Perhaps you’ve inherited an old family house and aren’t quite ready to part with it. Maybe your adult child just moved out of the apartment over the garage. Or you’d like to cash in on the beach house you use just one month a year.
For lots of reasons, you may be thinking of becoming a part-time landlord, an enterprise filled with promise and peril. Financially, there’s a lot you have to get right, and you could pay a high price if you get it wrong.
Renting out your house can be an excellent way to generate additional income, but it comes with both opportunities and challenges. Becoming a landlord requires careful planning and consideration. This guide will walk you through the essential aspects of renting out your house, from financial considerations to legal requirements and practical management tips.
Understanding the Financial Aspects of Becoming a Landlord
Before diving into the world of property rentals, you’ll want to have a clear understanding of the financial implications. This includes estimating your potential income and calculating all associated costs to ensure your venture is financially viable.
Calculating Potential Rental Income
To determine how much you can charge for rent, research similar properties in your area. Consider factors such as location, size, amenities, and property condition. It’s important to be realistic about your rental income expectations. Additionally, factor in potential vacancies. A good rule of thumb is to reduce your estimated rental income by about 5% to account for periods when your property might be unoccupied.
Estimating Expenses and Carrying Costs
As a landlord, you’ll need to cover various expenses, including:
- Property taxes
- Insurance
- Mortgage payments (if applicable)
- Maintenance and repairs
- Utilities (if not paid by tenants)
- Property management fees (if you choose to hire a manager)
Legal Considerations for Renting Out Your Property
Renting out your house involves navigating various legal requirements and responsibilities. Understanding these aspects is crucial for protecting yourself and your property.
Landlord-Tenant Laws in Your Area
Familiarize yourself with local, state, and federal landlord-tenant laws. These regulations cover various aspects of the rental process, including:
- Security deposits
- Rent control
- Eviction procedures
- Tenant rights
- Property maintenance standards
We recommend consulting with a local real estate attorney to ensure you’re fully compliant with all applicable laws.
Creating a Comprehensive Lease Agreement
A well-drafted lease agreement is essential for protecting your interests and clearly outlining expectations for your tenants. Key elements to include in your lease are:
- Rent amount and due date
- Security deposit details
- Length of tenancy
- Maintenance responsibilities
- Pet policies
- Rules regarding property alterations
Be sure to have a lawyer review your lease agreement to ensure it’s legally sound and comprehensive.
Implementing Rules and Regulations for the Property
Establish clear rules and regulations for your tenants to follow. This can help prevent misunderstandings and conflicts. Communicate these rules effectively and make sure they are included in the lease agreement. Common rules may include noise restrictions, parking rules, and guidelines for the use of shared spaces.
Preparing Your House for Rental
Before listing your property, you’ll need to make sure it’s in good condition and ready for tenants. This may involve some upfront investment but can lead to higher rental income and fewer issues down the line.
Necessary Repairs and Upgrades
Conduct a thorough inspection of your property and address any maintenance issues. This might include:
- Fixing leaky faucets or pipes
- Repairing or replacing worn flooring
- Painting walls
- Ensuring all appliances are in working order
- Checking and servicing HVAC systems
Deciding What to Furnish
If you’re renting out a vacation home or offering short-term rentals, you’ll likely need to furnish the property. For long-term rentals, it’s more common to offer unfurnished spaces. If you do, use durable and neutral furniture that’s in style to appeal to a wide range of tenants.
Staging the Property for Showings
To attract potential tenants, consider staging your property. A well-staged home can create a strong first impression and highlight the best features of the space. Simple touches, such as fresh flowers, clean windows, and a tidy lawn, can make a significant difference in how your property is perceived.
Insurance and Liability Protection for You and Your Home
Renting out your property exposes you to new risks; as such, you’ll need proper insurance coverage.
Upgrading Your Homeowners Insurance
Your standard homeowner’s insurance may not be sufficient when renting out your property. You’ll likely need to switch to a landlord or rental dwelling policy, which typically costs about 25% more than a standard homeowners policy. These policies often include:
- Property damage coverage
- Liability protection
- Loss of rental income coverage
For short-term rentals, you may be able to add an endorsement to your existing homeowners policy, but check with your insurance provider for specific requirements.
Liability Waivers for Tenants
Implementing liability waivers can offer additional protection for landlords. These waivers can set clear boundaries regarding the landlord’s responsibilities and can be included as part of the lease agreement. Consult with a legal professional to draft these documents to ensure they are binding.
