How to Rent your House – Ultimate Guide
Renting your house can bring in some handy income for you. Whether you are an investor who wants to generate passive income or a homeowner who finds the market to be way too depressed to sell the house, renting is a solution for a wide variety of situations.
Renting out a house can be quite simple if you follow the right practices. However, if not done correctly, renting can become a challenging experience. You may have heard stories of some landlords who had to spend a lot of money to evict a bad tenant.
Some horror stories involve tenants destroying property or creating trouble for the landlord in multiple shocking ways. Such stories show up in the media every now and then and they make house owners and real estate investors doubt if they should ever become a landlord.
However, the truth is that there are millions of landlords all over the world who are renting out their properties to great tenants. We have compiled the following guide to help you minimize hassles related to renting out properties and maximize your incomes.
The following step-by-step guide will handhold you through the process of renting out your house and getting the best results with the least amount of stress.
Part 1: Ask yourself some important questions
The first things you need to do before you even look for a tenant is to ask yourself a few questions. How you answer these questions will have a huge impact on the success that you may find renting out your property.
1) The first question is “Do I want to rent my house?”
This question is even more important than how to rent and what are the tricks and hacks in renting out a property. There are some benefits by renting out your property and they are worth mentioning.
Convert a liability into an asset:
A property which takes money out of your pocket is a liability. A property which puts money into your pocket every month is an asset. A property lying around by itself is not an asset. It only becomes one when you rent it out and it starts generating income for you.
Use rent to pay down your mortgage:
If you rent out your property, you can use the cash flows to pay down a mortgage on that property. If the mortgage repayments are less than the rental income, then you may even end up with some extra cash in your hands each month.
You can continue to be the owner of the property as the mortgage repayment happens and hopefully, the capital value of the property rises during that time period. That is a long-term way to build your wealth.
A first step towards becoming an investor:
Since you already own the property where your home is, you know it inside out. You know the neighborhood as well and you know what kind of tenants you can attract to such a location.
Hence, you rent out your home and treat that as a first step towards becoming a real estate investor. It is a relatively low-risk way to start out.
Buying a new property in a new location is not only capital intensive but also risky.
You have to do legal due diligence and also find out what the market looks like in that area. If there is a problem in either of those areas, then your investment can take a hit.
Once you build up cash flow from one property, you can then buy a second one and a third one. By the time you retire, the goal should be to have all your property mortgages paid off.
That way you will have a few income streams to support your retirement or to move into a bigger and better home. You can even sell your properties and get a lump sum corpus which can support your lifestyle.
You still retain your home:
By renting out your home, you still retain ownership and can move into it whenever you need to.
If you have had a change of job which requires relocation, then you can always rent it out and then move back in if your job situation brings you back to your home city in the future.
If you sell your house, then there is no way to come back to it in the future.
If you have decided that there is merit in renting out your house, the next question is…
2) “How many improvements should I make?”
After all, you will have to show your house at its best to motivate prospective tenants to rent the property from you.
In order to attract high-quality tenants, you will have to make sure that your house is clean and good looking. Adding small things like a garbage disposal or fittings which make life easy for a tenant can really help you close out a deal.
You can do plenty of things in terms of home improvement. But remember one thing; they all will cost you money. You do not want to go overboard and try to do every single thing to make your house look like a 5-star hotel.
One way you can guide yourself through the home improvement process is to think in terms of the cost-benefit ratio. For example, getting the carpet cleaned professionally can be somewhat expensive.
But not getting it cleaned properly can mean prolonged vacancy as no tenant wants to rent a place with shabby carpets. So, the cost, in this case, is too big to ignore and the money is worth spending.
Another example would be re-doing the painting or replacing the windows. It may not cost much, but the benefit in terms of aesthetics can go a long way. If you have to spend little to get disproportionate benefits, then it is a no brainer.
With home improvement, the idea is to gain a competitive advantage over other property owners who are also chasing the same prospective tenants that you are.
The more you minimize the need for tenants to call maintenance and repair folks, the further ahead you are in the queue of property owners wanting to rent.
Finally, remember that you are not touching up your house for yourself. You are doing it for the tenants who will be staying there. At times, your standards of living may be way higher than your target demographic profile.
