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Are you wondering if it's a good idea to rent out home space? In my CPA practice, I have seen clients lose large amounts of money and property value with poor management of their rental property. I also have clients that have made long term, positive income streams from their rental properties. This article is an overview on how to rent out a home by discussing two critical factors that will affect your financial success: choosing a tenant and the methods for setting the rental price for renting your home.
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As a preliminary step, be sure that you have determined that your local zoning, insurance policy, mortgage terms, and home owners association will allow you to rent the home. You should be familiar with local renting regulations and also have a detailed lease drawn up by a competent real estate attorney.
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Choosing the Tenant
Choosing the right tenant is financially far more important than the amount of rent that you charge. Rent to the wrong tenants and you will discover firsthand that it is expensive to replace carpets, repair holes in the walls, replace damaged fixtures, repair water damage, treat insect infestations, collect the rent, and on and on. It is traumatic and very expensive to evict a tenant. Good tenants will give years of steady, moderately easy income. One bad tenant can devastate your rental property and erase years of potential profit.
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Methods for Screening
In choosing a tenant, do following screenings as a minimum. Do not shortcut this process, even though it is tempting when you meet “really nice" prospective tenants. Ask any successful, long-term landlord and they will tell you stories of the tenants from hell that “looked and acted so nice."
The first four screenings are basically industry standards and will need written permission from the prospective tenant. The last two are from my experience with clients who are successful landlords.
- Do a criminal background check
- Run a credit check
- Call and interview at least two rental references. You may even want to run a check of the name of the former residence’s property title against the name of the reference to be sure that the prospective tenant did not just give you the name of a friend who has agreed to pose as a former landlord.
- Check with their current employer for a reference regarding length of service and any attendance issues. Poor attendance is a good indicator that the employee is going to quit or be fired.
- Look at their car – inside and out. The condition and cleanliness inside and out of their car is one of the best indicators of how they will care for your house.
- Arrange to drop off the application at their current home or at least drive past to see the outside. The way they keep their current home is also an indicator of the way they will keep yours.
Most prospective tenants will tell you that they are law-abiding, they always pay the rent on time, and they will keep your house very clean and in good repair. These screenings will help you to choose by the prospective tenant’s actual behavior.
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How Much Should I Charge?
Another important financial step in how to rent out your home is figuring out how much you can rent your home for. While any of the calculations below could determine the rent, you should calculate each one of them and then use a combination to figure the rent for your home. By the time you have calculated each one of these, you will be educated enough on average rental prices in your area that you can make a good decision on the monthly rent.
It is usually better to have the tenant pay their own utilities, such as electric and heat. Check with your utility company for their procedures when the tenant fails to pay their utility bill. You should arrange to be immediately notified and no utilities should be turned off without your knowledge.
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Using the Value of the Home as a Base
One very good method is the percentage value of the home that is prevalent in your area. For instance, your area may have 10% as the most likely monthly rent factor. In that case, if the home were worth $200,000.00, then the monthly rental would be about $1667.00 per month. ((200,000 x .10) / 12) This method is good because the value of your home takes into account the size, features, condition, and location of your home. Find the percentage factor in your area by researching values and rental price of homes that are being rented.
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Another method is the rental value per square foot. I find this to be the least reliable, but it is an important factor. A large house and/or yard, can command higher rent. This consideration should come after you’ve calculated the possible rent with all the other factors. Then, if you determine that the house and or yard is much larger than average, you may add a premium for this factor.
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The number of bedrooms and bathrooms is the first criteria that virtually every tenant will screen for when searching for a home. In general, the more bedrooms, the higher the rent. A one-bathroom house will almost always rent for less than a two or more bathroom house. Search local listings for comparison.
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A house in a desirable neighborhood usually rents for more than a house in a less desirable neighborhood. Consider the crime rate, the proximity to noise and factories, the views, the convenience of stores and cities, and the school district.
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Length of Lease May Affect the Monthly Rental
In general, the longer the lease, the lower the rent, although this is not necessarily a dramatic difference. It may appear that you can collect more with weekly rent, but don’t give in to this temptation unless your intention is to rent to high-turnover, high-risk tenants. Choose between monthly and yearly leases. Check for your area’s adjustment for a monthly vs. a yearly rent, which is often in the 5-10% range. For example a monthly lease payment might be $900.00 and if there was a yearly lease the same rent might be $850.00 per month.
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Consider the Costs of Owning and Maintaining Your Home
When figuring how to rent out a home and set the monthly rental price, you should always determine your costs of owning and maintaining the home. For a positive income flow, your rent must be above your costs. Add the mortgage payment, real estate taxes, homeowner association fees, utilities, maintenance and repair, insurance, your mileage to visit the property, and any other costs. Then walk around the home and do your best to estimate those areas that will see greater wear and tear as a rental. For example, you might always take care to save wear on your carpets, perhaps by leaving your shoes at the door. Your tenant is not as likely to do this. Add in extra for carpet cleaning and eventual replacement.
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Smoking, Pets, and Small Children
If you will allow smoking, pets, more than one family in the home, and possibly even small children, then a monthly premium should be charged. All of these areas create extra cost for you in insurance, maintenance, and repairs.
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Where to Find Comparable Rent Prices
When researching the above factors to determine how to rent out your home at the best monthly rental price, use resources such as craigslist.org, the local newspaper, other online local rental listing websites, and any other source for local rental property listings. You should also call local rental property management services to get their rental pricing.
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Choose Wisely when Renting a Home and Enjoy the Income
If you carefully choose your tenant, collecting your monthly rent should be an easy, stress-free procedure. If you also set the correct monthly rent, you should be on your way to years of good monthly rental income. These are important tools for determining how to rent out your home for the best monthly income.
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This article is not intended to be specific advice. It is intended as a general overview of renting a home only. Any specific advice should be sought from your CPA, real estate professional, and/or your attorney.