Whether you’re looking for a passive income source or want to diversify your investments, renting out your home can be worthwhile. If you’ve never been a landlord before, you may be unsure of where to start. Below, we’ll dive deep into how to rent out your home so you can learn more about the process and figure out if it makes sense for your unique goals.
What does it take to become a landlord?
To become a landlord, you’ll need a second home or physical space to rent out. This space may be an entire home, a single room, like a bedroom or basement, an accessory dwelling unit (ADU), or garage. In addition, you must have the financial means to cover various expenses, such as renovations, maintenance, and repairs. It’s also important that you can afford unforeseen costs, such as emergency repairs and vacancies that may chip away at potential profits.
How to rent out your home
Once you confirm you have what it takes to become a landlord, follow these steps to rent out your home.
Brush up on landlord-tenant laws in your area
There are a number of local, state, and federal laws that govern the relationships between tenants and landlords. It’s your job to familiarize yourself with the regulations that apply to your local area. Do your research and learn about required licenses, building codes for the health and safety of your tenants, rent control rules, security deposit requirements, mandatory disclosures, rental repair laws, and eviction laws. Your state page on the U.S. Department of Housing and Development website is a good place to start.
Get landlord insurance
Landlord insurance is similar to home insurance but designed for landlords who rent out their space. While it’s not a legal requirement, your lender may mandate landlord insurance if you have a mortgage on your property. This type of insurance policy can protect your rental from covered hazards, like fire, hail, theft, and vandalism.
It may also temporarily reimburse you if you lose rental income after your property becomes uninhabitable or a tenant or visitor suffers an injury due to a maintenance issue. The amount of landlord insurance you’ll need will depend on the size of your space and the number of tenants who live in it.
Create your lease agreement
A lease agreement outlines the terms and conditions you and your tenants must follow. It should include a description of your property, the duration of the lease, monthly rental costs, security deposit requirements, and penalties for late or missed payments and breaking rules.
Be sure to clarify whether or not the tenant can break their lease early, make modifications to the home, and have pets. Also, state which maintenance and repair tasks you’ll cover and which ones the tenant will be responsible for.
While it may be tempting to just “wing it” or download a generic lease agreement for free, it’s in your best interest to consult a legal professional. They can write and/or review your agreement to make sure you’ve covered all your bases and protect yourself from unexpected costs or unwanted surprises.
Prepare your home for rent
Next, it’s time to get your property ready to rent. First, tackle any deferred maintenance or necessary repairs or updates so that your home is more appealing to potential tenants. Then, inspect the space so you can assess its condition and catch issues before they turn into major problems and costly repairs. Also, prepare the various documents you’ll need based on legal and regulatory requirements. In addition to the lease agreement, these may include rental applications, tenant screening documents, pet policy agreements, welcome letters, and move-out letters.
Market your property
In a perfect world, prospective tenants would be knocking on your door. Since this is unlikely, you’ll need to promote your rental. First, create an online listing on a website like Zillow or Realtor.com. Include high-quality pictures and an enticing description that highlights appealing features about your property and its location, like granite countertops, vaulted ceilings, ample storage space, a deck or patio, and a top-rated school district.
You should also stage your space or decorate it in a way that makes it more attractive to prospective tenants. Staging can help tenants envision living there and convince them to choose your property over another one. To stage your rental, you can declutter, apply fresh paint, add flowers and diffusers, and open up windows and blinds to let in natural light and create the illusion of a larger space.
In addition, you might want to plan an open house, which is an event multiple interested tenants can attend so they can see your space and determine if it’s the right fit. If possible, set a specific time for the open house instead of range so you can create a sense of urgency and encourage prospective tenants to come earlier rather than in the last few minutes. Don’t forget to collect the contact information of anyone who shows interest and follow up with them.
Screen and select your tenants
Once you’ve found interested tenants, you’ll need to screen them through a rental application. While screening will take some time and effort, it’s essential because it will help ensure you rent to those who will pay on time and won’t cause intentional damage.
Every prospective tenant’s rental application should include their rental history (other places they’ve rented), employment records, proof of income, and an authorization for a criminal background check and credit check. In addition to a rental application, request references from each interested tenant.
When you call each reference, which may be a former landlord or employer, find out if the person is reliable, able to keep a job, and care for their home. As you screen tenants and try to figure out who to choose, be mindful of the Fair Housing Act.
Per the Fair Housing Act, you can’t discriminate against a prospective tenant on the basis of race, disability, religion, gender identity, national origin, and familial status. This is a federal law you must follow or you may face costly fines and other penalties.
Once you’ve chosen your tenants, send them the lease agreement so they can carefully review it and ask you any questions they might have. If they agree with your agreement and accept its terms, ask them to sign on the dotted line to finalize it.
Tips for renting out your home
These tips can increase your chances of a successful rental arrangement.
- Maintain your property: As a landlord, you’ll need to keep your property maintained, safe, and livable. It’s your responsibility to maintain heating and cooling systems, keep the water heater running, clean the gutters, and perform basic landscaping. In addition, you must handle all repairs related to various appliances and systems in your property.
- Set up a rent collection system: Figure out a convenient way to collect rent from your tenants. This may be through online payments, automatic withdrawals, or old fashioned checks. Be sure your tenants know when they’re required to make their rent payment every month.
- Keep records: You should maintain copies of all lease agreements, financial transactions, and repairs. These documents can come in handy if problems or disputes arise.
- Consider a property management company: If you’d rather be a hands-off landlord, hiring a property management company may be worth it. They’ll market your property, screen prospective tenants, create documents, collect rent, handle maintenance and repairs, and deal with legal issues, including evictions. Most property management companies charge a monthly fee, which is usually 8-12% of the rent payments.
- Create an exit strategy: An exit strategy is a plan that lays out what will happen once a landlord-tenant relationship comes to an end. It should include details on when and how each party can terminate the agreement, and what needs to be done for you to return the security deposit. It’s also a good idea to outline what you’ll do to prepare for new tenants.
Renting out your home can be an exciting way to supplement your income and enjoy a debt-free retirement. Just make sure you treat this venture as a business and adhere to all landlord rules and regulations. Once you have success with your first rental property, you can always add to your investment portfolio and increase your profits.