The wife and I are thinking of moving in with her folks. It’s an opportunity to save some money and be closer to the family. I’m all for it, but now I’m wondering what are the things I need to consider if I am going to rent my house to a complete stranger?
Being Latina, I am no stranger to multi-generational households. As you say, it is a great way to save money AND be closer to the family. Those extra moments shared will be treasured, I’m sure. But, on to your question about renting!
While not all-inclusive, here’s what to look out for when renting out your home (to strangers OR acquaintances, no difference!):
- First of all, be aware that you will lose the Homestead status on your property by moving out of it. This may or may not increase your property taxes (really long story and I promise to post on this in the future). The moment you move out, you can no longer claim the Homestead Exemption. This will affect you the following year, since Homestead Exemptions run 1/1-12/31 and are not pro-rated.
- Next, start thinking about your insurance. If you have a mortgage on the home, the bank makes you get insurance. If you don’t have a mortgage, it’s still wise to have insurance. However, the type of insurance will change if you are no longer living in the home and have tenants. Contact your insurance agent and let them know you are renting the home. They will write you a Dwelling Policy instead of the usual Homeowner’s Policy owner-occupants have on their homes. Furniture and personal property is not usually covered in a Dwelling Policy so if you’re leaving furnishings behind, make sure you ask about this. If the title to your property is under your own name, there should be no issues. If title is held under a corporate entity (INC LLC etc) it’s a little trickier to get the Dwelling Policy. Again, contact your insurance agent.
- And while we’re on the topic of insurance, make sure your new tenants get a policy of their own (Renter’s Policy) which will cover them for their liability, loss of use, personal property, electronics, furniture, etc. It’s real important that this be stipulated on the lease and that you follow up and make sure they purchased the policy.
- Discuss tax implications with your accountant. The moment you become a landlord, and start collecting rent, you will be responsible for reporting the rent as rental income to the IRS. You will have expenses offsetting that income but discuss the bottom line with your accountant. The usual expenses are mortgage interest, insurance premiums, real estate taxes, property management fees, and most costs related to the rental of the home. When in doubt, ask a professional.
- A written lease is a must. Not because it’s required by law (it’s not), but because it makes sense and if things go awry (as they sometimes do) the lease spells out all the terms and will be used by the court to determine who should have done what.
- Screen prospective tenants and check employment, credit, personal and work references. While it’s never a guarantee that things won’t go wrong in the future, it provides some peace of mind and if you see something bad on the screening you can give the tenant a chance to speak their part and explain. A late rental payment to a previous landlord may have a valid excuse while an eviction on their record is harder to overlook. All screening costs are usually paid by the tenant. In the past, I reimbursed my tenants for their screening fees by applying it to their first month’s rental amount. It was my way of showing good faith but at the same time, I wouldn’t be stuck paying for multiple screenings for applicants who did not qualify. The only one who got the money back was the final tenant. This was a personal choice of mine, and I don’t see anyone else doing this. But I like to top off my sundaes with cherries =) In other words, I go the extra mile.
- If your property is inside a Homeowner’s Association, make sure their guidelines are followed. Most HOA’s have their own screening application procedures in place. YOU decide if that will be sufficient for you or if you want to also ask the tenants to go through your own screening process. Many HOA’s will not give you copies of the results. They will just tell you the tenant was approved and give you an approval letter. If you are OK knowing the tenant passed according to the HOA guidelines and nothing else, then don’t do the additional screening. It will make your chances of getting a tenant easier. Less roadblocks in their way. But again, this is a personal choice you must make.
- Consider hiring a property manager if you’re not going to live in the area and be available at 3am when the air conditioning unit stops working. Even if you live in the area, it’s still a good thing to think about hiring a professional to manage the property. But this, too, is a personal choice.
- Whether hiring a professional property manager or not, it’s a good idea to consider purchasing a home warranty for the lease term. Home warranties usually run for a full year and, guess what, so do leases. A home warranty will cover all working appliances and plumbing, electrical and other items. Contact a reputable home warranty company. Or contact a reputable real estate agent to give you the names of some. There are a handful of really good ones out there. They run in the neighborhood of $400 (more for pools, washer, dryer, etc.). That’s one flat fee for the year and it brings peace of mind should something break. Also consider giving the tenant the option to pay the extra premium to decrease the deductible for each service call. A one time increased premium payment of about $60 will reduce the service call deductible from $100 per trip to only $50. Makes sense.
- Have a walk-through of the property with documented condition of items (pictures too) right before the tenant moves in.
- Make sure you get CERTIFIED funds at the walk-through for the current month’s rent, any pre-paid rent (such as last month’s) and security deposit. A personal check is not wise for moving in. If that check bounces, you’re stuck with a tenant on your property and no security deposit to fall back on. You’re already at a disadvantage if that happens.
- Do consider hiring a good real estate agent to find a tenant for you. They will arrange all the paperwork, showings, legal documents drawn, screening of tenants, walk-through of the property and any communications with other agents and HOA’s. The fee is worth it. And don’t be surprised to find out that not all agents handle rentals. Many do not. Some, such as myself, will work rentals for current clients. That’s why it’s always a good idea to have a real estate agent on your team of trusted professionals.
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