Handling Maintenance and Repairs
Prompt attention to maintenance issues is needed to keep tenants happy and preserve your property’s value. Establish a system for tenants to report problems and have a network of reliable contractors ready to address issues quickly.
Encouraging Long-Term Tenancy
Building a positive relationship with your tenants can encourage them to stay long-term, reducing turnover and vacancy periods. Consider implementing incentives for long-term tenancy, such as small rent reductions or minor property upgrades. Regularly communicate with tenants to understand their needs and address any concerns promptly.
Tips for Renting Your Home
Avoid spending more than you bring in
Sounds obvious, right? You want to collect enough in rent to cover your costs, if not more—this is what the pros call being “cash-flow positive.” Carrying costs will include property taxes, insurance, maintenance, repairs, mortgage payments, and possibly a property manager.
Breaking even will be much easier, of course, if you no longer have a loan on the home. But even then, getting the math right can be a challenge. “What can quickly trip up new landlords is not regularly allocating money for maintenance and repairs,” says Gillian McCarthy, a certified financial planner(CFP) in Pottstown, PA. McCarthy suggests setting aside 10 percent of the rent you collect for upkeep, more if it’s an old home. And cut your estimate of how much rent you’ll collect by 5 percent to cover potential vacancies.
In the case of a vacation home or an apartment on your property, turning a profit may be less important to you. “Even if the rent just helps offset some of the out-of-pocket costs, it’s a win as long as you’re comfortable renting out your home,” says Shawn Gallagher, a CFP in Melville, NY. If you’re holding on to the home for a few years before you sell, breaking even may be a sufficient goal.
Make sure to master the tricky tax rules
As soon as you rent out a home for 15 days or more, you trigger an income-tax bill (14 days of rentals each year are tax-free). You’re entitled to lots of write-offs that can reduce that bill: Mortgage payments, property taxes, insurance, repairs, and professional fees are all deductible.
You’ll also be able to deduct depreciation—essentially the value of the house less the land, spread over 271/2 years. But you’ll need to take care with some deductions; deductible repairs versus nondeductible improvements can be a gray area, for example. “It’s the difference between patching your roof and replacing it,” says Tom Gibson, a CPA and senior tax strategist in Vero Beach, FL.
What raises the level of difficulty is when you use the house part of the year and rent it out at other times. If you rent out a property more than 14 days annually and also live in it during part of the year, you have to prorate deductions based on the number of days the property is rented over the combined total days it is used. While direct costs like advertising for tenants are fully deductible, maintenance and insurance must be prorated. “The key to success is to keep really good records,” says Henry Grzes of the American Institute of Certified Public Accountants.
You probably won’t be able to deduct rental losses against ordinary income. Rental income is considered passive and is deductible only against other passive income. Professional real estate investors can deduct losses, but you need to spend more than 750 hours a year actively managing the property to qualify, or about 15 hours a week. “Ideally, you don’t want to spend fifteen hours a week on your rental,” Grzes says. “Better to have great tenants and less work.”
Should You Hire Help To Rent Out Your Home?
This is possibly the biggest decision landlords have to make.
“As a landlord, you have to ask yourself if you’re ready to deal with some major headaches,” says Catherine Valega, a CFP in Winchester, MA. “Are you ready for the hassle? If not, it may make sense to pay a property manager.”
By hiring someone to manage the property, you can offload the work of screening tenants, drawing up a lease, collecting rent, and handling maintenance requests, among other things. But you could pay about 10 percent of your rental income for that help, maybe more.
If you go it alone, you’ll need to research local rules for rentals (more towns are adding restrictions to discourage short-term rentals), run background checks on prospective tenants, draw up a lease, and deal with repairs. “If you’re going to be your own property manager, choose properties close enough so you can get there in 20 minutes,” says Valega. Since every state has different tenant-protection laws, you may want to use an attorney to draft a lease.
For screening, you can pay an online service about $50 to run a report covering financial problems, criminal history, and any previous evictions. The key, McCarthy adds, is to determine your process for screening tenants and stick to it, even if the people seem really nice.
“The purpose of screening is to avoid potential eviction, which is a terrible experience on both sides,” she says. “Where you get into trouble is when you have a process but you ad-lib.”
Our Conclusion
Renting out your house can be a rewarding way to generate additional income, but it requires careful planning and management. From understanding the financial aspects and legal considerations to preparing your property and managing tenants, there’s much to consider before becoming a landlord.