If your target tenant profile does not demand the highest standards of living, then it may be alright to not go all out and opt for the most premium option in every renovation activity that you do. Avoid unnecessary costs where possible.
The third question you want to ask yourself is…
3) “How much rent can I quote?”
After you have decided to rent your house and spruced up your home, it is time to start thinking about prospective tenants.
When tenants show up or when you advertise your property, the most important piece of information that everyone will be looking for is the rent amount. While you may desire a particular amount every month, rents are determined by the market.
Rent is what someone would be willing to pay you for having the chance to stay in your property.
So, your goal is to determine what the maximum amount is that the market is willing to pay for your property. By doing some market research, you will be able to arrive at an amount known as the “fair market rent”.
You will have to go out and find out what others in the vicinity are charging for rent. You can even go online and look for rental information.
Remember to compare the rents on properties that are similar to yours in size, conditions, and location. You do not want to compare a luxury mansion to a 3 bedroom house. Apples-to-apples comparison is what you need.
Some useful ways in which you can conduct your market research are by reading local newspapers, visiting websites like Craigslist, Zillow, Trulia, and Padmapper, visiting properties by driving through neighborhoods and looking at “for rent” advertisements, speaking to property management companies, and networking with other landlords.
The more people you speak to, the better you will know how the industry functions and what kind of rents they charge. While speaking to others, clearly describe what your property is like and what the going rate would be in their opinion. Mention the size, location, condition, and any other important attributes of your property.
You can sometimes pose as a prospective tenant and ask landlords how much they are willing to rent your their property for. This method is useful if landlords aren’t forthcoming with sharing rental information with you as a property owner.
4) “Should I hire a property manager?”
Either you can be a hands-on landlord who takes care of maintenance, tenant requests, rental collection, admin work, etc. or you can hire someone to do all of the work for you. Obviously, hiring someone will cost you money. But is it worth the money spent?
If you are planning to rent out your property and be a passive investor, then hiring a property manager makes sense.
If you are going to be moving away and living in another city or far away from the property, then hiring a property manager also makes sense. It will save you a long driving trip for every little thing.
Generally, property managers charge a fee which is around 10% of the monthly rent. In addition, there is a one-time fee of 50% of the tenant’s first rent.
The functions of a property manager include advertising and marketing to attract new tenants, getting leases signed, collecting rent, maintaining a record of all the finances, scheduling and ensuring regular repair work, issuing legal notices for non-compliances, and even filing eviction suites.
If you do not hire a property manager, then be prepared to perform all of the above functions yourself. You have to think about whether you have the time, energy, and ability to perform all the key functions related to the property yourself. If you feel that you can do all of it and save significant money, then there may be no need to hire a property manager.
On the other hand, if you feel that it makes sense to pay a property manager who can do all the work and give you the peace of mind, then hire a manager by all means. This question about property manager is something you have to think about.
5) “How much security deposit should be charged to new tenants?”
A security deposit is a refundable amount that a tenant pays you so as to ensure that the terms of the lease are fulfilled by them. In case of a default, you can use the deposit to protect your interests.
The deposit is refundable and hence it should be kept in a separate account from where money can be returned when the tenant moves out. If any damages to the property need to be repaired, then such amounts may be deducted from the deposit.
Most states have laws governing the amount of deposit that a landlord can charge a tenant. Normally, one month’s rent is charged as a deposit amount. However, if the tenant is deemed to be high-risk or has a questionable background, then a higher deposit amount can be insisted upon by the landlord.
Part 2: Finding high-quality tenants
Every landlord wants to find the best tenant and rent out their property to them for as long as possible. The quality of tenants plays a very significant role in determining the success of a real estate investment.
A good tenant will pay rent on time, give you peace of mind, and not create any problems for you. A bad tenant can delay rent payments, cause you financial loss, cause damage to your property, and give you a lot of stress.
1) Advertise your property
Only when prospective tenants find out about your property will they be able to connect with you. You can use the following modes for advertising:
Print advertising may be considered old school in the age of digital, but the medium is time tested and it still works. Advertising in newspapers can be expensive. Hence, you must choose your newspaper wisely. Opt for local newspapers in areas where your target customer might be present.
When you draft your ad, shorten the text by using abbreviations that are commonly used in the real estate industry. Put all the necessary information on the ad but do not put down the address of your property. Instead, list your contact number and let people talk to you first.
