What You Should Know About Renting Out Your Home
From local real estate laws to finding tenants, here’s what you need to know about renting out your home.
Renting out your home to long-term or short-term tenants is not as simple as putting up a For Rent sign.
“Rental real estate comes in all shapes and sizes, and a prospective buyer needs to be thoughtful about what they want and what goals they have,” says Daniel Close, a Redfin premier agent.
Homeowners considering becoming landlords need to consider various factors, including local laws in their area and the logistics of finding and maintaining happy tenants. Real estate experts offer tips on what to consider before taking the plunge.
What to Look for in a Rental Property
Renting out a home is a great way to make money, but the property you choose will affect your bottom line. Deciding whether to rent out your current home or purchase one that you’ll use as a rental property is a major decision.
“If the property you own can easily be rented, this can be a wonderful source of additional income,” says agent Steven Gottlieb of Coldwell Banker Warburg. “If this is a future priority while you are shopping for a house, it is important to understand the rental market of the area, as well as whether there are rules and regulations regarding renting.”
An ideal rental home will have different features for different buyers.
“Are they looking for a project? A turnkey property? Something that needs a lot of work? Something that they want to live in first and then eventually rent?” Close asks. “There are all sorts of opportunities, and it isn’t to say one type of rental real estate is better or worse than another, but instead it is all about the buyers thinking critically, understanding their priorities, and ensuring the home meets those standards.”
One way to think about choosing the right rental property is to consider the same factors you might take into account when buying your own home.
Redfin premier agent Heather Mahmood-Corley suggests prioritizing locations and properties that are close to universities and colleges, public transportation, shopping, restaurants, and major highways.
Whatever you choose, Kate Wollman-Mahan, an agent with Coldwell Banker Warburg, suggests finding a home in an area where you know tenants are searching for rental homes. In other words, don’t buy a home in an area you hope will be the next big neighborhood.
“Just be certain that it is an area that is desirable to rent right away so you can at least cover your costs while anticipating long-term appreciation,” she says. “Buyers have gotten into trouble by assuming that an up-and-coming area will appreciate and are surprised when it doesn’t happen—if it was completely predictable, everyone would do it!”
Next, you’ll want to price your home based on the area.
“When deciding on an appropriate asking price for rent, it is important to understand the comps, as well as the recent history of similar properties nearby,” Gottlieb says. “Be cognizant of your property’s strengths and shortcomings, as compared with what else is on the market, as well as different times of the year, as renter activity often fluctuates seasonally.”
Following the Rules
Unfortunately, deciding to rent out your home is just the first of many steps you’ll face in becoming a landlord. You’ll soon need to learn many rules and regulations to do everything by the book.
“Legal considerations vary widely based on municipality—in addition to any applicable state and county ordinances—so it is important an owner speaks to an expert, whether it is an attorney, a licensed property manager, or a licensed real estate broker, to understand the unique restrictions and requirements their city may have,” Close says.
Close works in Chicago where homeowners can lease without licenses, but the city requires more permitting for short-term vacation rentals, he explains. Chances are your area also has different rules for different types of rentals.
“Depending if it’s a short-term rental, some cities and HOAs may require a license but most do not,” Mahmood-Corley says. “Some HOAs have rental restrictions so during due diligence, you want to verify all that info.”
Mahmood-Corley also suggests consulting with professionals about other regulations. Real estate agents and property management companies can be good resources.
“Really understand your local and state tenant laws, meet with multiple property management companies that fit best for what you are looking for,” she adds. “All PMs are not the same.”
Once you decide to rent out your home, the next step is finding tenants. To start, keep in mind you’ll have to follow the cardinal rule of housing.
“Homeowners should be aware that they don’t have complete discretion in selecting their tenants,” Wollman-Mahan says. “Fair Housing laws are taken very seriously by municipalities and can have serious consequences for a landlord who discriminates. Make sure you understand what federal and local protected classes apply to you before turning away any potential tenants and even when publishing any property descriptions so that you don’t unwittingly violate the law.”
Close says one thing you should do immediately is check the credit of potential tenants to ensure they can pay for the rental.
“You can also ask for the contact information of their current or most recent landlord and speak to them about their time renting, payment history, and any complaints or issues that may have arisen,” Close said.
When you find the right tenant, get everything down in writing with a rental agreement.
“Both the landlord and tenant are taking a leap of faith when they enter a rental agreement,” Gottlieb says. “The landlord hopes the tenants will take good care of the property, and the tenant hopes that the landlord will fix things that go wrong and allow their quiet enjoyment of the property. A lease contract delineating insurance requirements, as well as house rules, is a great first step in making sure that everybody will hold up their side of the agreement.”
Overwhelmed by the idea of finding the right tenant? You can always ask for professional help through a property management company.
Being a Responsible Landlord
Making money shouldn’t be your only goal when renting out your home. You’ll also want to be a good landlord to ensure the arrangement is fair and goes according to plan. To that end, learn the rules of what is expected of you as a landlord and follow them closely.
“It’s just not about having a great cash flow of a property but if a tenant requests anything to be repaired or fixed that the landlord has the reserves to cover it,” Mahmood-Corley says. “From a dishwasher, to AC, electrical issues, pool, landscaping, termites.”
Mahmood-Corley recommends using a property management company for this reason. Using a third-party company also allows you to rent out your home while living in another area or another state. It’s especially helpful in finding tenants and evicting tenants who break the rules.
In general, Close says you’ll want to stay up to date on your responsibilities by finding trusted experts to consult with. Don’t get your information from other homeowners or neighbors, he warns.
“Do not take to Facebook to find answers to your questions,” he says. “I belong to many local community pages, and I’ve lost count of the number of confused homeowners I’ve seen post questions, only to be given advice that is either terrible, inaccurate to their local municipality, or both.”
Short-Term vs. Long-Term Rentals
The biggest differences in local regulations usually come down to long-term vs. short-term rentals.
Long-term tenants rent your home for a year or so at a time, depending on your lease agreement. Short-term rentals are more like vacation rentals, where you could have multiple visitors in a given week or month, meaning more coordination, cleaning, repairs, and noise for the neighbors.
“A lot of time short-term rentals are much more work than long-term rentals,” Mahmood-Corley says. “You have to know if the short-term rental is in your local area or will you own a short-term rental out of the area, and who will handle the turnover of the property. Also if you do a short-term rental, what will make yours stand out? A lot of markets are saturated with short-term rentals.”
In parts of the country where short-term rentals are common, such as Scottsdale, Arizona, Mahmood-Corley says there are unique regulations. One requires landlords to have an owner representative who can be at the property within an hour if the police are called or a neighbor complains.
“With long-term rentals, if you are in a high-demand area, you can have constant cash flow and multiple offers to lease; in some areas with a lot of tech or colleges, tenants will pay for a whole year upfront in cash,” Mahmood-Corley adds.
Short-term rentals must be furnished, which is another consideration, Close says.
“Short-term tenants can ultimately create high cash flow for the property, but there is also more risk since there is no guarantee many back-to-back short-term tenants will book a given property, and vacancy may eat into the bottom line,” he adds. “Short-term tenants also create more turnover, which leads to higher operational costs such as cleaning, flipping the unit so it is move-in-ready for the next party, and higher overall maintenance costs.”
Both arrangements have ups and downs, so it comes down to what you’re willing to deal with as a landlord.
“Long-term tenants are a safer financial bet in most cases, with leases that are usually at least one year, which locks in the expected rent with zero vacancy,” Close says. “However, long-term tenants often do not offer the same financial upside as short-term cash flow might, and if you have issues with your tenants, being locked into a long-term lease may not be the best thing.”