How to Rent your House
Are you looking forward to phone calls at 3am, consistently late rent, drug dealing tenants, and costly evictions? Of course not. No one wants to be a landlord with those problems. So why do so many landlords find themselves in this kind of trouble? The answer, we believe, is that most of these landlords never learned the correct way to rent out their houses from the beginning. Many look at the process of filling a vacancy like the “pregame” show – but in reality, getting your house rented IS the game. If you learn how to rent your house intelligently from the beginning, you can avoid years of headache later.
Whatever the reason is you’ve decided to rent your house out, the simple fact is: you want to do it right. Perhaps you’ve tried selling but the market is too soft. Perhaps you’ve been temporarily transferred out of the area for work. Perhaps you owe more than your house is worth and can’t sell. Perhaps you’ve realized the incredible wealth building opportunities that renting a home out can provide for your financial future.
Chances are – you’ve heard horror stories from accidental landlords about costly evictions, destroyed properties, professional tenants from hell, and all the reasons why you should not rent your house out. While these stories receive the most press and attention – the fact is, every day millions of landlords are renting out houses to great families across the world. While all hassles can’t be eliminated, by following the tips, tricks, and techniques outlined in this guide, you will be able to minimize those hassles and turn your house into a profitable venture.
Whatever your reasons are for learning how to rent your house out, this definitive guide is going to walk you through, step by step, how to rent your house with the least amount of stress and the best results.
Questions To Ask Yourself First
Before handing the keys to your house over to a complete stranger for care, there are decisions you need to make. In fact, the decisions you make now, before even searching for a tenant, will make the biggest impact on the success of your rental.
The following are some questions to answer before you rent out your house:
Why Rent Your House?
Perhaps you are on the line, trying to decide whether or not renting your house is a good idea. Therefore, the first question you need to ask yourself before “how to rent my house out” is “should I rent my house out?” If you’re choosing between renting your house vs. selling it, I’d like to make the case why renting out your house is the best decision. After all, the benefits of renting out a house are numerous.
How to Rent Your House
Your primary home, while a necessity in life, is not typically an asset or investment. An asset is something that makes you money, where a liability is something that costs you money each month. By renting out your home you are able to transform your liability into an asset.
By renting your house, you are able to continue to hold onto your house while the tenant’s monthly rent pays down your mortgage each month. During this time, property values (hopefully) will climb and build wealth for your future. You may also begin to experience additional monthly cashflow if you can rent your house out for more than what your monthly expenses are, which should be the goal for all potential landlords.
Renting your house out may also help start your investment career with no additional costs – since you already own the home. This could be a first step in a tried-and-true method for building wealth. Many real estate investors begin this way – by renting out their homes as they upgrade to bigger or better properties throughout their life. This may also help fund your retirement, as you may end up owning multiple properties “free and clear” by the time you are ready to retire, providing monthly income or a lump sum if you sell.
Finally, by renting out your house you retain the possibility of returning to that home. This is especially helpful if you’ve been forced to move quickly because of temporary job relocation.
What Condition Do You Want You’re House In?
There is no end to the amount of improving you can do to your house before renting it out. The problem becomes learning when to stop. When is good enough, good enough?
A house should be clean, empty (unless you are offering it “furnished” which is uncommon) and free from any major repairs at the time the tenant moves in. Be sure everything is up to code, to the best of your knowledge. Have a professional carpet cleaner clean the carpets before showing the property.
Remember, the home does not need to be as fancy as you would want it to be if you were living there. Look around at other rentals in your area (via driving around or pictures online) and try to see what the typical quality is. Tenants will generally never take as good of care of your house as you do – so don’t spend too much time or money making unnecessary upgrades that will only be ignored or broken.
Should You Use a Property Manager
This question is highly important and will affect the way you move forward reading this guide. Will you manage the property yourself or hire a property manager to look after it? Generally, a property manager will charge approximately 10% of the monthly rent plus 50% of the first month’s rent when a new tenant moves in. A property manager will typically:
Advertise for new tenants
Collect the rent
Keep track of finances
Schedule maintenance repairs
Issue legal notices
File evictions (you pay lawyer fees)
If you decide to manage the property yourself, instead, these are all duties you will need to do (or hire out individually) yourself. The decision of whether to manage yourself or hire a property manager cannot be made by anyone other than you. If you have the time, abilities, and energy to manage yourself – you can save a good deal of money by doing so. However, if you try to manage without the ability – it could end up costing you much more than what a property manager might charge.
