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The Costs of Renting Out Your House
December 18, 2011
You have a single-family house you’d like to rent out. Perhaps you’re temporarily relocating for work, or maybe you inherited your childhood home from your parents, and you’re not quite ready to part with it yet. This has become a very popular option for many home owners but there is risk involved.
Renting can be a profitable choice, but it requires an investment of time, money, and organization to make it work. Here’s how to determine whether renting out your house is worth the cost.
Calculate your monthly expenses
You want to charge at least enough to cover your monthly outlay. So the first step is to use our free downloadable worksheet to calculate your costs. Start with regular expenses like mortgage, maintenance, and homeowners association dues.
You may also need to upgrade your insurance coverage. Your agent can advise you about adding landlord insurance, a special type of policy that covers rental properties. As a rule, landlord insurance costs about 25% more than standard homeowners insurance.
If you’re renting the house furnished, make sure you’re covered for the personal possessions you leave behind. Jane Cline, the insurance commissioner of West Virginia, tells owners to prepare a detailed inventoryof household items. If you’re renting the house unfurnished, figure in the costs of moving and storing your items.
Check out prospective tenants
As a practical matter, you’ll have to formally check out your prospective renters. MrLandlord.com, an information and service site for landlords, suggests a variety of background checks: credit reports, eviction reports, and criminal background reports. None of these is expensive, but you must get your prospects’ permission.
MrLandlord.com charges $8.95 for an eviction report. A combined credit and eviction report is $14.95. If you want to be especially careful, a countywide criminal report costs $29.95.
Account for maintenance and upgrades
Even with the most scrupulous checks, you can’t be completely sure renters will take good care of your home. Eva Rosenberg, an enrolled agent in Northridge, Calif., advises that if you’re not within easy driving distance of your rental property, you’ll need to arrange for someone else to keep an eye on the place, even if it’s just to make sure the lawn is mowed. If the tenants are neglecting upkeep, you’ll want to know about it sooner rather than later, since it could be a warning sign of trouble down the line.
Of course, even if the renters are conscientious, problems can crop up: boilers will fail; roofs may leak; washing machine hoses can burst. If household systems or appliances need repair or replacement, you’re better off spending the money up front, before the fix becomes an expensive emergency.
You may also want to invest in some of the “extras” that Sue Peters, a broker in Wellfleet, Mass., recommends adding to attract a tenant willing to pay a higher fee. She suggests spending money on air conditioning, expanded-channel cable TV, and a Wi-Fi network.
Don’t want the headaches? Hire a property manager
You can save yourself a lot of time and effort if you engage a management company to oversee the property and take care of the details. Some firms charge a percentage of the rental fee, others a flat monthly fee, based on the extent of services. Joe Aimone of GoRenter in Phoenix, Ariz., says his firm offers a variety of services, starting at as little as $50 a month, including general maintenance, rent collection, and—if necessary—eviction.
A management company can help you figure out how much to charge, find and vet tenants, and prepare a lease. It will also pay the real estate taxes on your behalf and present you with an annual 1099 form. Many management companies maintain 24-hour emergency lines and a roster of approved service people, so they can take care of plumbing or electrical problems and bill you later. A property manager will also see that driveways and sidewalks are shoveled, so you don’t find yourself with an unpleasant claim against your liability insurance.
Expect to pay a management company 8% to 10% of the annual gross rent, on average, with a $50 to $85 monthly minimum.
Keep scrupulous records
Whether or not you use a management company, you’ll have to keep extensive business records. DeDe Jones, CFP, CPA, in Lakewood, Colo., advises owners to save receipts for any expenses and to file them carefully.
The IRS treats maintenance expenditures, like a new hot-water heater, differently from capital improvements, such as a new deck or patio, so you’ll want to consult a tax professional. Meanwhile, keep the two types of receipts separate to make tax prep easier. You’ll have to file Schedule E on Form 1040, which can also serve as a template for the kinds of records you’ll need.
Finally, because of the complex tax and liability issues involved, many financial experts suggest forming a corporation when you become a landlord. An attorney can advise you about whether incorporating makes sense in your situation.
Thinking About Becoming a Landlord? You Should Know This
December 10, 2011
Landlording is a great business for some…and poor business for others. It’s an attractive idea and there are certainly many “investment” properties on the market with happy taglines like “live mortgage free!” and “investor special”. But there are some things you should know before starting your adventures as a landlord. Even before you think about cap rates, repairs and building structure.
