Author Archives: rmheditor
What are the risks of renting my house out?
Renting your house out can be a fun and profitable venture. But just like any business endeavor, becoming a landlord carries some risks. You’re entrusting a major asset—your home—to people who you likely don’t know well, and who are not nearly as invested in its maintenance as you are. This is one major reason many new landlords, or real estate investors who are not planning to make a career out of managing their own rental properties, choose to hire professional property managers.
Here are some of the risks that a professional management company can help you mitigate:
Disruptive tenants
Aside from damaging the property, tenants can cause difficulties by paying late, refusing to pay, or violating the terms of their lease agreement. As with damage, this may be caused by an accident or one-time oversight, or be part of a pattern of behavior in which people attempt to avoid paying what they owe.
They could bring in a pet after agreeing not to, fail to mow the lawn and perform similar maintenance tasks, run up the water or electricity bills by leaving lights or faucets on or even just annoy the neighbors with loud music. How much of a problem a disruptive tenant is can vary widely. Tenant default may be the most serious risk, since it means a drain on the owner’s financial resources to pay the mortgage, property taxes and other expenses.
Vacancy
When trying to rent any property, there is a risk that it will be vacant for a prolonged period. Each day it sits empty is a day that a home is not bringing any revenue to the owner, and the cost of upkeep may actually be higher than while it is occupied by a good tenant. The owner or rental manager will have to personally see to it the home remains clean and looks appealing or else the odds of attracting a resident will go down over time. These tasks include caring for grass and clearing walkways, along with all duties that residents would generally be expected to perform.
If a vacancy lasts a bit long, it may not be a problem. If this occurs repeatedly or tenants are extremely hard to find, however, the expense and time maintaining a property may become problematic the longer it lasts.
Liability
There are serious liability risks associated with renting a property. Any risks to tenants or employees that occur on the property due to inadequate maintenance or dangerous property conditions leave the owner vulnerable to legal action. There is also the risk of fraud by tenants or prospective tenants, and of allegations against the landlord. Owners may also be accused of discrimination against employees or current or prospective tenants, which makes it important to have consistent, preferably written policies that demonstrate fairness.
One potential benefit is that insurance providers may consider the risk of theft and vandalism lower in an occupied rental than a vacant home, so coverage for some risks may be cheaper.
Rental profitability
The rental prices tenants are willing to pay will depend on market conditions and the state of the home, and they will fluctuate. If the area becomes more desirable, housing grows scarce or the property is particularly well-kept and appealing, then rents may be go up. Market changes can be unpredictable, however, and there is always a risk that rents will drop, making the home less profitable. Setting rents too high can drive away tenants, while setting them too low cuts profits, making it a difficult task.
7 Things to Do Before Renting Your House
While renting your house out may seem as easy as posting an ad on Craigslist, we recommend that you set aside some time to prepare for you new business venture before you leap into the world of finding and managing tenants. Here are seven essential steps that every new landlord should take:
1. Get an Insurance Policy
Purchasing landlord insurance (also known as rental property insurance) is one of the most important steps to take before renting your home. In addition to the things covered in a typical homeowner’s policy, landlord insurance will protect you from major damage done by tenants, as well as from legal actions they may take against you. Be aware, though, that rental property insurance will not cover your tenant’s personal property—they’ll need to purchase rental insurance to cover their belongings.
2. Enlist an Accountant
Assuming you’re not an accountant or deeply familiar with rental tax laws, it would be wise to enlist an accountant to help you sort through the tax implications of renting your house. An accountant will help you figure out what records you’ll need to keep in order to navigate Schedule E come tax time. He or she can also help you figure out how to minimize your tax bill by helping you choose the right depreciation strategy.
3. Have a Lawyer Review your Lease Agreement
A real estate lawyer can help ensure that your lease agreement does not contain any illegal provisions, while also protecting you from the financial harm that could result from tenants exploiting loopholes in your agreement. A good lease agreement will specify the ways tenants can and cannot use the property, how many people can occupy the rental, what insurance is required, who is responsible for paying utilities, and what will happen if the tenant doesn’t uphold his or her obligations.