How Much Can You Rent your House For?
In a theoretical sense, the value of anything is not based on what the seller wants – but what the market is willing to pay. In the world of rentals – this means that you do not necessarily set the rental amount – the market does. Your job is to discover what the market will allow for your house and attempt to get that amount, known as “Fair Market Rent.”
Luckily, discovering what the monthly rent will bear for your house is not difficult; the best way to determine how much your house will rent for is to simply do market research. In business, market research means to get out there and find out what others in your industry are charging; learning how much to charge for rent is no different. Your house will generally rent for about the same amount as other properties are renting for that are of similar location, size, and condition. To determine this and do your market research, there are many places you can look, such as:
PadMapper.com & other online rent services
Driving Around, looking for “For Rent” signs
Calling Property Management Companies
Asking other local landlords
For each of these sources, call and speak to the landlord and ask questions (posing as a tenant.) This will help you determine how similar the target property is to your own. You will quickly be able to determine what the “going rate” is for your style house. For example, if you are trying to rent a three bedroom, two bath home in good condition, it will probably rent for about the same amount as other three bedroom, two bath homes nearby.
For a more on figuring out rents, see The Ultimate Guide to Fair Market Rents.
How Much Should You Charge for a Security Deposit?
A security deposit is a sum of money paid by a tenant to ensure they fulfill the terms of their lease. Remember though – this is a deposit, not a fee. This money should be held in separate bank account and returned to the tenant when the tenant moves out, less any damages that need to be repaired.
The amount you charge is largely up to you, though many states restrict the amount you can charge, so make sure to check to find any local limitations. I typically charge the equivalent of one-month’s rent for a security deposit, though I may charge more than that if the tenant has anything in their background that worries me (which we’ll get to in a short while.)
How to Rent Your House to the Best Tenants
The most important decision you make that will determining the success or failure of your rental is the person you put in. A bad tenant can potentially cause years of stress, headache, and financial loss – while a great tenant can provide years of security, peace, and tranquility. Don’t underestimate the important of renting to only the best tenants. You are reading this guide because you want to learn how to rent your house. Finding the best tenants is how to make that rental enjoyable.
Advertising for Tenants
When it comes to attracting tenants to rent your house, you will want to reach the most potential tenants as possible so you have the largest pool to choose from. The following are three easy ways to attract tenants.
Advertising for Tenants
Newspaper: Though a quickly fading and expensive marketing technique, your town’s local newspaper may be a great way to attract tenants. Learn the common abbreviations (see our comprehensive list of real estate abbreviations) in order to minimize the length of your ad, but be sure to include all the important information. I recommend NOT putting the address in the newspaper, so people are forced to call (no text or email either) and talk with you first.
Craigslist.org: Craigslist.org is one of the internet’s largest websites and best places to find tenants. Perhaps the best part? Craigslist is free (unless you are a Property Manager in New York City.) Don’t list the address here either. You can also place your ad in other online rental submission sites, like Trulia.com, Zillow.com, or PadMapper.com.
Yard Signs: One of the oldest, but most successful ways to market your rental is with a simple “For Rent” sign in the yard. The biggest drawback to a sign, however, is instant notification of a vacant house to anyone driving by.
Pre-Screening The Tenants
Calls from Tenant When you receive a phone call from a prospective tenant, always pre-screen ahead of time. This means to try and qualify the tenant over the phone before spending time going over to the house to show them. The easiest way to do this is by setting rental criteria and explaining that criteria over the phone. My criteria looks like this:
The gross monthly income must equal approximately three times or more the monthly rent
Applicants must have a favorable credit history.
Applicants must be employed and be able to furnish acceptable proof of the required income.
Applicants musth have good references concerning rental payment, housekeeping, and property maintenance from all previous Landlords.
We limit the number of occupants to two per bedroom (per State law)
You can read this list over the phone to the prospective tenant and ask them if they meet these qualifications. If they don’t – don’t rent to them. These qualifications are designed to take the emotion out of renting to someone, so stick with them. By allowing tenants to move in who don’t meet your minimum qualifications, you are only setting yourself up for failure later on.
