If you’re ready to take the next step in investing, you may consider renting out your house. It was something that intrigued me for many years before I jumped in headfirst. I’m glad I did my research beforehand so I could be successful at it, and now I want to share with you what I learned.
Knowing how to rent out your house means more than slapping a “For Rent” sign on the lawn and taking the first applicants that come along. Below are some things to consider before you rent out a house.
How to tell if you’re ready to rent out your house
Honestly, you should first do some soul searching to make sure you’re ready to rent out your house. Just because you have a house that will sit vacant because you moved into another home doesn’t mean you’re prepared to rent it out.
Here’s what you should consider.
Can you handle the pressure of being a landlord?
I won’t sugarcoat it. Being a landlord is hard work. You are 100% responsible for all maintenance and repairs on the property, the liabilities, and keeping up with all financial responsibilities of the property.
It has its ups and downs, so make sure you can handle it not only financially but physically and emotionally too.
Do you have money set aside for emergencies?
As I said earlier, you are 100% responsible for all property-related things. If something breaks at 3 a.m., you get the phone call and are the one responsible for fixing it or paying someone to fix it.
Ensure you have enough capital to cover anything that could happen, so you aren’t putting yourself in financial trouble for a property you don’t occupy.
Have you diversified your investments?
Have you ever heard the term “don’t put all your eggs in one basket?” This is especially true with investments. Don’t put all your money in a real estate property. There’s never any guarantee it will work out. While the hope is that you’ll make money, there’s always the risk of failure. Just look at the real estate crisis of 2008 —no one saw it coming, and it happened faster than anyone could react.
If you feel ready to rent out your house after answering these questions, take the steps below.
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How to rent out your house—9 easy steps
1. Know the laws
Not only are there federal laws governing tenant-landlord relationships, but there are state and local laws too. It’s imperative that you know all the laws and follow them to the letter. For example, federal laws protect tenants from any type of discrimination, but your state and local laws may have other requirements regarding how much you can charge, how long your lease may be, or what terms the lease can contain.
If you aren’t sure of the tenant-landlord laws in your area, consult with an attorney to make sure you’re covering all your bases.
2. Get to know the market
Not every market is great for renting. So before you commit to renting out your property, find out the demand in the area.
This takes a little work. You can look around on sites like Zillow to find out the average rent charged in the area, how many houses are on the rental market, and how many days they sit on the market.
Do this early, and you’ll be able to see if the market is favorable for rental properties right now or not. You can also see how much you can charge. While each property is different, you should know the fair market rent for the area, so you’re in the same ballpark, or you may sit with a vacant property if you charge too much.
As you figure out if the market rent is enough for you, think about the mortgage cost (if applicable), real estate taxes, homeowner’s insurance, HOA dues, and the average cost of maintaining the home. If you don’t walk away with a profit, you may want to look at other options.
3. Decide how you’ll screen tenants
Screening tenants is the key to ensuring your safety and not getting taken by a scam. You have a few options to screen tenants:
- Hire a property management company to do the screening for you
- Pay for a software program that does the screening
- You individually order a credit report, criminal background screening, and call the applicant’s references yourself
Obviously, hiring a property management company or paying for tenant screening software will cost more money, but it saves you time and effort. They may also be more thorough than you can be handling the screening yourself.
If it’s not in the budget to pay someone to do the screening for you, make sure you’re as thorough as possible while obeying the laws in your area.
4. Decide how you’ll market the property
To have tenants to screen, you must market the property. So, before moving forward, decide what you’ll use to let others know your property is for rent.
The sky’s the limit, but here are some options:
- Social media — Letting locals know about your property for rent is a great way to get word-of-mouth going, and it’s free.
- Sign in the yard — Like a home that’s for sale, a sign in the yard can catch the attention of the right audience and get your home rented faster.
- Advertise on real estate sites — You can submit your listing to sites like Realtor.com, Trulia, Facebook Marketplace, and even Craigslist.
Diversifying your advertising efforts will help you rent your property out the fastest. Having a plan before you are ready to look for tenants is key, though.
5. Choose whether you’ll use a property management company
As a part of the planning process, you should decide if you’ll manage the property yourself or hire a property management company.
A property management company is another expense, so if there’s not a lot of wiggle room with profits, you may want to handle it yourself. If there’s room, and you know, you don’t have the time to maintain the property, or you don’t want to deal with tenants, finding the right property management company is key.
