumpstart an investment career with no additional costs. Many real estate investors begin this way.||You will have to be available to tenants, often at short notice, for their questions, concerns, repair requests, etc.|
|Holding on to your house means you can return someday – great for someone working out of the area.|
A property manager can help mitigate some of these disadvantages, though it will cost money.
Should You Use a Property Manager?
Will you manage the property yourself, or hire someone? A property manager will typically:
- Advertise for new tenants
- Sign leases
- Collect rent
- Keep track of finances
- Schedule/complete maintenance/repairs
- Issue legal notices
- File evictions
Property managers usually charge about 10% of the monthly rent, plus 50% of the first month’s rent when a new tenant moves in. If you decide to do it yourself, the above responsibilities will be yours to handle. You can save a great deal of money by doing it yourself. How much time you spend every week managing your rental depends on several factors, such as the condition of the home and the quality of your tenants. It may be beneficial to considering outsourcing many of your responsibilities to a property manager if you:
- Live out of the area or far away from the property (driving to and from to sign leases, respond to issues, perform maintenance etc. will add up)
- Have difficulty making repairs on your own due to physical ability, time constraints, or being out of the area
- Need help keeping track of bookkeeping and record-keeping for the property
What Condition Do You Want Your House In?
Your house should be:
- Clean (have a professional carpet cleaner come in before showing the property, repaint walls if needed, etc.)
- Free from any needed repairs
- Compliant with the building code requirements for your state
How Much Can You Rent your House For?
Value is not based on what a seller wants, but what the market is willing to pay. This means that the market sets the rental amount. You can determine what the market will allow for your house by getting out there and finding out what others in your industry are charging. You can look in many different places to find out this information, such as:
- PadMapper.com & other online rent services
- Driving around, looking for “For Rent” signs
- Calling property management companies
- Asking other local landlords
- Local newspaper
Call landlords, posing as a prospective tenant. Ask questions to determine the “market rate” for your type of house. A three-bedroom, two-bath home in good condition will probably rent for about the same as other three-bedroom, two-bath homes nearby. For more on determining rents, see this guide to fair market rents by state.
How Much Should You Charge for a Security Deposit?
A security deposit is paid by a tenant to ensure they fulfill the terms of their lease. This is not a fee and should be returned to the tenant when they move out, less any needed repairs. You choose the amount, but you should check state and local regulations first. Most landlords charge the equivalent of one-month’s rent, possibly more if there were any red flags on the application. For more detailed information as well as the laws for your state, see this article.
How to Rent Your House to the Best Tenants
A bad tenant can mean months–or years–of stress, hassles, and financial losses. A good tenant? Steady income, security, and peace. Choose wisely!
Advertising for Tenants
Attracting as many prospective tenants as possible will give you the best options. Three easy ways to advertise:
|Newspaper||It may seem quaint, but many people still use newspapers to look for rentals. Do not put the address, and specify no texting/emailing–a phone call gives a more accurate first impression.|
|Craigslist.org||A hugely popular website for landlords, and it’s free (unless you’re a property manager in New York City). Or try Trulia.com, Zillow.com, or PadMapper.com|
|Yard Signs||An oldie but a goodie. (If you’re worried about advertising a vacant house, skip this one.)|
When taking a call from a prospective tenant, you can qualify them right then by explaining the rental criteria over the phone. The basic criteria:
- Gross monthly income must equal approximately three times the monthly rent.
- A favorable credit history.
- Applicants are employed, with acceptable proof of required income.
- Good references from all previous landlords.
If they don’t meet your qualifications, don’t rent to them. Doing otherwise only sets yourself up for problems down the road.
A note on discrimination: Be sure to not discriminate when you are advertising and screening. Federal law defines seven protected classes of people that you cannot discriminate against, which include race, skin color, sex, national origin, religion, disability, or familial status. Even asking questions about the above appears discriminatory.
Showing the Property
Showing units can be a pain – many people don’t show up. To minimize this, you can use one of the following techniques:
- Give them the address to drive by and tell them to call back if they are interested. This eliminates those who don’t like the location.
- Schedule one showing with everyone. Having multiple applicants show up can be a lot to handle, but it creates a sense of competition and scarcity, garnering more applications.
The Application Process
Give an application to everyone who is interested, even if you are not (another measure to avoid discrimination accusations). Many applicants ask to mail it or drop it off. You can try to discourage this without pressuring them, but it’s common, so have a process in place to accommodate it.
