Whether you’re considering becoming a landlord because you have some extra space, because you want passive income from a duplex, or because you just don’t want to deal with selling your old house quite yet, real estate may look like a sound investment to you. Before you take the plunge, it’s important to educate yourself about the process and how it works. Here’s a step-by-step guide on how to rent your house.
At its simplest, you put your money down on a place, rent it out, and collect a monthly check. But experienced investors will tell you that there’s a lot more to becoming successful as a landlord in real estate.
“Owning rental property is a business, and it has to be approached as a business investment. You have to have the right personality to do it; it’s not for people who are not risk-tolerant.”
Step 1: Assess your situation
Before deciding to jump into renting, assess your potential rental situation.
If you have a spare bedroom, maybe you’re thinking of listing it on Airbnb or finding a roommate. This could lead to a loss of privacy if you have to share a kitchen or bathroom. The short-term renter or roommate could have different standards of cleanliness, appropriate noise levels, or they might come and go at odd hours. Before attempting this route, be honest about your tolerance levels when living with strangers.
In a duplex or multifamily unit, you’ll have more privacy, but you’ll still share some spaces. Your bedroom wall may be next to a tenant’s loud television, or they could park on your side of the driveway. Buying a rental home entirely separate from your living situation is the most expensive (but often the least annoying) option for landlords.
If you already own the house you’re planning on renting, then you’ll want to make sure your mortgage loan and insurance are both set up for a non-owner-occupant to live in the house — and change them if they aren’t.
Next, consider what type of rental you want the property to be. Short-term, or long-term? Whether you’re renting a room or a property can influence this decision … along with the amount of cash you’ll need to start as an investor.
Maybe you just want to rent out the extra room in your house, or your vacation home occasionally to make extra money. Or, maybe you own a separate property and are more interested in a long-term rental agreement. Each comes with its pros and cons.
Short-term rental pros
- You’ll have the freedom to use the property when you want.
- With occasional occupants, the property won’t experience as much wear and tear.
- Seasonality and current market demand can be factored into your nightly rental rate.
Short-term rental cons
- You’ll have to clean the property more often than if it was occupied by a long-term renter.
- If you live in a touristy area, it may be tough to find renters in the off-season.
- Competition can be steep. You’re not only competing against nearby hotels and resorts, but also other rentals in the area. What gives your property an edge?
Long-term rental pros
- You’ll have a consistent second source of income (as long as the property is rented).
- The responsibilities of the utilities are passed on to the renters. So, no utility payments for you!
- You can partner with a professional property manager who will handle things like screening potential renters, adhering to rental laws, and handling home repairs and maintenance.
Long-term rental cons
- Having the property continually occupied is going to lead to more wear and tear on the home and its appliances.
- You could find yourself bound to a long-term contract with a less than ideal tenant.
- You’ll lose out on using the property as a vacation home.
The pro of being a landlord in this market is to be able to take that money, and if you’re smart with it, pay down your mortgage in a faster way so you can be debt-free better and have a much better equity in your home.
- Dawn Bremer (The Bremer Team) Real Estate AgentCloseDawn Bremer (The Bremer Team) Real Estate Agent at Keller Williams Success Currently accepting new clients
- Years of Experience 7
- Transactions 463
- Average Price Point $219k
- Single Family Homes 406
Step 2: Crunch the numbers
Top real estate agent and certified home stager Dawn Bremer specializes in investment properties and vacation homes in the Chicago area.
“The pro of being a landlord in this market is to be able to take that money, and if you’re smart with it, pay down your mortgage in a faster way so you can be debt-free better and have a much better equity in your home,” says Bremer.
Bremer’s watched rental prices increase by 15% to 20% from 2019 to 2021, and she says that now has never been a better time to be a landlord. Plus, according to a report from HouseCanary, the number of single-family rental properties rose further by midyear 2022 compared to a year prior, with rents rising nationally by 13.4% year-over-year.
But to be a successful landlord, it’s important to always keep an eye on your expenses.
When Dearing is taking clients to look at possible properties, they start with the mortgage. “If they’re going to finance it, with taxes and insurance, how does it pencil?” she asks. At a minimum, your rental income must cover these basic expenses, but she also advises diving deeper.
Questions to ask include:
- Is it rentable?
- What’s my likely vacancy rate?
