The Reluctant Landlord: Renting Out Your Home in a Weak Market

“That’s hard for a lot of people to understand because they want to make up that mortgage payment,” Holmes says. And while how much you’re paying the bank will figure in somewhat to what you charge, it’s key to do your research on what similar houses are renting for, much like you’d look at comparative properties when figuring out an asking price for sales. “Of course you want to take a realistic look at your PITI [principal, interest, taxes and insurance payment costs] if you have a payment on the home, which most people do,” he says. “But you also have to consider what the market will bear in terms of rent.” Mincher says that if you bought a townhouse at the height of the market, you’re probably not going to make up a $1,200 payment if all the other similar houses are renting for $900 a month. Another factor to consider is insurance. You will pay more for insurance on a home you’re renting out, despite the fact that you’re not insuring the contents, only the structure. Call your homeowners’ insurance company and talk to them about any rate increases that will result from changing your residence status on the house so you can figure that into the price you’ll charge a renter. And for homeowners who paid a premium for granite countertops, gorgeous hardwoods or full-stainless-steel kitchen, there’s more bad news. These extra features don’t necessarily translate into higher rent prices. “You may have less vacancy because of these things, but you’re talking to renters, not buyers,” Mincher explains. “They don’t care as much about your beautiful landscaping. So, figuring out what to charge is a challenge.” How should the average homeowner who’s thinking about renting confront the challenge? “You really just have to check newspapers and online ads and get a feel for what a home in your price range within about a three-mile radius is going for,” Holmes says. Other good sources of information include a trusted broker or Realtor; if you have a good relationship with someone in real estate, s/he may be able to offer you useful advice. Finding the Right Tenants Once you’ve priced your house and you have interest from a potential renter, it’s critical to perform due diligence in checking out the person or people you’ll be entrusting your home to. “On their own, people can verify employment by contacting a current employer,” Holmes says. “Get paycheck stubs to make sure they’re making what they say they’re making. Also do a rental history check. Call previous landlords and see what kind of information you can get.” Also, consider outsourcing some of the rental screening process. “If a person wants to do a full screening, the process is pretty intensive because you basically become a credit reporting agency,” Holmes says. For that reason, homeowners should consider looking at companies that complete the tenant screening process for you, he says. They’ll do credit checks, eviction checks, criminal background checks and other similar screenings. A tenant screening company is how Hanley found her first renters. “We hired a rental management company to find the tenants since they had the skills and resources to do the credit and background checks,” she says. “We paid them a percentage of the first month’s rent for their services. It was well worth the money since we ended up with an accountant couple from Wisconsin who were the best tenants!” Are You Ready to be a Landlord? Once your tenants are in place, your main duty as landlord is to maintain the property. But if you’re living in a different city, state or even country, how do you handle it when a pipe breaks or the air conditioning dies mid-August? “I advise people to get a home warranty program in place,” says Holmes. “Things are going to go wrong—they always do. A home warranty program prevents a huge out-of-pocket expense when it happens.” Most home warranty programs have a premium you pay once a year. Then, whenever something goes wrong that your homeowners insurance won’t cover—like a dishwasher that leaks or a refrigerator that won’t cool—you call the home warranty company. You’ll pay a “co-pay,” usually $50 to $60, and the home warranty company picks up the rest of the repair tab. If you don’t want to pay the initial premium of the home warranty, however, employ a handyman. “Going outside your comfort zone can cost more money than repairmen,” Cortez says. “It’s many times worth it to hire an expert. Find a good all-around handyman that is trustworthy.” Money Management While the process of getting a property rented and managing it can be all-encompassing for novice landlords, dealing with the dollars and cents is a critically important factor. • Insurance: Talk to your insurance company about renting out your property, Mincher says. “You’re going to transfer your coverage from a homeowner’s policy to an investment property policy, which will cover the actual structure but not the contents,” he says, adding that it is critical that landlords make it clear to their renters that their coverage does not protect the renter’s possessions or liability. “Renters policies are so cheap,” he says. “We pretty much make our tenants get them. We practically walk them down to the insurance office.” • Taxes: This can be complicated for owner/landlords. If you plan on selling the property in the next few years, you probably just want to deduct your property taxes as you normally would. But if you’re transferring it to a true investment property and don’t plan to sell for a while, there can be other tax benefits. You can depreciate rental property, says Mincher, which is a real tax benefit because home prices actually should appreciate. “If a property is held for investment purposes and you generate rental income, you can depreciate the property,” he explains. While it’s best to consult an accountant, he explains that residential properties are depreciable for 27 1/2 years. “So, if I owned 50 rental properties, I can depreciate an average of $10,000 a year for each one, that’s $500,000 a year in tax deductions I get that I never had to write a check for.”

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