A note on discrimination: Be sure to not discriminate when you are advertising and screening for tenants. Federal law defines seven protected classes of people that you cannot discriminate against, which includes a person’s race, skin color, sex, national origin, religion, disability or familial status. You cannot even ask questions about these terms without appearing discriminatory – so don’t do it.
Showing the Property to the Tenants
Showing units can be a pain because 50% of the time, tenants will not show up. To combat this, I use one of two techniques:
We give them the address to drive by first and tell them to call me back if they are interested in seeing the inside. This eliminates the people who are disinterested because of the location.
We try to “batch” all the showings to one time. I will tell all the callers that I will be at the house from “5:00 to 5:30 on Friday afternoon” and if they want to see it – show up then. Having multiple tenants look at a property at the same time can be a little bit awkward, but it creates a sense of competition and scarcity which allows for more applications.
It’s also a good idea to include the criteria and application process with the application. This makes it easy for the prospective tenant to understand how the process is going to work and gives you yet another way to pre-screen for duds.
The Application Process
Always give an application to every single person who is interested, even if you are not interested in them (this is another measure to ensure you will not be charged with discrimination.) Encourage them to fill it out there, but you will probably find that the applicant will usually want to fill it out later and drop it off or mail it to you. I try to discourage this, as it adds a lot of time, but sometimes the tenant will want to think about it, so have a plan in place to deal with this.
The Rental Application
An ideal rental application should have space for the tenant to fill in the following items for all adult applicants, at minimum:
Names of all potential renters
Date of Birth
Social Security Number
Phone Number and Cell Phone
Alternate Phone Number
Previous Addresses (last 5 years)
Current Employer (name, hire date, income, contact info)
Past Employer (name, hire date, income, contact info)
Emergency Contact Information
Release of Information Statement
Signature for All Tenants
The Application Fee
Always – I repeat- always take an application fee with the application. Don’t even bother processing any part of the application unless the tenant has paid the “application fee.” This amount can be whatever you’d like (and whatever the market will bear) but I recommend finding out what the local property management companies are charging and charge a similar amount. Currently, I charge $35 for the first adult and $20 each adult after this. Be sure to check with your State laws and make sure there are no laws dictating how much you can charge.
The application fee covers the cost of the background check, but it doesn’t have to be equal to that amount (you can get paid for the hassel of needing to check their background.) However, I recommend not being dishonest and don’t take advantage of tenants with this fee. The application fee should be reasonable.
When you receive back an application from a tenant with the application fee, look over the document and look for the important things before bothering with a background check. The obvious things are those you read to the tenant over the phone, which included:
The gross monthly income must equal approximately three times or more the monthly rent
Applicants must be employed
Applicants musth have good references concerning rental payment, housekeeping, and property maintenance from all previous Landlords.
The number of occupants is to two per bedroom or less
If you can quickly see that the rent for the house is $1000 per month and they only make $1800 per month in gross income, they clearly did not pass the income qualification. Sometimes this is due to a writing error or income they forgot to include, so be sure to clarify with them before rejecting the application. Chances are, however, that the tenant simply doesn’t qualify and was hoping you wouldn’t notice. If you did a thorough job of explaining the criteria over the phone with the applicant and they still applied and didn’t qualify – it’s up to you if you want to return the application fee. However – don’t bother running the background/credit check if they are disqualified due to one of the above criteria. We’ll cover more on how to disqualify someone in just a moment.
Background and Credit Checks
Screening Tenants If the tenant’s income is high enough and you feel confident moving forward, it’s time to dig deeper.
There are many different sources you can use to run a background or credit check on a tenant, but I recommend using SmartMove. SmartMove is offered as a service through TransUnion and is great because all you need is your tenants email address. SmartMove will email your prospective tenant and that individual will enter their information online; you’ll receive the results of the background check in hours and can make your decision.
Deciding what kind of “background” or “credit history” you’ll allow is largely dependent on your location and the strength of your market. If you have a lot of applicants to choose from, you can be more picky and only accept the highest qualified tenant. However, if you are struggling to get applicants, you may need to loosen your standards slightly in order to move someone in.