- What can I get per square foot in the current market?
- Will rents continue to grow?
When making decisions, look at the overall rental market as well as a specific property.
Plan on setting aside money for maintenance and repairs. Unfortunately, tenants can do a lot of damage. Dearing tells this story: A friend with a rental property lost her year’s income when she had to repair $20,000 in damage that a tenant had done. Most landlords plan on saving 10% of the property’s value each year for maintenance, but unexpected major repairs can hurt.
Other unexpected costs landlords should factor into their overall expenses include yearly upkeep costs, insurance and taxes (which tend to run higher for rental properties), and any periods of vacancy. These can all tack on a pretty penny, especially if the home stays vacant for a while and you get stuck covering the mortgage and utilities.
Additionally, there could be homeowners association fees that come with the property, and you may want to account for the initial marketing expenses of listing the property, including lawn care and property maintenance services (especially if you don’t live full-time in the area where your rental is located).
Step 3: Talk to your insurance agent
Don’t forget to loop in your insurance agent before you rent all or part of your home. Even if you’re just renting a room, you’ll want higher liability coverage.
“If a tenant burns themselves on your stove, they’re more likely to sue you for that,” Dearing points out. Tell your insurance broker that you’re going to have tenants coming and going from your guest room, and ask what you need to do to protect yourself. They’ll know which riders you need to add to your home insurance, or where you need to increase your coverage.
On average, landlord insurance costs between 15% and 20% more than homeowners insurance. Although purchasing rental property insurance (another term for landlord insurance) isn’t a requirement, doing so has many benefits for both short-term and long-term rentals. It protects property owners from acquiring costly repairs, whether the damages are caused by the renter or a natural disaster. (Note: flood insurance is purchased separately.)
Most landlord insurance policies offer coverage of the following:
- Property damage: Coverage that helps pay for repairs to the property due to damage by fire, weather, or natural disasters. These policies may also cover the landlord’s personal property such as appliances, furniture, lawnmowers, and so on.
- Liability: This legally protects landowners from being held liable for any medical injuries the tenant sustains while on the property.
- Loss of rental income: This applies when a property is damaged due to a covered event and the property is not available to be rented until repairs are made. In this instance, the insurance agent would cover the loss of rental income.
Other optional riders you can add to landlord insurance policies include:
- Vandalism: If the property is damaged by a tenant or another person
- Building code coverage: If the city requires an upgrade due to a change in regulations, building code coverage insurance will help offset these costs
- Burglary: Coverage of any property damage caused by a break-in; broken windows, doors, and so on; this policy does not encompass stolen personal items
Another option Bremer suggests is for landlords to purchase a home warranty. They run around $700 a year and cover most items in the house — dishwashers, refrigerators, washers, dryers, and garage door openers.
Step 4: Determine how much you could earn
Janet Fields, co-founder, and CEO of Oak Trust Properties, a property management company in Charleston, South Carolina, says the fast rental market is similar to the sales market — little to no inventory, rising price points, and low days on the market.
“We have also seen more people working from home and looking for bigger spaces for an at-home office or a larger yard for at-home entertainment,” says Fields.
When it comes to pricing your rental, you want to cover your expenses — but you can’t charge an astronomical rate, or you’ll never find any renters. It’s important to do some market research on rent rates before buying a rental property or listing a room. What you can get for rent will determine your profitability.
Fields advises that landlords put their personal preferences aside and look at their rental properties as a tool that can help them reach their financial goals.
“I love decision filters, and have a few I try to keep in mind. Is this necessary? If I do X, what will happen? If I don’t do X, what will the probable outcome be? Is this a fear-based answer, or can I find data to help support the options set before me?”
At the end of the year, any spending decisions should result in a positive financial impact on return on investment. Taking this approach to financial decisions about your investment can be vital in avoiding mistakes that can cost significant dollars in the long run, advises Fields.
To help set a rental rate, keep tabs on your local market with an agent who knows the area. You can also do some research on your own by checking online for local apartment listings, using sites like Craigslist, Nextdoor, Facebook Marketplace, and more. Some property managers list rentals on the MLS, or you can look up local listings on Airbnb or short-term rental sites. Drive around the neighborhood and call the phone numbers, or jot down the numbers listed on “For Rent” signs to gather data.
