Your house has not sold, and now you find yourself in a situation where you have to find a renter. In a tough real estate market, many sellers are facing this same scenario. Some sellers are underwater and owe more than they can sell their home for, or sometimes the housing inventory is just too high and you can’t sustain a lengthy time on market. Becoming a landlord offers a solution that helps your monthly cash flow and postpones the sale of your home until the housing market has improved. To the first time landlord, dealing with tenants and leases is unfamiliar territory. Here are some quick tips to help you when becoming a landlord.
- Figure out the rent – The rental housing market is much more fluid than the resale market, and rent prices fluctuate based on real-time supply and demand. The best place to figure out a market rent is to visit the websites where renters are looking for apartments. In most cities, that will be Craigslist and maybe a few other rental sites. An afternoon shopping for similar rentals will give you a price range to start.
- Do I need a property manager? – Most accidental landlords don’t want the hassle of finding tenants, dealing with repairs or collecting rent. A property manager can be appropriate to offload these responsibilities, but in most cases it will be cost-prohibitive to the owner of a single rental unit. A typical property manager may collect 7%-10% of the monthly rent, plus charge you half or a full month’s rent as a “lease-up” commission. Unless distance or time constraints don’t allow it, it usually makes most financial sense to manage the property yourself.
- Control freaks – Does your emotional attachment to your home border on the fanatical? Are you obsessing about damage that potential tenants may cause or how they may decorate the place? Tenants have the right to enjoy a property free from unreasonable landlord restrictions, so put your control freak tendencies aside. Ignore my advice in #2 and hire a professional property manager.
- Get your rental forms ready – Before you start looking for tenants, get yourself setup with all of the appropriate rental forms. At a minimum, you’ll need a rental application, a well-written lease and a property condition report, but in many cities there are many more forms to deal with. Do NOT visit your local office supply store or visit a random website to pick up generic lease forms. Rental laws vary considerably by city and state, and you absolutely need a lease written with local laws in mind. If you are in a major city, contact the local rental housing association, which often provides well-written leases specifically for local landlords. (If you are in Seattle, you will want the Rental Housing Association of Puget Sound.)
- Determine your screening criteria – Tenant screening is essential to securing good tenants. Speaking from many years of personal experience, you absolutely cannot judge a potential renter by the car they drive, the clothes the wear or how much you personally like them. Some of the worst tenants talk a big game upfront, but simple tenant screening procedures would help uncover what they are really like as a tenant. You need to evaluate a few key questions. Can they afford the apartment on their income? Do they have a reliable income stream? Do they pay their bills on time? Have they been good tenants in the past? Fair housing laws demand that you have a set criteria that is evenly and fairly applied to all applicants, which leads to my next point.
- Follow fair housing laws – You need to pay attention to both federal and state fair housing laws. Apply your rental screening criteria evenly and fairly to all members of “protected classes” and you will avoid potential fair housing complaints.
- Advertise your rental – Advertising a home for rent is pretty darn easy these days, and most times all it takes is a simple Craigslist ad. You can get fancy and try online flyer solutions like vFlyer and Postlets as well. The other beauty of the rental market is that it has no “price memory”, so you can actively tweak your price until you find a taker. Pick a price and give it a try for a week or two. If you are not getting any activity, try something lower. Eventually you’ll get to a price that starts the phone ringing.
- Be flexible about showings – Most renters make rental decisions quickly. A lot of rental decisions are made within a few days, so if you receive a call or email about someone wanting to see your rental, make it happen quickly. If you make them wait more than a day or two, they will often rent something else.
- Taking an application – Make sure your prospective tenants fill out a complete application. You’ll also want a copy of their ID so that you know they are who they say they are. You may be able to charge an application fee to cover the expenses involved in tenant screening, but this is one area where you’ll need to consult local laws. In Washington, you can only charge for fees actually incurred in screening.
- Tenant screening – When I screen for tenants, I look at a few key criteria. Are they currently employed? Is that employment likely to continue through their tenancy? Do the prospective tenants earn enough to pay the rent? (I personally like to see their rent not exceed 33% of monthly gross income, but this can vary.) I also run a credit check to see that they pay their bills on time and contact their previous landlords to look for any obvious issues. You should find an agency who can run credit reports for you. There are many credit screening services available, some of which are offered through local landlord associations. Lots of great tenants may have a few dings on their credit report. Asking for an explanation of late payments may show honest mistakes. What you are looking to avoid is chronic late payers.
- Signing a lease – Once your tenants pass your screening process, it is time to sign a lease. The length of a lease is negotiable. My own policy is to ask for an initial 12-month lease that automatically reverts to a month-to-month tenancy. That gives your tenants an significant initial commitment, while offering lease flexibility once they have been there for a year. If you are eventually looking to sell the property, you need to understand how local laws affect your ability to terminate a lease in the future.
- Security deposit – Asking for a security deposit is a sound business practice for any landlord, providing protection in the event of damage to the house. The deposit should be substantial and reflective of the value of the property being rented. Many first-time landlords make the mistake of making the security deposit equal to one month’s rent. This is a recipe for tenants to say “I’m moving out next month. Just take my security deposit as my last month’s rent.” This leaves you with no protection in the event of damage. I always make the security deposit something arbitrarily less than one month’s rent to avoid this situation. In most places, you are required to hold a security deposit in a “trust account” that is not mingled with other funds. Check your local laws.
- Property condition report – You and your new tenant need to fill out a property condition report at the beginning of the tenancy. If you have to keep any portion of the security deposit because of damage, you need documentation about the original condition of the home. If you end up in a dispute about a security deposit, your tenant will win the dispute if you cannot produce documentation about the original condition of the home. You may even want to include photos in the report.
- Regular maintenance – Have a plan for ongoing maintenance, particularly items that tenants may neglect like landscaping, snowplowing and furnace filter changes. You’ll also want to inform your tenant on the best way to contact you in the event something breaks.
- Move out – If you have a fixed-term lease, your tenant does not need to notify you that they are moving out. If they are on a month-to-month tenancy, they will have to give you proper notice, which varies by locale. (In Washington state, tenants need to inform you 20 days before the start of the next rental period.) When a tenant moves out, it is time to revisit your property condition report. If the tenant has caused damage, you may be able to keep a portion of their security deposit, but you need to be able to document the damage and price of repairs. Most rental laws will not allow you to collect money for “normal wear and tear.”
Being an accidental landlord may be intimidating, but it isn’t that hard if you follow these simple guidelines. Seek assistance from local professionals if you need it, and be sure to adhere to local landlord/tenant laws.