There are many reasons why you may be renting a house to tenants; you may have moved out after purchasing a second property or you may have purchased the home knowing you would rent it out. In any case, you must ensure that you are knowledgeable about the rental process and prepared to handle all it entails.
5 Things to Know
1. All applicable laws
Each state has specific landlord-tenant rules and regulations that you must fully understand and follow in order to avoid costly lawsuits and fines. Most landlord-tenant laws detail specifics about things like security deposits, late fees, and evictions. As the saying goes, ignorance of the law is no excuse, so you should be aware of any state and local laws that govern renting out your home.
You should also be aware of the Fair Housing Act, which is a federal law that prohibits you from discriminating against renters that are a part of a protect class. Classes protected under this law include: race, color, national origin, religion, gender/gender identity, familial status, marital status, age, disability, participation in government subsidy programs, or sexual orientation. For example, this means you cannot specify (without getting yourself into legal hot water) that you will only rent your house out to married families. In order to ensure that you don’t accidentally violate the Fair Housing Act, you should treat all applicants and tenants the same; if you require one thing from one applicant, you must require it from all applicants.
Federal law also specifies that you ensure that your home remains habitable while the tenants are residing in the residence. Any problem that makes the dwelling inhabitable, such as leaks or gas smells, must be addressed immediately. If you do not address these emergencies quickly, you may face a lawsuit for failing to ensure habitability.
If you are unsure of any legal requirements, consult with a landlord-tenant lawyer for further clarification.
2. How to write and customize a rental agreement
If you are writing a new rental agreement for your property alone (without the help of a lawyer), you can easily find lease templates online or even from other landlords you may know. However, you should never just print out a template and go; no matter what, customization is essential for covering yourself legally and addressing all rules you want in place for your tenant. You must make sure that the lease perfectly fits your rental situation; for example, if you are renting a house in a family-oriented neighborhood, you may want to specify that the tenant should hold no large get-togethers after 10:00pm without your express permission. You should also work carefully on drafting your lease so that you protect your rights.
The lease should include:
- The rental term
- The rent and the day each month it is due
- Late rent fees and grace period policies
- Security deposit amount, where it is held, and how it will be returned
- Repair and maintenance responsibilities
- The repair and maintenance request process
- Pet policies and fees
- General rules (i.e. quiet hours and smoking policies)
- Process for showing the dwelling while occupied (if needed)
- Eviction terms
- Names and contact information of all the tenants, including minors
Lastly, while customizing your lease, you should ensure that the agreement does not violate any federal or state laws. For instance, your late fee should not cost 30% of the rent when state laws only allow late fees to cost a maximum of 10% of the rent.
3. How much to charge for the rent and security deposit
To determine the right rent you should charge, you should evaluate how much positive cash flow you want each month, along with the market in which your property is located. Even if you want to make $300 a month renting out your property, you should not charge a rent that is significantly higher than all other comparable properties in the area.
You should absolutely do market research to help you determine the right rent to charge. If you charge too much, you’ll scare away all potential tenants and find yourself with a perpetually vacant property. If you charge too little, you might attract a nightmare tenant looking for naïve landlord to take advantage of. To ensure that you charge the perfect price, research your market by looking at what other comparable properties charge each month for rent. Use various online listing platforms to see how much similar homes cost. You can also physically search your neighborhood for “For Rent” signs and call to inquire about the cost of the rent. Other research options include calling property management companies for quotes and searching the “For Rent” section in your local newspaper.
When it comes to determining your security deposit, you should keep in mind that this money is held to cover any unexpected damages caused by the tenant. At the end of the tenancy, you will return to the tenant whatever you do not have to use. Before settling on a price, you must verify that your state does not have any restrictions on how much you can charge for a security deposit and ensure that you do not go beyond this amount. For example, many states specify that you cannot charge more than two month’s rent. In general, you will want to charge one month’s rent for the security deposit. However, you can increase the amount if the screening turns up any red flags that you may want to cover, such as a history of non-payments.
4. What insurance you need
When renting out a house, you will no longer be covered by your Homeowners Insurance; should you try to make a claim using your Homeowners Insurance and you do have a tenant, the insurance company will most likely deny your claim. Therefore, before your tenant moves in, make sure you switch your policy over to Landlords Insurance. Be aware that the cost for this coverage will be approximately 25% more than the cost of Homeowners Insurance but will cover you in case anything goes wrong while you are renting your house.
Most Landlords Insurance will provide liability insurance, property protection, and loss of income coverage. You can also choose to pay for additional coverage that you may feel is applicable, such as vandalism coverage if you live in an area where vandalism is rampant. To save money and secure the best deal on insurance, contact your current auto insurance company and see if the company will give you a discount on bundling your auto insurance with Landlord coverage.
5. What to do when things go wrong
No matter what, you should always remain calm and stick to your rental agreement. Even in the case of severe emergencies or nightmare tenants, you should never forget any applicable laws. Be prepared that things will not always go as planned; that’s why you have Landlords Insurance. If you do find yourself in a legal situation, do not hesitate to contact a landlord-tenant lawyer. Lawyer costs, while expensive, will not be nearly as expensive as the costs associated with losing a landlord-tenant lawsuit. Lastly, never get emotional or try to take things into your own hands. At the end of the day, always remain professional and allow the law to take over when needed.
How to Find a Good Tenant
When it comes time to rent out a house, you may be concerned about finding the perfect tenant. There is a specific type of renter that wants to live in a house rather than a traditional apartment or condo. As a house owner, you may also be more emotionally invested in your property in comparison to owners of large, multifamily properties.
Advertise online and include a catchy title, thorough description, and aesthetically pleasing photos. Try to cater your description for your ideal renter, while also avoiding discriminatory language. For instance, you may describe your property as “a suburban retreat with room for 5 close to award winning schools and tranquil parks.” Do not explicitly state that you only want “families” or “couples without children” in order to avoid a discrimination lawsuit.
Once you do find applicants that seem promising, you should ensure that you screen all potential tenants properly. This includes performing credit and criminal background checks for each tenant, verifying all applicants’ income and rental history, and avoiding applicants that give you any red flags, such as showing up late or speaking to you inappropriately.
Finally, after screening and selecting your ideal tenant, make sure that they agree to and sign your rental agreement. Even if an applicant has no red flags on their record, you need the legally binding agreement to protect yourself and your property.
Property Management – yes or no?
A big question many landlords ask when renting out a house is whether or not they need to employ a property manager. It may seem like a single-family home is far too need a property manager, but it can be a valuable tool for both inexperienced and experienced landlords.
Property management companies will both find you new tenants whenever needed and manage your property; this generally entails collecting rent, charging late fees, handling repairs, advertising for new tenants, documenting all property finances, and taking care of all evictions and unexpected vacancies. A property management company will also keep you from getting emotionally involved in your property. For example, if the tenant violates the rental agreement or fails to pay rent, it is the property manager’s responsibility to take care of it. You’ll only be responsible for paying.
On average, a property management company will charge you 10% of the monthly rent plus 50% of the first month’s rent for a new tenant. Although employing a property management company is undoubtedly expensive, it will streamline your job as a landlord and take a majority of the responsibility off your shoulders.