You probably know this option, but Craigslist is the number one website to list stuff. Whether you want to sell a car, a pack of cards, or rent out your home, craigslist is the place to post. The good thing about this website is that listing does not cost money. You can put up an ad for free.
The same rules apply to a craigslist ad as a newspaper ad. Do not list the address of the property, mention all the important info about your house, and list your contact number so that people can get in touch with you.
You will have a bit more freedom with the amount of text that you can include in your craigslist ad as the limits will be a lot higher than what newspaper ads allow.
Real estate websites:
The growth of online has resulted in websites like Trulia, Zillow, and Padmapper. Make sure you list your property on those websites as well.
Physical yard signboards:
Going back from the digital to old school, yard signs are a very effective way of advertising your property. Anyone passing by will see the “For Rent” sign and interested parties may contact you.
The one downside with this method is the fact that you are letting everyone know that the house might be vacant. It may attract thieves and burglars. But if you plan to live in the property till a tenant is found, then that should not be an issue.
Once you have your phone ringing and interested people calling you about renting out your house, the next step is to…
2) Compile a list of all interested parties and screen them
Since you want to find the best tenants who can give you stability and peace-of-mind, you want to select the best people based on some criteria.
In fact, you want to screen your tenants as you speak to them on the phone. Only the ones that seem genuine and real are the ones who get to see your property.
Why would you want to spend time and effort on someone who has a criminal background or who is someone you would never rent to?
The most common criteria for the initial screening would be:
- Monthly income would be a minimum of three times the rent you plan to charge.
- A clean credit report with a good credit history.
- Proof of employment. Without salary, how will the tenant pay you the rent?
- Any references for timely rent payment and good housekeeping/property maintenance from previous landlords.
- The number of occupants that plan to live in the house. Many states have a two-per-bedroom rule.
You can come up with more criterions to suit your own needs but you probably get the idea. Just make sure you do not discriminate against anyone on the basis of race, sex, nationality, religion, or anything that would lead to a lawsuit against you.
You can discuss all of the above points with any prospective tenant who calls you. If they pass your screening test, then you can consider showing them the house. If they don’t, then you can simply call off the deal.
Whenever you ask these questions, try not to appear like you are interrogating the tenant. Also, try not to appear discriminatory by avoiding the things mentioned above which can be considered as discriminatory.
3) Ask Interested Tenants to Drive By the Property First
You have screened your prospective tenants, spoken to them over the phone, and are now ready to show them the property. However, not everyone who agreed to see the house will actually show up.
So, what you want to do is ask the interested folks to go and drive by the property. See it from the outside and know the neighborhood. Then, if they are interested to see the house from the inside, a suitable time can be scheduled to do so.
This extra step will filter out all the duds who won’t even show up or who won’t like the location once they drive to the property. You will find it amazing that about 50% of interested parties who speak positively on the phone never actually show up at the property.
Another thing that you can do is set up a showing time. For example, you can tell all prospective tenants that you will be at the property on Friday evening from 5 pm to 6 pm. Anyone who wants to see the house from the inside can come during that time.
This sort of batch scheduling brings all the tenants together and creates a sense of competition and scarcity, which pushes the really interested ones to make a quicker decision. When people visit your property, you can inform them about your application procedure so that they become aware of what you expect from them.
Part 3: The Application Process
When you have qualified and genuinely interested people visiting your property, you want to hand them out an application. You want to hand out the application to everyone who shows up, even the people you do not like or think are qualified. That way, no one can accuse you of discrimination.
Most people will take the application papers and fill them out at a later time. But, you want to try to encourage them to fill out the application at the property itself. If the prospective tenant fills out the application later, then he/she has to mail it to you, and the whole thing just takes up a lot more time.
In the rental application form, you should ask the prospective tenant to provide you with the following information:
- Full name of all the people who will stay at your property
- Date of birth of the main applicants
- Social security number of the primary applicant
- Contact number (ask for two)
- Current address
- Previous address over the past 5 years
- Current Employer (including contact info, the hiring date, and salary details)
- Past Employer (including contact info, the hiring date, and salary details)
- Emergency contact person details
- Release of information statement/waiver
- Signature of all tenants who plan to stay at the property
You should also charge an application fee. It does not have to be some exorbitant amount. Rather, it should be just enough money to cover your time and effort in conducting the background checks. Insist on this application fee and make it non-negotiable.