For us, we look at the rental history and income with a lot higher regard than I do credit – because I live in a lower income area where the vast majority of prospective tenants have terrible credit. Your area might be different, so if possible, talk with other landlords in your area.
The things I look closely at on the background and credit checks are:
Prior evictions filed
Prior evictions carried out
Other criminal or bad financial history
Make it a policy to never rent to a person with an eviction on their record or recent felony (within 7 years.) Yes, people do change – but I don’t find the risk worth taking. I’ll leave that risk to other landlords.
Verifying Income and Rental History
People often lie, especially when they want to get into a new rental and cannot qualify. As such, it is vitally important that you verify everything that the tenant writes on their application. As discussed earlier, your application should include a “release of information” signature from your prospective tenant to allow you to properly check up on their claims.
Begin with their job. The application should include the name and phone number of their current employer, so call and speak with the manager, owner, or human resource manager. Many times you will be required to fax over the release of information signature. The important questions to ask are:
How much do they currently make?
How long have they worked there?
Is this job considered temporary?
Next, call their previous landlords. Don’t simply call their current landlord – because many landlords will lie or embellish the truth in an effort to get rid of bad tenants. Instead, call all the previous landlords for at least the previous five years. Be sure to check their background check and credit check to see if any other addresses appear that might indicate they conveniently “forgot” to include a landlord that they rented from. When talking with previous Landlords, you might want to consider asking the following questions:
How long did the tenant rent from you?
What was their monthly rent?
Did the tenant give proper notice when vacating?
Did the tenant receive back their security deposit?
Would you rent to this tenant again?
Accepting or Denying an Applicant
After receiving their background check and verifying the information listed on their application is correct, you will have a good idea of whether or not the tenant is worthy of your rental property. Sometimes, you will receive applications from multiple parties who both qualify. To avoid discrimination complaints, always process applications on a first-come, first-serve basis – processing the application until you discover they do not qualify. If someone doesn’t qualify, move on to the next.
When you deny an applicant, it is important that you clearly document your reasons for why you are denying them to avoid discrimination complaints. Always inform the tenant with written notice. I always send a letter to the tenant stating that they did not meet the minimum requirements for tenancy for “such and such” reason. Be sure to keep a copy of all records pertaining to the prospective tenant so you can back up your reasons for denying a tenant.
When you find an applicant that meets all your requirements, you can verbally let them know that they are approved. However – your job is not yet finished. Many times a good applicant will be approved but still find another place to rent, leaving you wondering what happened to that applicant. Therefore, it is important to require a deposit to hold the vacant property. This deposit is non-refundable and should be due within 24 hours of being accepted. Simply let the approved applicant know that you cannot hold the property indefinitely so if they want to guarantee their position they will need to pay the deposit within 24 hours.
(Some landlords actually require that the deposit-to-hold be paid when the application is filled out and the landlord simply returns the deposit if the tenant doesn’t qualify. While I don’t personally use this technique, it may work for your location if there are a lot of qualified applicants trying to rent your house.)
This deposit will turn into their security deposit (which we will get to later) so it’s not an unexpected cost for the applicant. When you collect this deposit, be sure to sign two copies of a “deposit to hold agreement” that states what the deposit it for and what the terms are. Essentially, this document will state:
The applicant has until “such and such” date to sign a lease agreement.
If not signed by that date, the deposit will be forfeited to the landlord.
Both you and the prospective will receive a copy of this agreement, which will serve as a receipt for the applicant. I try to schedule the lease signing for as soon as possible, to minimize the amount of time the property is left vacant and costing money.
The Rental Lease Agreement
Lease Agreement In order to sign a rental lease with your tenants, you will need to have – of course – a rental lease. You can get a state-specific lease agreement from a number of sources, such as EZLandlordForms.com, USLegalForms.com, a local paper supply company like Staples or Office Depot, or your attorney. You can also download a free lease online in many placesbut be sure to run the lease past your attorney for review. Each state has different rules and laws that govern the landlord-tenant policies in that state, so chances are a lease found for free online may not be legally binding for you. Don’t skimp on the quality of a lease.
