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What To Consider Before Becoming A Landlord
Make sure you have satisfactory answers to these 8 questions before you put your home up for lease.
If you’re considering investing in real estate as a way to make money, two ideas will likely come to mind. First, you can flip houses. House flippers invest in fixer-upper homes, remodel them, and then sell them for much more than the original purchase price. However, that sizable profit can’t be guaranteed and home flipping is riskier than ever because of current conditions in the housing market. This brings us to your second option to profit off your real estate, which is becoming a landlord.
If you have a nice guest house on your property or own secondary homes, you may be able to earn some extra income from leasing them out. You might have even tested the waters by temporarily renting out your home to tourists on vacation through companies like Airbnb. When everything goes to plan, renting out your home can be a passive way to earn extra income, diversify your investments, and give your property value time to increase so you have the flexibility to sell when the time is right. If you had to move away for family or work obligations, you will also have extra security in the presence of the people who rent your home. Vacant homes are more likely to become targets for thieves, vandals, or criminals. Many landowners get peace of mind knowing whoever is living in their home is also looking after its wellbeing and maintenance. But before you decide to lease your home, make sure you are comfortable with the good, the bad, and the ugly that comes with becoming a landlord.
How much do you need the money?
While leasing out your property can bring in extra income, it’s not a good idea if you desperately need the money or are relying on it as your sole source of income. If you are relying on your rent checks to pay off your mortgage or other expenses, you could find yourself in serious trouble if the property is unoccupied longer than you had planned or your tenant is late with their payments. In addition, landlords are generally financially responsible for making repairs that pop up and handling some routine maintenance for the home as defined by your rental agreement. If the home requires a particularly costly repair, you might not make any additional money off the home that month, and could even lose money. With all that said, renting out your home can bring in lots of extra cash. However, you shouldn’t rely on that money coming in case something goes wrong.
How will you set and collect rent?
The first step to leasing out your property is to determine how much rent you will charge. You may need to conduct your own research or work with a qualified real estate agent to pick a value that is fair and consistent with current market conditions. If you set the price too low, you will be denying yourself extra income. But if the price is too high, your property could be sitting vacant for much longer than you’d like. You will also need to decide which utilities that you will provide and which utilities the tenant will be responsible for handling.
Once your price is set, you will also need to put a plan in place to collect your monthly rent. Since Millennials are currently the largest generation and pay over 60% of their bills online, it might behoove you to also collect your payment online. Plus, online payments are generally the most convenient and secure. However, some landlords do prefer more traditional methods of asking tenants to send in a check each month.
Can you handle awkward conversations?
If you don’t like confrontation, becoming a landlord may not be right for you. It’s important that you enforce the rules in your lease agreement, and sometimes you may need to (respectfully) lay down the law in order to do so. You need to be prepared to have some awkward or stern conversations with tenants who are missing payments or violating the terms of their lease. If you have a tenant who is continually violating the lease terms or months behind on their rent payments, you also need to be able to handle the stress of eviction procedures to remove your tenant.
Do you have plans to sell your home in the near future?
If you are planning to sell your property in the next year or two, now is probably not the right time to rent it out. If your tenant isn’t ready to move by the time you want to sell, you could be dealing with lots of awkward conversations as you uproot your tenant’s life and make them go through the hassle of moving sooner than they planned.
Depending on how clean and careful your tenant has been, they could have done damage to your home or transformed it into a cluttered mess that will lower your property’s value. You may need to do some major clean-up or costly repairs before your home will be ready to go on the market. In theory, you could end up paying more to fix your home after renting it out to a careless or unorganized tenant than you’d earn from 1-2 years of rent checks. Similarly, if your tenant is still in the home when you start showing it to potential buyers, you will need to coordinate with the tenants to schedule appointment times that are convenient for them. In addition, you may not be able to guarantee the house is always up to par to be seen by potential buyers with someone else living in it.
How will you find the right tenant?
As a landlord, the best thing you can do is find a good tenant and keep them in your home for as long as possible. But, how do you go about finding that all-star tenant who makes being a landlord a dream job? Our recommendation is to have a thorough screening process in place when vetting potential tenants. The process should include a rental application and an interview with you to see if your personalities will be compatible as landlord and tenant. In addition, your screening process should include a background check, credit check, calling references to assess character, and require proof of income. You can easily pull credit checks through well-known credit reporting agencies like Equifax, Experian, and TransUnion. While a variety of companies provide background check services, we recommend picking a business with a good rating and accreditation from the Better Business Bureau. While this may sound like a lot of work, it’s worth it to ensure you have a tenant with a good attitude who is more than capable of paying the required monthly rent.
Have you prepared a rental agreement?
Don’t just use a boilerplate rental agreement that you found online when it’s time to seal the deal with your new tenant. The lease agreement is supposed to be a binding contract that puts the terms of your deal in writing. It should clearly define the terms of your rental agreement and include details regarding a security deposit, when rent is due, late fees, who handles what repairs, pet policies, appropriate behavior within the home, and more. Since this rental agreement is meant to protect your rights, it’s important you have the contract reviewed by an attorney or go through a reputable real estate management company to ensure you are properly protected as a landlord. In addition to using a rental agreement, you should also keep organized and digitized records to document your correspondence with your tenant, property maintenance, and repairs.
Do you need to hire a property manager?
If you want to emphasize the passive in the passive income that comes from being a landlord, you may want to hire a property manager or real estate management company that can do the hard work on your behalf. Property managers can do tasks like collect rent, manage maintenance and repairs, advertise the property when it’s time to look for tenants, and interview and screen potential tenants on your behalf. They also have experience managing rental properties that you may not. However, you will be paying your property manager a fee for their services. In addition, you may lose some control over your home because you’ll essentially be paying the property manager to make decisions for you. While a property manager definitely adds convenience to your life if you lease out your home, you will ultimately have to decide if their services are right for you.
How will leasing out your home impact your insurance?
When you live in your home as your primary residence, you protect your property with homeowners insurance. But when you lease your home out to a tenant, you need to purchase rental home insurance, which is also known as landlord insurance or fire insurance. Your rental home insurance will protect your home and other structures on your property if there's damage caused by fire, lightning, wind, hail, storms, or another covered loss. It may also include protection to pay for an unexpected loss of rental income due to repairs, medical expenses if you are deemed responsible for a tenant’s injury, and legal fees if you were to be sued by a tenant. While these protections are definitely necessary, keep in mind that that landlord insurance is typically around 25% more expensive than homeowners insurance on the same property.
In addition, it’s also important to note that you are not responsible for your tenant’s belongings and your landlord insurance will not cover your renter’s possessions. Therefore, it’s highly recommended for landlords to require their tenants to purchase their own renters insurance as a condition of the lease. Your tenant’s renters insurance policy should protect their possessions and provide them with some liability insurance of their own.
Learn more tips and tricks for buying or selling homes at the Dabl Real Estate Hub!