Don’t forget to consider how the number of bedrooms for rent, amenities such as a backyard or off-street parking spot, and the unit’s condition impact a unit’s rentability.
You’ll also want to consider whether to hire outside parties to help you manage the property. Though these additional services can cut into your bottom line, they have many benefits and can provide landlords peace of mind.
Here are three professionals you may want to consider hiring.
Renting your property through a property management company can save you a lot of headaches. Their duties include screening tenants, handling repairs and routine maintenance, collecting rent payments, and more.
They are a great option for owners who prefer a hands-off approach, who live far away from the property, or for those who own multiple properties.
Being a landlord is essentially being a business owner, and like with any business, it’s important to make sure you and your business stay protected. Having an attorney on hand can help guide you through local property regulations of an area, assist with writing a lease, and help navigate difficult situations like landlord-tenant disputes or eviction.
When tax season rolls around, an accountant can assist in filing taxes for a rental property and find out if there are any tax deductions you qualify for. Along with many other services, they can also advise early on about any changes to the U.S. tax code that may result in financial gains or losses.
Step 5: Security deposits
All rental properties require a security deposit, which is like collateral to protect the property. The tenant pays the security deposit to the landlord when signing the lease, and the money is used to cover any damages that may occur during their stay. If the property is in the same condition upon move-out, the security deposit is refunded back to the tenant.
For landlords, security deposits are a way of protecting their investment and ensuring they don’t get stuck with a mile-long list of repairs (and an even bigger bill) if a tenant treats their property poorly. Depending on where the rental property is located, there may be laws determining how much a security deposit has to be, along with what repairs the money can be used toward. To keep expectations clear with a tenant from the get-go, lay out all the tenants’ financial responsibilities in the lease agreement.
As for tenants, besides treating the property with care, there are a few other precautions that can help win back that security deposit upon move-out.
Take pictures of the property at move-in, documenting any nicks, cracks, broken appliances, or other damage to the property, and report them to your landlord ASAP. This will inform them that the damages were there before you moved in.
Also, make sure you have a clear understanding of expectations come move-out time. Do you need to steam clean the carpets? Fill in any holes from hanging items on the wall?
Step 6: Property inspections
Before signing a lease, it’s common for landlords and renters to walk through a property and perform a move-in inspection together. This is a time where any concerns can be discussed, and both the landlord and renter can agree to the condition of the property at move-in. After the inspection checklist is completed, it’s added to the signed lease agreement for viewing at the time of move-out to determine if anything needs deducting from the security deposit.
Besides the initial move-in inspection, there are three other recommended inspections landlords should perform.
The routine inspection
Otherwise known as “check-in inspections,” these occur annually or a few times a year.
Here, landlords inspect the property to ensure things are still in tip-top shape. If there are any concerns with the way a tenant is treating a property, this is a good chance to discuss these issues to keep the property protected and keep a tenant on track to getting their security deposit back.
The drive-by inspection
This inspection doesn’t need to be orchestrated ahead of time, as it is much more casual. The landlord inspects the outside of the property to see if any issues need addressing, or if it looks like a routine inspection needs to be scheduled.
The move-out inspection
Very similar to the move-in inspection, both the landlord and tenant walk through the property together, comparing its condition against the move-in inspection report.
Step 7: The importance of curb appeal
“Curb appeal is great,” says Bremer. “I think that there are a lot of people who can do landscaping themselves. Even putting in a few potted plants can make a huge difference between whether a house looks rentable or not.”
Some ideas to spruce up your rental’s curb appeal include keeping the gutters clean, lawn cut, tree branches trimmed, and weeds pulled. Also, don’t forget about cleaning the outside of the house.
“Power washing is such an easy thing,” says Bremer. “I think people think, ‘well, I have to repaint,’ but you really don’t have to repaint. A lot of places have vinyl siding and stucco and whatnot, and you can get a power wash, and a power wash does wonders for your house.”
Bremer says a few more cost and time-effective ways to refresh a rental property include painting trim inside the house and around the garage, or adding a fresh coat of paint on the kitchen cabinets.
When considering renovations, Fields says it’s important to look at the parts of the property that leave the most visual impact to gain the highest return on investment: the front yard, main living area, and main suite.
Step 8: Building codes
Before renting out a property, it’s important to ensure the home is up-to-date with all the latest building codes from your local municipality.
