At surface level, the idea of renting out your property sounds wonderful. You get to keep the property, and you can make some extra income as you do so. Unfortunately, being a landlord is usually not that ideal. There is property upkeep to consider, and tenants, unfortunately, are not always kind to the property they rent. Before you rent out your property to tenants, here are eight things you’ll want to consider.
While it would be nice to always have tenants who leave your property just as they came to it, the simple truth is that many renters are not as careful with rental property as they would be with their own property. So, it is important to decide beforehand how you are going to screen potential tenants for your property. You might, for example, work solely on references from people you know, or have applicants provide referrals that you can personally contact.
Keeping good tenants
On the other side of the coin, you want to consider how you will handle tenants, good or bad, once they have moved into your property. Good tenants can really be worth their weight in gold to a landlord, as they keep the property clean and reduce the need for repairs. You might want to have a system in place for keeping tenants like this, such as promising never to raise rent cost as long as they are there. You might lose a little income by not raising rent costs, but still, you may save money by not having to make as many repairs.
Dealing with bad tenants
Meanwhile, it’s important to have a system in place for dealing with bad tenants, such as those who cause significant damage to your property. This is something that your lease agreement (contract) can handle. You might, for example, set specific terms as to when are allowed to ask the tenant to vacate the property. In addition, you will want to establish a system for how tenants might have to repay you for certain types of property damage.
The lease agreement
Your lease agreement can either offer you peace of mind or serve as a major source of headache, depending on how you word yours. You could write an entire blog post—or even multiple blog posts—alone on how to create the perfect lease agreement, but in general, here are several things that you should address in a lease agreement:
- Parties involved (your name and the name of the tenant)
- Property’s address
- Lease term (month-to-month, July 1 to June 30, etc.)
- Security deposit (usually one month’s rent or more)
- Changes the tenant can and cannot make to the property
- Special requirements of the tenant (e.g., cannot park in the driveway)
- Regulations the tenant must abide by (e.g., noise regulations)
- Who is responsible for utilities
- Disclosure of any property defects
- Subleasing guidelines
- When and how a lease can be terminated
After drafting up your lease agreement, it is a good idea to have a real estate attorney review it to ensure that it abides by rental property laws and that it includes all of the necessary details.
Many renters rent specifically because they do not want to deal with the upkeep associated with owning a home. So, if your property requires any upkeep in the form of landscaping or lawn mowing, you need to consider how you are going to handle landscaping on that property while it is being rented out. Will you supply the garage with a lawn mower and express to the tenant that it is up to them to keep up with the lawn? Will you personally stop by every so often to take care of landscaping needs? Will you hire another company to take care of it? Don’t forget to consider things like pest control and snow removal, as well. Many landlords choose to outsource property maintenance and to build that maintenance cost into the cost of rent.
Even the nicest of rental properties can be subject to vacancy losses. The term “vacancy losses” refers to when the landlord does not receive their typical income on a property, due to the property being in between tenants. Should your tenant suddenly break their contract, or should you have a difficult time filling a vacancy, you could incur vacancy losses. It’s important to keep this potential loss in income in mind as you prepare to rent out your own property, as it can help you set better expectations as to how much income your property will actually bring in. This article has some great tips on how you can minimize vacancy losses as a landlord.
Do you know much about the laws in your state associated with renting out property? Some states, for example, require landlords to place rental security deposits in an interest-bearing account and, at the end of the lease term, return the security deposit plus interest to the tenant as long as there is no property damage. A real estate attorney can help you abide by renting laws by ensuring that your rental lease agreement is up to par.
Another reason to consult a real estate attorney: your taxes can change quite a bit when you become a landlord. Landlords are entitled to a number of tax deductions, for example, including repair costs, travel costs for rental activity, home office expenses,casualty and theft losses, insurance premiums, legal and professional service costs, and even mortgage interest payments on loans used to obtain property. Still, not all of your expenses will be tax deductible in the way; any expenses that go toward increasing the value of your property must actually be capitalized, with the expense taken over several years through depreciation. Long story short, if you are considering renting out your property, you should probably be prepared to keep records of all of your expenses and consult an experienced attorney.