By Megan Renart
Thinking of sticking a “For Rent” sign in your front yard?
Many homeowners choose to rent out their homes for different reasons: some are trying to sell but aren’t having much luck, and some want to move but keep their old place as a means of receiving income. Whatever your reasons, the effort and expense of renting out your home go beyond the minimal makeover of a few coats of paint, fresh caulk in the shower and new drapes. You’re about to undertake a huge responsibility by becoming a landlord, and you’ll need to do more than just a little physical labor — you’ll need to know the ins and outs of the law!
One of the immediate benefits is a psychological one: the relief of having a solution if your house isn’t selling. This is especially helpful if your family needs to relocate fast, and you don’t want to get caught paying two mortgages at once. That said, there are lots of other benefits to renting out your home:
• Possible increased cash flow: If rental payments exceed expenses for that house.
• Appreciation: You could reap the benefits of housing appreciation while the monthly rent covers mortgage payments.
• Flexibility: You can wait for the market to recover and possibly not lose any money you’ve invested into the property.
But there are also risks — and the more informed you are, the better prepared you may be for any curveballs down the road. Some risks to renting out your home include:
• Maintenance and repair expenses: When something breaks, you have to fix it, unless you make arrangements with a property management company or repair company who will handle issues. So, ask yourself: Do you know how to fix a broken air conditioner or a burst pipe? If not, can you find and pay reliable professionals who can? “Many landlords choose to transfer the responsibility of the maintenance and time commitments to a professional property management company. That does add to the expense column of your budget and may be as much as 10% or so of the monthly rental payment, so adjust your asking price for monthly rent accordingly,” says Rich Lunsford, advice director at USAA and a CERTIFIED FINANCIAL PLANNER.
• Time commitment: As a landlord, you’re expected to be available 24/7 to handle any and all issues related to the property or tenants. This means 4 a.m. wake-up calls to address anything from plumbing issues to weather disasters to break-ins. It also means having holidays and vacations interrupted. Are you willing to make that sacrifice? It won’t just affect you — if you have a family, their time takes a hit, too.
• Expenses: Resources related to marketing the property, screening tenants and enforcing the terms of the lease can add up quickly. “You may find that simple screening and marketing of the property may eat up 25% of your first month’s rent and enforcing the terms of the lease can add up not only in time, but cost of repairs,” Lunsford says.
• Liability: You’re responsible for any and all liabilities related to the property.
So, if all that doesn’t make you want to run for the hills, and you feel confident in facing the risks associated with being a landlord, it’s time to get started. Here are a few suggestions to help you have a successful experience:
1. Learn and abide by federal, state and local housing laws. These laws are designed to protect both you, as a landlord, and your tenants. Understanding them fully will work in your favor.
Consult with a certified public accountant and look up all the relevant tax codes related to investment properties. Research federal, state and local housing laws — this way, you can provide a safe property for your tenants while protecting yourself from possible litigation. “Typical suits involve the landlord refusing to repair the property adequately or at all. Compliance with building codes and safety issues are of chief concern in most litigation cases,” Lunsford says.
Always sign a lease or an amendment: Avoid “shaking on it” or any verbal deals, because you won’t be able to enforce them. You must have paperwork in place to prove the terms of your rental agreement. “I’ve heard it said that good fences make good neighbors. I’m not sure about that but in my experience clear lease agreements make good renter/landlord business relationships and avoid much of the legal troubles down the road,” Lunsford says.
Be prepared to make timely repairs on the property, or you could face lawsuits from your tenants.
2. Know the rental rates. Research rental rates in your area to know what you can ask and whether listing the property is even worth the effort. Depending on the market, you may not be able to cover your monthly mortgage.
To be competitive with other rental properties, you may have to put some considerable upgrades in your house, like new appliances and flooring, or energy-efficient doors and windows.
3. Protect your investment. Hire a quality property manager — someone with proven experience, not just the cheapest option — and understand what services they do and don’t provide. Don’t underestimate the costs for repairs and maintenance on the property, including possible legal fees for enforcing a lease. You’ll also need to be financially prepared for those times when the house isn’t rented.
4. Make sure you have the right insurance. It’s important to contact your insurance company to review your policy and ensure you have the right coverage in place for renting a home, and you haven’t missed anything that may need attention.
5. Know your tenants. Review his or her credit report and run a criminal background check. You may want to contact previous landlords. Encourage your tenants to purchase renters insurance. Find a trusted agent —a friend or family member — within proximity of the home who you can rely on to assess damage or other major issues with the property.
Something to consider: If you rent to a family member or friend, know that enforcing the lease might be difficult and awkward, as it can put a strain on the relationship.
And remember that you may not always have a renter. “You’re usually on the hook for expenses from the property whether you have a renter of not,” Lunsford says. “Mortgages and utilities still have to be covered, so keep a few months of expenses for the rental property in reserve to provide that extra cushion to your finances while you find a new renter.”
Now you know how to get the most out of renting your home in case challenges arise so that it’s a pleasant experience for all involved. Happy renting!
Ready to branch out into property rental? Rental property insurance offers important protection for landlords.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
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