You may research what the industry in general charges in terms of an application fee. Normally, rates around $30 are commonplace. Make sure that there are no state laws prohibiting you from charging beyond a certain amount as application fee. If the laws are present, comply with them. Ultimately, do not overcharge applicants and be honest.
Evaluate the applications
The next step after receiving the applications is to evaluate them. Remember the criteria which we listed above in evaluating a tenant? We will use all of those once again. We repeat this process because often times, people say things to satisfy us over the phone but when the time comes to put things in writing, the genuine facts surface.
People will fill out information which does not meet your requirements and hope that you overlook it. You should be particularly focused on the requirement of gross income being three times the rental payment.
You should also keep an eye on employment status. You do not want unemployed tenants. They might not pay you rent after a couple of months! Also, make sure that the number of tenants does not exceed more than two people per bedroom. If that is not the case, then the applicant can be rejected right away.
If something on the application does not meet your criteria, then call the applicant and verify if that is indeed the case. Sometimes, people mistakenly write wrong information on the form. Reject the applicant only after you have verified the facts.
Run background checks and credit checks
Now that you have thoroughly vetted your applicants and selected the ones that meet your criteria of n acceptable tenant, the next step is to run a background and credit check on that applicant.
Background checks may be more desirable than credit checks. If your property is located in a low-income area, then chances are that most of the applicants may not have the best credit scores.
It is much better to judge an applicant on the basis of whether they have a job or not or whether they have a criminal background. Rental history can also give you an idea of how reliable a tenant the applicant is.
Some things that you want to watch out for when performing a background check are:
- Cases of felony
- Eviction suites filed in the past
- Any actual evictions that were carried out
- Any legal judgments against the applicant
- Any other criminal history
- Any other financial black marks
Sometimes, you might struggle to find tenants. In such cases, you may loosen your standards a little bit, but you have to be non-negotiable on criminal records. You might set the criteria for a fixed duration.
For e.g. the applicant should have no criminal record in the last 7 years rather than no criminal record ever. But, even with such loosening, you are taking some risk. So, make some criteria flexible and some others non-negotiable.
Evaluate employment and tenancy history
Remember that you had a section in your application form for release of information? That part is going to be useful in checking employment history and past tenancy history.
You basically check the employment and tenancy histories of an applicant to make sure that they are being honest with you and that they do not have a questionable background.
As you had asked the tenants to fill out past employer’s name, contact info, and other details, you need to call each and every one of those employers and speak to human resources to verify if the applicant has indeed worked with that employer.
When you call a company, the human resources there may ask you to fax over your release information statement. If such a request is made, send over the page with the statement and the applicant’s signature authorizing you to seek such information.
There are three things you want to find out when you call an employer: The income level, the duration of employment, and the nature of employment (temporary or permanent). You want to do the same thing for the current job as well.
Next, you should call all past landlords that are listed on the application form.
You want to find out if the applicant paid rent on time, how much rent did they pay, how long they rented, whether they gave a proper notice before moving out, whether they were compliant with all the terms of the tenancy agreement, and whether they received back their security deposit.
Sometimes, applicants might leave out a certain tenancy from the application form. When you perform a credit check, compare if the addresses on the credit report match the tenancy history that the applicant provides you with.
Alternatively, check for continuity in the applicant’s tenancy history. Any gaps in the dates might mean that the applicant may be “conveniently forgetting” one or two tenancies which might have been bad experiences.
Accepting or rejecting an applicant
Now that you have performed all the checks and have thoroughly evaluated the applicants, it is time to decide who passes your test and who fails. Applicants who do not meet your requirements can be rejected without any hesitation.
When rejecting an applicant, send them your decision in writing. List the reasons why they did not qualify and how they do not meet your minimum requirements. This procedure is important to avoid any claims of discrimination by the applicant against the landlord. Keep a record of any correspondence that you send to an applicant.
If two applicants qualify, then pick the one who came first. Again, this way you are not accused of discrimination since both the applicants are good enough to be tenants but only one of them can.
You can inform a qualified applicant verbally that they meet your requirements and that you would be willing to move ahead with the deal. Verbal correspondence is advisable because you still don’t know if that applicant will come to you or move on to another property that he/she may have seen.