“Having a strong, loophole-free lease agreement is probably the most important aspect of maintaining good, long-term tenants who treat your property the way it deserves to the be treated (or pay the price if they don’t).” – J Scott
Before purchasing your lease agreement, however, you need to decide on whether you want a month-to-month rental agreement, a one-year lease, or something in between. Most landlords choose a one year lease in an effort keep their tenants in the home as long as possible and minimize turnover. Others choose to offer only month-to-month leases, to hold on to the ability to quickly and easily remove a tenant if things don’t work out right. Still others choose a six or nine month lease, which is often helpful for ensuring a lease doesn’t end during the holiday months of November through January, when vacancies are the most difficult to fill. This comes down to a personal choice that you can make, but with whatever lease term you chose, be sure to buy the correct lease agreement form.
While lease agreements generally vary in length and content, most lease agreements contain the following information:
Names of tenants
Address of the rental property
Lease term Length
Security deposit amount
Late fee description
The move-in condition report
Provisions for or against pets, utilities, smoking, and more
You may also need to provide certain State and Federal documents with your lease, depending on when your home was built and your State laws. The United States EPA requires that you give your tenant a pamphlet called “Protecting Your Family from Lead in the Home” if your home was built prior to 1978. Check with your local attorney for state specific forms you may be required to provide.
How to Sign a Lease Agreement
Schedule a time for the tenant to meet with you at the property. Don’t sign at a coffee shop or via the mail/fax, but actually meet at the property on the day they will be moving in. Some find it helpful to go through the lease ahead of time and mark all the signature or initial areas with post-it notes or a highlighter so nothing will be forgotten or missed.
When you meet with the tenant, walk them through each provision in the lease – step by step – and sign (with a blue pen) as you go. This may be time-consuming but will help protect you when the tenant says, “Well, I didn’t know that” months down the road. You may consider having the tenant initial next to important items as well, such as a “no pet” policy. It’s easy for a tenant to later forget details, so having an initial is helpful in jogging their memory later on.
Accepting the Rent
During the lease signing, when you get to the part that says how much the monthly rent is – this is a good time to get the money for the first month’s rent. You should have already received their security deposit (in the form of a “deposit to hold” when they were approved) so typically this is when you will collect their first month’s rent.
One final note on the rent: Only accept rent in certified funds, such as a money order or a cashier’s check. Don’t take cash and don’t accept a personal check – especially for the first month’s rent. You do not want to move a tenant in and find out weeks later that the check was bad, forcing you to evict. This is a wise policy to have all around in your relationship with your tenants: certified funds only.
The Move-in Condition Report
By this time, the rent and security deposit has been paid and lease has been signed. It’s now important to do one final thing before handing over the keys: the move-in condition report. The move-in condition report is simply a paper that the tenant will sign those documents, in detail, the condition of the property. Allow the tenant to take some time walking through the property and inspecting it – letting them take notes of the condition of each room. If there is a hole in a door – document it. If there is a light switch that doesn’t work – document it. If there is a stain on the carpet – document it.
The move-in condition report is designed to protect both your interests and the interests of the tenant when it comes time for the tenant to move out. As much as you might think you’ll remember every detail of the home – you won’t. By documenting everything and having the tenant sign-off on that documentation, the tenant cannot come back to you next year and say “oh – the giant hole in that wall was already there.”
For the same reason, I also recommend taking photos (or a video) of the property before handing over the keys. This will be further evidence in the future when the tenant moves out. In many States, a landlord cannot deduct any charges from the security deposit if a move-in condition report was not filled out when the tenant moved in.
Handing over the Keys
When the tenant has filled out the entire lease agreement, both parties have signed it, the move-in condition report has been signed, and the rent has been paid – you can now hand over the keys to the tenant to allow them possession. Although the tenant may ask – never let a tenant move in things before signing the lease and paying the rent. The consequences for failing to do this could be disastrous.
Be sure that you have made it clear to the tenant the rules you expect, as well as the procedure for paying rent, requesting maintenance repairs, and other details about your house. By training your tenants, you set the ground rules ahead of time and ensure they are aware that you’re not the kind of landlord that they can walk all over.
Congratulations! You’ve officially gone from a vacant house to a fully rented home to great tenants and have joined the ranks of your fellow real estate investors. However, your journey is not over – but just beginning.
As a landlord, it is now your responsibility to ensure rent is paid on time, your tenants are properly trained in the most efficient manner possible, late fees are given when needed, repairs performed when required, and bookwork kept up to date.