The Rental Application
The perfect rental application will contain, at minimum:
- Names of all potential renters (adults)
- Date of Birth
- Social Security Number
- Phone Number and Cell Phone
- Alternate Phone Number
- Previous Addresses (last 5 years)
- Current Employer (name, hire date, income, contact info)
- Past Employer (name, hire date, income, contact info)
- Emergency Contact Information
- Release of Information Statement
- Signature for All Tenants
When reviewing an application from a prospective tenant, check for obvious deal-breakers. Disqualifiers include:
- Gross monthly income that is less than three times the monthly rent
- Lack of employment
- No references
The Application Fee
An application fee is essential — do not process any part of the application until you’re paid. A background check runs at about $35 or more depending on which company you use. Check with your state laws to see if regulations dictate the amount.
Background and Credit Checks
If you feel comfortable moving forward, begin your background check. I recommend using SmartMove, offered through TransUnion (learn more about TransUnion here). Smartmove sends the form to your tenant’s email, and you receive results in a few hours.
Deciding what kind of “background” you’ll allow depends on your location and the market. More applicants? More competition – you can be picky. Otherwise, you may need to loosen your standards slightly (only slightly!).
Renters should pay close attention to:
- Recent felonies (last 7 years)
- Other criminal or negative financial history
It’s up to you whether it’s worth the risk to rent to someone with any of the above, but we don’t recommend it.
Verifying Income and Rental History
Unfortunately, people lie, especially when they already know they aren’t qualified. Always verify information, beginning with the employer.
- How much do they currently make?
- How long have they worked there?
Next, call their previous landlords for the past five years. Don’t call their current landlord – many lie to get rid of bad tenants.
Questions to ask previous landlords:
- How long did the tenant rent from you?
- What was their monthly rent?
- Did they give proper notice when vacating?
- Did they receive back their security deposit?
- Would you rent to them again?
Accepting or Denying an Applicant
After completing the above, decide whether you are comfortable renting to the applicant. To avoid discrimination complaints, be clear that you process applications on a first-come, first-serve basis, and document denials in writing.
Act quickly to inform an applicant of approval as they’re likely looking at other properties. Let them know that to hold the property, a non-refundable deposit is due within 24 hours of approval. (Or they can pay it when the application is filled out, and get it back if they don’t qualify. This may secure you a tenant faster from a larger pool of good applicants.) This will become the security deposit later on.
Be sure to sign a “deposit to hold” agreement stating:
- The applicant has until X date to sign a lease agreement.
- If not signed by that date, the deposit will be forfeited.
Make two copies – one for you, one for the tenant. Try to schedule the lease signing for as soon as possible to minimize wait time.
The Rental Lease Agreement
State-specific lease agreements are available at EZLandlordForms.com, USLegalForms.com, Staples, or your attorney. There are free leases online, but most are not legally binding, so you should skip them. However, it can be helpful to view a lease template online to get an idea of what is covered in the agreement.
Lease agreements can vary in length and content. Most contain the following:
- Names of tenants
- Address of the rental property
- Lease term length (1 year, six or nine-month, or monthly. Make sure to get the right length on the form)
- Rent amount
- Security deposit amount
- Late fee protocol
- Move-in condition report
- Rules for pets, utilities, smoking, etc.
You may also need to provide additional documents, depending on the laws. For example, if your home was built before 1978, you must provide a pamphlet called “Protecting Your Family from Lead in the Home.”
How to Sign a Lease Agreement
Schedule a signing at the property. Walk the new tenant/s through each provision, step by step, signing (in blue ink) as you go. This may seem tedious, but will protect you if the tenant claims, “you didn’t tell me that” later.
Accepting the Rent
Collect the first month’s rent when signing the lease. In the future, you can have them mail it or use an online system. To avoid scams or insufficient funds, only accept certified money, such as a money order or cashier’s check.
The Move-in Condition Report
Before handing over the keys, take the move-in condition report. You both inspect the property, taking notes on the conditions and documenting all flaws. Take photos too. This protects both your interests when it’s time to move out. Keep a signed copy on file. Don’t skip this — many states have ruled that a landlord cannot deduct charges from the security deposit if this report was not completed upon move-in.
Handing over the Keys
Once the lease and move-in report are filled out and signed, and the rent is paid, you can hand over the keys!
What if Things Go Wrong?
Congratulations! You’ve turned your vacant house into a new home for great tenants, and yourself into a real estate investor.
The work isn’t over, though – it’s just beginning. Being a landlord is a huge responsibility. You must ensure rent is paid on time, facilitate repairs, enforce rules, and keep expenses in check. Hassles are unavoidable, and you’ll face issues you didn’t anticipate, but you are much more prepared than you were 2000 words ago! For more information, check out the resources below, which will save you countless hours, headaches, and dollars.