It might sound simple, but real estate pros warn that there’s a lot to know. The landlord who doesn’t follow such basic guidelines as conducting a thorough background check can get stuck with a nightmare tenant. It takes both business sense and common sense.
“Most of my tenants, 98%, are terrific,” said Jupiter real estate broker and investor Carl Presto, who owns 60 properties. “The problem is that 2%.”
The down economy that has resulted in real estate bargains also means it’s more difficult to find a tenant who can afford to pay first and last month’s rent and a security deposit up front. Landlords report they are having to go through 30 to 40 applicants before finding a qualified tenant.
Landlords also find they are competing with foreclosed houses, which some people rent below market, forcing rents lower.
Although picking up a cheap condominium unit might be tempting, David Dweck, founder and president of the Boca Real Estate Investment Club and a real estate broker and investor, advises avoiding them.
Instead, buy a duplex, triplex, small apartment building, or single-family home where you won’t be subject to a condominium board, he suggested.
Special assessments levied by condo associations can run into thousands of dollars.
Presto agrees: “Pay cash and buy a duplex. Offset your rent. Rent one side, and live in the other.”
Financing is also difficult. Douglas Rill, a West Palm Beach real estate broker who has been a landlord for 38 years, said about 70% percent of investment properties are cash deals.
Whatever the property, Dweck, Presto, Rill and other experts say finding a decent tenant starts with the screening process.
Credit checks and criminal background checks are a must. Small-scale landlords can find help at websites such as http://www.mysmartmove.com. Operated by Trans-Union, a major credit bureau, SmartMove gives independent rental owners access to the same tenant screening used by large property management groups. It also gives renters data privacy because they provide their identifying information directly to TransUnion in a secure, online setting.
For $25, the landlord receives a credit-based leasing recommendation, national criminal report including 50 state sex-offender and terrorist searches, renter fraud warnings, and automated renter identity verification.
For an additional $5, the landlord also can get access to a credit report, a credit score, and a detailed rental address history.
The $30 is well spent compared with the basic eviction filing fee, which can get into the 100’s of dollars.
A West Palm Beach landlord contacted recently did not conduct a background check. Now he has a tenant whose true identity is a mystery. “My experience with landlording has not been positive,” the man said. “I am in the middle of an eviction and the person will not say who he really is.”
Lawyer review of lease form advised
A written lease is essential. Standard leases are available for free at sites such as http://www.mrlandlord.com or can be purchased at office supply stores. Have an attorney review the lease form you select and modify it specifically for your property.
Of course, leases cover such basics as the term of the lease, when the rent is due and how much the rent is. But they also should include sections on policies about late rent, security deposits, and how many people are allowed to live on the premises and that the premises are for residential purposes only.
The lease needs to state what might seem obvious. Many landlords err by not spelling out everything. If you don’t allow pets, don’t just say, “No pets.” State that no pets of any kind are allowed, including visiting pets. Or one day you will knock on your tenant’s door to find her holding a ferret, as one landlady did.
Don’t just state that parking is provided. Be specific. For example, the lease created states that the tenant must park in his or her assigned space.
Don’t simply state that the premises must be left clean and undamaged in order for the tenant to receive his damage deposit back after he moves out. Lease requires tenants to comply with a number of conditions, such as having the carpet professionally cleaned and cleaning the entire home, including the range, oven, refrigerator, bathrooms, closets, cabinets, windows, carpet, and balcony, etc.
‘Professional tenants’
No matter how ironclad the lease is, what some experts call “professional tenants” do exist. These are people who move in and never pay rent. They know that it often takes awhile for an eviction to be carried out.
“Anything is only as good as the tenant’s word. They can still walk out on you,” said a landlord. “I went to court on an eviction. The guy said, ‘Yes, I owe the money.’ The judge said I did not properly file the three-day notice. The name and address were supposed to be on the bottom right-hand side. It was at the top on my letterhead. It cost me a couple thousand and the guy owed me four grand. I never got paid.”
Landlording is a business, and experts say it’s not for the soft-hearted.
When rent is past due, most state laws require landlords to give tenants notice that they must pay the rent or move. If the rent is not paid, then the landlord can begin legal action to evict the tenant.
“You have to be on top of it. The stories can get ridiculous. I keep a notice act in my car. I have had people tell me they will not pay the rent because they are buying Christmas presents,” a landlord said.
Don’t start your new line of income off without getting the facts. Consult with a good attorney and hire a good Realtor to assist you. Do your homework on the property, the area and the rental history. Make sure that you can weather vacancies and repair as well as unpleasant situations such as evictions and difficult conversations.
Real Estate and *stuff * 