The accidental rental: A 12-step plan for landlords
Underwater homes complicate your life if you need to move. If you owe more on your mortgage than the likely selling price, you can unload the home and take a loss, walk away and ruin your credit, or sell short and watch your lender play chicken with prospective buyers.
With rents on the rise, maybe it's time you forget about selling and rent out your old home instead.
12-step plan for landlords
If you think being a landlord means putting a cute ad on Craigslist, handing over the keys and blowing town, slow down. As Winston Churchill said, "He who fails to plan is planning to fail." Here's your 12-step plan for becoming a landlord:
- Determine your home's rental value. Interview several property managers who can value your rental and describe their fees and services. Good ones look up all homes similar to yours in size, age and bedroom count that are currently listed and have leased within the last 90 to120 days, says Mia Melle, president of operations at Renttoday.us, "They should give you a range with no more than a $300 to $500 differential and that will give you a starting point."
- Decide if you're going to handle it yourself. If you're not handy or don't want to handle repairs, you'll have to look into hiring a property manager. You'll also want to hire a manager if you're leaving the area, have a demanding schedule or simply dislike dealing with people. It will likely cost 7 percent to 10 percent off the top of your earnings, plus a bonus every time you change tenants. The upside is that someone else delivers bad news like evictions or rent increases, takes those midnight calls when the thermostat breaks and keeps records for tax time.
- Get applicable rental forms for your location. This doesn't mean simply going to Office Depot and picking up a general set of forms. You need forms appropriate to where you live. Many cities have housing associations that can provide you with the correct lease, rental application and property condition form.
- Decide upfront how you're going to screen tenants. Equal housing laws require that you apply the same screening criteria evenly and fairly to all applicants. It is easier to do this if you put it in writing upfront. You might decide, for example, that all potential renters have no pets, a 620 minimum FICO credit score, one year at the same job and a monthly income of at least three times the rent.
- Prepare the home. Get your personal stuff out of your home. Give the home a thorough cleaning, and address repairs and safety issues. Who are you targeting? Is it families, college students or seniors? Address your prospective tenants' needs. Nick Jabbour, vice president of Nest Seekers International in New York, says, "When preparing to rent, offer a nicer product. Paint, clean, garden, and make the property as pleasing as possible. You won't only likely command more monthly rent, but you'll attract a higher-quality tenant."
- Protect yourself. Is your insurance adequate if a tenant does a face-plant on your threshold or burns the place down? Some lawyers advise that landlords transfer their properties into limited liability companies (LLC). Doing this, and carrying the right insurance, can protect your personal assets if you get sued by a tenant or visitor. However, there are drawbacks to forming an LLC for rental properties. That's why it's important to discuss the move with a lawyer or other expert.
- Market the property. Try social media and real estate classifieds, fliers on bulletin boards, a "for rent" sign out front--whatever fits your budget and comfort zone. "There are a lot of accidental landlords out there today renting their property as a traditional 12-month unfurnished rental," says Kimberly Smith, founder of CorporateHousingbyOwner.com and the president of the Corporate Housing Provider's Association."Consider marketing your property differently, maybe as a corporate rental." Smith says going the corporate rental route will help you attract high-quality renters such as traveling business professionals, and "you'll command one-third more rent."
- Show the home. Be available on fairly short notice. You're competing with apartment complexes and professional property managers who show rentals all day with no lead time. If you make people wait, they will often rent something else.
- Get a complete application. Make sure you request an authorization to release information and obtain phone numbers for employers, banks and former landlords. You may be able to charge an application fee. Pull a credit report and verify all references, or pay a screening company to do it.
- Sign the lease and collect a security deposit. If you have a lot of applicants (and can legally do so), get first and last month's rent plus a security deposit. If you have more competition or find a qualified tenant, make the deposit less than one month's rent. If you do this, make sure tenants understand that the deposit is not their last month's rent.
- Complete the property condition report. This report is an overall summary of the property's condition done before the tenant moves in and just after moving out. If you charge your tenant for damage, you could be sued--and lose--if you can't document the original condition of the home. That's why taking pictures is recommended.
- Nail down maintenance. Contract for help with landscaping, snowplowing and chimney sweeping in advance. Tell your tenant how to contact you if something breaks. "Use a licensed professional [to] do the work and never try to save money by being your own handyman," Melle says. "It's not professional."
While being a landlord certainly is not for everyone, you may find that your rental becomes an opportunity and not a burden.
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Gina Pogol has been writing about business, mortgage and finance topics since 1994. In addition to a decade in mortgage lending, she has worked as a bankruptcy paralegal, a business credit systems consultant for Experian and an accountant for Deloitte.