4. Establish Criteria for a Tenant
Working with in Fair Housing Act guidelines, outline a set of criteria your rental applicants will need to meet, and put these down on paper to hand out to potential tenants when you show them the property. These criteria should include acceptable monthly income levels and credit scores and the number of tenants who may occupy the house. You should also lay out your smoking and pet policies.
5. Get Your Paperwork Ready
Beyond the lease agreement, there are a number of forms you’ll need to have on hand before renting your house out. These include rental applications, credit check authorization forms, any disclosures your state requires, move in checklists, move out forms, and various notices to tenants.
6. Get a Home Inspection
Having your home inspected by a professional will help you fix any critical maintenance issues before your tenants move in. This will help protect you from potential legal issues, while also saving you from having to answer multiple maintenance phone calls within the first few weeks of renting your property. Having home inspections both before a tenant moves in and after he or she moves out will also provide third-party documentation of any damage caused by the tenant.
7. Clean, Paint, and Landscape
There’s no substitute for a through deep cleaning and a fresh coat of paint when it comes to brightening the interior of your rental home. While trendy upgrades may be optional, if you want to attract the most qualified tenants, this basic rental hygiene is required. Likewise, it’s important to make sure that the lawn and garden surrounding your rental house is neat and tidy before you post the “For Rent” sign.
Can I Rent My House and Buy Another?
If you’re thinking of renting your house out while purchasing another, you likely have a lot of questions about how to make it all work. Whether you’re contemplating becoming a landlord by choice or by necessity, financing the investment is almost certainly a key concern.
The good news is that, while purchasing a second home may seem out of reach at first, there are actually several good options that will allow you to become an income property owner within your budget and with minimal risk. Many beginning real estate investors have to get creative when it comes to finding funds for their first purchases. Here are some of their top strategies:
1. Use a Local Bank
Local banks tend to be more community-focused than national institutions, and will often work with beginning real estate investors to provide financing, especially when there’s a solid business plan in place. In addition to knowing more about local properties than a distant corporate bank, you’re local loan officer likely knows you personally, and he or she is likely to consider your character and history when it comes to signing off on a loan. Even if you haven’t already established a relationship with a local bank, a loan officer from your community bank or credit union should be able to sit down with you and provide several options for financing the purchase of a second home.
2. Obtain Seller Financing
“Seller financing” simply means that the seller of the home you’re interested in provides you with the loan you need to make the purchase. Instead of making you a cash loan, as a bank would, the seller agrees to let you take over ownership of the house, while you pay him or her the purchase price over time, with interest. While this ties up whatever equity the seller has in the home, it allows her to collect the interest payments that would otherwise have gone to the bank. More sellers than you might think are amenable to providing buyers with financing, especially in a down market.
Another form of seller financing is called the “seller second.” This is where the seller loans you enough money for a down payment, to allow you to qualify for a traditional mortgage that covers 80% of the purchase price. Sellers eager to rid themselves of their homes (as many are, in this economy) may well agree to this if you ask.
3. Do a Lease-to-Own Deal
There’s no reason why you can lease-to-own a second home while renting out your first home. Under the terms of a typical lease-to-own (or “rent-to-own”) contract, you’ll pay a small “option fee” (generally 1 to 5% of the property’s value) up front, which reserves your right to buy the house at the end of an agreed upon period, usually three to five years. After that, a percentage of each month’s rent will go toward the purchase price of the home. At the end of the leasing period, you’ll have amassed the equivalent of a down payment through the option fee and your monthly payments, at which point you’ll qualify for traditional financing.
There are some common contract clauses to keep in mind with lease-to-own properties. If rent is not paid on time then the portion set aside for purchasing the home may be rendered void. Also, as the intent is ownership of the property, the landlord might include that he or she will be not be responsible for any maintenance on the home.
Conclusion
Don’t let the challenge of financing a second home deter you from investing in rental property. With determination and a little bit of creativity, you’ll be an income property owner in no time.