Building codes apply to both the inside and the outside of a property. They are the minimum safety standards a house must comply with out of protection for the tenant’s health and safety.
Here’s a look at common building codes and what they measure.
This applies to the safety of the home’s structure.
The foundation, walls, doors, and windows of the home should be secure, the walls weatherproof, and there shouldn’t be any standing water within the home.
The heating, electrical, plumbing, gas, and other systems should be safely up and running, and in compliance with local codes. Additionally, the home should be equipped with smoke and carbon monoxide detectors.
It is the landlord’s responsibility to supply tenants with size-appropriate garbage and recycling containers.
The landlord is required by the Landlord-Tenant Act to supply the tenant with clean, running hot and cold water.
These codes are in place to protect tenants from unsafe homes with things like faulty electrical wiring, lead-based paints, mold, asbestos, and other unsafe living conditions. To check if your rental property is safe and up to code, schedule an appointment with a local home inspector.
Step 9: Find applicants and prepare your rental for viewing
Fields says that at Oak Trust Properties, to find the most qualified tenants, it’s first important to establish guidelines around acceptable income and credit scores.
“We have found there tends to be a ‘magic’ credit score number that backs up future payment history of a resident, especially when income and residential history is verified.”
Fields advises doing your prep work ahead of time to know what you’re looking for and setting requirements. This can save both you and potential applicants time and frustration. Other helpful tips Fields suggests include:
- Wait for the right applicant to present themselves
- Call landlord references
- Verify a potential tenant’s income (with an employer or recent bank statements/pay stubs)
- Avoid accepting tax statements as they may not represent a tenant’s current state of finances
“Unfortunately, fake bank statements and pay stubs exist, which means employment verifications are a key part of the application process,” warns Fields.
So, how do you know if it’s time to hire a property manager? Fields recommends landlords pull out their lease and read it cover to cover.
“If your eyes don’t glaze over, you might be able to self-manage well enough,” says Fields.
Fields mentions that it’s important for landlords to not only understand the lease, but also consider possibilities like: “What would I do if the resident doesn’t pay on time or at all?”
“Life happens, and it can negatively affect tenants, and when this occurs, the lease must be followed consistently and to the letter of the law. If you miss steps, you most likely will weaken your case if brought to court,” advises Fields.
If you don’t hire a property manager, you’ll have to find renters on your own. List your house on the MLS, online listing portals, classified websites, put out some yard signs — everywhere you went looking to do your research!
It also helps to take high-quality, sharp photographs to accompany listing your property, particularly if you’re trying to rent to the luxury vacation market.
If you’re doing the listing yourself, after you list, prepare to field phone calls and emails. You’ll need to set aside time in your schedule to answer messages through online portals, as well as to show the unit. Depending on your local rental market, finding a qualified applicant can take a matter of hours or weeks.
Next, you’ll want to prepare the home for viewing.
“I don’t believe in taking down your personal photos,” says Bremer. “I think you can reduce the photos, but a nice family photo is a great way for people to picture their family inside that home.”
Other easy, affordable ways to ready a home for viewing include deep-cleaning the house, putting out fresh flowers, staging the house with a few odds and ends (like wine bottles and glasses in the kitchen), adding a “Welcome” sign on the front porch, changing out light bulbs, and cleaning the windows.
If considering renting your past residential home, Fields advises that landlords “flip their perspectives” when looking at their home as an investment.
“It’s no longer your home; it’s your business — and it needs you to think critically and avoid emotional attachment to the property at all costs,” says Fields.
Not only will this save you time, money, and stress, but it will help you make smart, practical decisions about the home as an investment.
“If you can begin to make decisions based on cost, longevity, and marketability, you are heading in the right direction to owning a functioning, profitable passive income producer,” says Fields.
So, where do you find investment properties?
“Don’t shy away from cities outside your immediate area,” suggests Fields. “You do not need to be in the same town or make annual trips to your properties to be a successful investor.”
Researching up-and-coming cities showing potential long-term growth, a steady job market, and amenities like parks, favorable schools, food, and nearby entertainment are good places to start.
“Take into consideration cost of living, the average income, average home prices, and property taxes. If the overall area is favorable, you have likely found a great place to start looking for the perfect addition to your investment portfolio.”
Header Image Source: (Jason Pofahl / Unsplash)