Keep in mind that just by informing a successful applicant verbally, you are not going to wait for them for weeks. You need to give them a deadline by which they need to sign a lease agreement. To protect yourself, you should ask for a non-refundable security deposit in order to hold your property vacant for them. You can ask them to pay the deposit within 24 to 48 hours of them qualifying.
The security deposit can turn into a refundable one if the applicant does sign the lease agreement. Otherwise, it gets forfeited since you cannot hold the property vacant forever. You have to move on to other applicants if your first pick does not respond.
When the security deposit is paid, make sure you sign a deposit agreement which clearly spells out what the deposit if for and by what date the applicant needs to sign the lease agreement. Also clearly mention that if the lease agreement is not signed by the date listed, then the money is forfeited.
Make two copies of the deposit agreement, one for you and one for the applicant.
Part 4: Drafting the lease agreement
You can work with your lawyer to draft a rental agreement. For reference, you can check websites like EZLandlordForms.com and USLegalForms.com for state-wise examples of a lease agreement. Each state has different requirements and details matter.
Hence, do not cut corners or try to save money by getting a less-than-optimal rental agreement. Spend money if you have to, but draft a high-quality agreement which will protect your rights and those of the tenant as well.
Some points that you should consider when drafting the lease agreement are:
Duration of lease:
You can go for a month-to-month lease or a yearly lease. Some landlords even do 6-month leases or 9-month leases.
Long and short leases have their pros and cons. With a long lease, you get guaranteed and stable income. With a short lease, you can end the tenancy if the tenant turns out to be different from what you expected.
Timing of the lease:
You should time the lease end such that it does not end during the holiday season. November and December are difficult months to fill vacancies. Hence, the duration of the lease should be such that you can find a new tenant if the existing one does not renew.
Make sure the lease has the name of the tenants, the address of your property, the rent amount, the lease term, the security deposit amount, amounts of late fees and other fees, a move-in condition report, and any other terms and conditions like pet policy, smoking policy, etc.
Additional documents as applicable:
Some states have laws about the lease agreement having additional documents attached if the property is old and was built prior to a certain year. Research your state laws and add any documents if necessary.
Part Five: Signing the lease agreement
The lease agreement should be signed at the property itself. Meeting at a coffee shop or a Starbucks might sound enticing but that is a terrible location for signing your lease agreement.
You should preferably meet at the property a day or two before the move-in or on the move-in date and first sign the lease agreement. Walk your new tenant through the lease agreement. That way, they know what they are signing and there is no case of “I was not aware” later on.
It is a good idea to have initials on each page and sign in full wherever needed. In fact, you can mark all the places where a full signature is needed. Tenants can forget what they signed and there should be no later on.
Part 6: Collecting the first rent
You should have already received your security deposit before signing the lease agreement. Upon signing, collect the full first month’s rent. The first month’s rent should be preferably collected in the form of a cashier’s check or money order.
Personal checks are generally not preferable as they might bounce. Then you have to spend effort getting the tenant evicted and you haven’t received any rent money either.
For future rent payments, send the rent bill to your tenant about a week before the due date. Try and set up an online payment system so that you do not have to wait for the mail or visit the tenant in-person every time you expect the rent to come in.
Part 7: Move-in condition report
When the tenant moves in, have them fill out a property move-in condition form. Let them walk through the house and document any imperfections or faults. If there is a hole in the wall, it needs to be documented.
Pictures should also be taken by the landlord before handing over the keys. These steps are important because there should be no dispute about any property damage later on. Both you and the tenant should be on the same page as far as the condition of the property is concerned.
When the tenant moves out, you will check the premises for any damages and deduct the repairing costs from the security deposit. As a landlord, you cannot charge the tenant for any pre-existing conditions that were there before the tenant first moved in. The move-in condition form captures all of this.
Part Eight: Handing over the keys
The last step is to hand over the keys to the property to the tenant. This step should only be done after the rent has been received and the lease agreement has been signed.
While handing over the keys, explain the tenant the rules and procedures about requesting maintenance/repair services and any other terms and conditions that are important.
Train and condition your tenants to follow all the rules and you will hopefully have a hassle-free experience for a long time to come.
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