6. Screen tenants and make your decision
With your plan in place, it’s time to advertise the property, screen applicants, and make your decision. Before you start screening, decide if you or the tenants will pay the application costs. Expect to pay $50 - $55 per application to get the answers you need.
With the answers from your screening, you can decide which tenant fits the bill the most. Think about what you want from the “perfect tenant” so you can make a fast decision when you have the facts in front of you.
7. Create the lease and execute it
Once you have a tenant ready, you need a lease. This legal agreement binds you and the tenant to the term. For example, if you have a 1-year lease, you and your tenant are bound by the lease for that time.
Your tenant must abide by the terms in the lease, as should you. I recommend working with your attorney when creating the lease to make sure it meets all local, state, and federal guidelines.
8. Collect rent (if not using a property management company)
If you aren’t using a property management company to handle the rent, collecting it monthly is your responsibility. While a paper check might work, it’s a lot more streamlined to collect rent payments online.
Talk with your tax advisor about the best way to collect rent to keep your costs down and ensure you get your payments on time.
9. Be prepared for anything
This step is the most important. No matter how much you learn about how to rent out your house, anything can happen. So be prepared for anything and know how to roll with the punches.
You will likely have vacancies from time to time, and you may end up with a crazy tenant or two that really pushes you to the limits. Have your resources and backup for when things do go haywire. You’ll be better able to handle the stress and make fast decisions to minimize any serious losses.
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Pros and cons of renting out your property
There are pros and cons to renting out your property like any investment. Here’s what you should know.
Pros
Cons
Tips to use to rent out property
Before you rent out your house, here are some tips to make it as stress-free as possible.
Think about a security deposit
A security deposit is for your peace of mind. It’s not money you make (it’s not a fee), but it’s there in a separate account should your tenants violate their lease. Even if you find the “best” tenants, always require the security deposit. Anyone can make mistakes or change during the lease term. Don’t take any chances, and always charge a security deposit at least equal to one month’s rent, but consider even more if you’re taking on a risky tenant.
Consider what you will and will not allow ahead of time
Don’t fly by the seat of your pants. Sit down and think about what you will and will not allow in the property and put it in writing.
- Will you allow pets?
- Are plants and gardens allowed?
- Will you allow your tenants to sublet?
- What are your smoking requirements?
- Are parties allowed?
Think about what you do and do not want going on in the property and put it in writing. It must be in the place for you to enforce it, so think about it seriously.
Treat your rental property as a business
Your rental property is a business. You are the landlord and are charging rent. You'll pay taxes because you’re making an income, but you can also write off certain expenses because it is a business.
Don’t get emotionally involved with your tenants, either. Keep an arm’s length relationship so you can make tough decisions if/when necessary.
Don’t rent for less than the fair market value
It might feel tempting to rent the property for less than the going market rate, but that’s a loss for you. No matter how desperate you are to get the property occupied, don’t settle.
You should make the fair market rent, and you’ll need it to keep up with the property, your mortgage, and the taxes. If you advertise the property for much less than the fair market rent, potential tenants may wonder what’s wrong with it too.
Require renter’s insurance
Even though you must carry landlord’s insurance, renters’ belongings aren’t covered under it. Since we live in a society that is happy to sue for any little thing, it’s a good idea to have your renters protect themselves. If your tenant lost everything in a lawsuit, you could too because the tenant won’t be able to pay their rent.
It’s good practice to require renter’s insurance, and on average, it only costs renters $200 a year.
Get everything in writing
Keep documentation of everything. Your lease should include all the terms and agreements you want, but keep track of any issues or concerns that come up while the tenant lives in the property too. You never know when you’ll need written proof of something. Try to have all conversations in writing and if you have a verbal conversation, follow up in writing, so there's a record of it.
Final thoughts—How to rent out your house
Once you learn how to rent out your house, it can get addicting. Real estate investments can be great when they’re profitable. Get your feet wet with your first property and see how it goes from there.
Diversifying your real estate investments in different cities and even different states can be a great way to increase your net worth if you decide you like it.
About Millennial Money Man
Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. He is a personal finance expert who has been seen on Forbes, Reuters, MarketWatch, CNBC, International Business Times, Business Insider, US News, Yahoo Finance, and many other personal finance and entrepreneurship media outlets.
