Learning how to rent out your house is probably the easiest way to get started in real estate investing. Because it’s a property you already own, you don’t have to worry about one of the biggest hurdles investors face – funding.
But does that mean you can just throw a “For Rent” sign in your front yard and expect a great tenant? Can you charge any price you want without doing any work on the house to fix it?
Of course not.
There’s a lot to consider (and do) before you can turn your home into a rental property. This guide will give you an idea of how to get started.
Step 1: Identify the Pros and Cons of Renting vs. Selling
Even if you’re already sold on the idea of renting vs. selling, there are a few things to consider.
The first is to do a little research into the housing market in your area. Are rental prices high? Are a lot of new homes being built? What about your neighborhood – does it stand out against other options in your local area?
You need to do this because you have to make sure you can rent your house at a high enough rate to cover everything:
Paula from Afford Anything recommends the 1% Rule mainly because all of these things add up. While it doesn’t precisely apply 100% in this situation since you already own the home, it’s still worth a read.
The second thing to consider is how much you could get for the house by selling it. If you have a lot of high-interest debt, it might make sense just to sell the home and pay off the debt with the proceeds. But if you don’t have much home equity, renting it out for a while may make sense.
Finally, think about management. If you’re moving away from the local area, you’ll likely need a property manager. They are worth their weight in gold, but they do add an extra expense—more on this in a minute.
Still set on renting out your home? Okay, let’s talk about preparing the house then.
Step 2: Get Ready to Rent Out Your House
The condition of your home is extremely important to renters. Nobody wants to move into a dirty, smelly home with intense paint colors on every wall.
No, I’m not necessarily saying that’s your home. But there are a few things you should do before putting the house on the market:
- Bring it up to the local code. For example, maybe you have an old water heater without an expansion tank.
- Get the carpets PROFESSIONALLY cleaned. If it’s a reputable company, they’ll almost certainly do a better job than you can.
- Fix anything that may be an issue for renters—leaks, rodents in the attic, etc.
- If the landscaping isn’t in great shape, have a pro come out and take care of it for you.
I know this sounds like a lot, but it’s not as expensive as you might think. These are minor improvements; you may not need to do large ones.
That said, depending on your home’s layout, your potential tenants, etc., you may want to consider doing a larger renovation. For example, does your home have three bedrooms and a bonus room that isn’t completely walled off? If so, maybe you could put up walls around the bonus room to create a 4th bedroom. That is almost guaranteed to net higher rent each month, especially if you’re renting out to college students or a few single people living together.
Another example is knocking down walls. Old homes used to be very closed off, but people prefer open layouts these days. If you’re able to knock down a few barriers between the living room and kitchen, for example, you’re more likely to rent the home out faster and may be able to charge a bit more.
Finally, if your home is a single-family house that isn’t part of a neighborhood, maybe you can convert it into a commercial property. Sometimes you’ll see a small store that (clearly) used to be home but was converted. This can also net you higher rent.
Step 3: Hire a Property Manager (if applicable)
If you’ve decided not to hire a property manager, that’s fine. Move on to Step 4. Just keep in mind that you’ll be responsible for all of these tasks:
- Marketing the property
- Screening potential tenants
- Setting up the contract paperwork
- Collecting rent from tenants
- Schedule maintenance and emergency repairs
- Legal issues (including evictions)
For those of you who decided to invest in a property manager, there are two main things you should do:
- Prepare a list of questions to ask the property manager.
- Ask around for referrals- real estate investing clubs, friends, neighbors, etc.
Remember that this is a business interview. You want the person taking care of your investment to have an excellent track record and be professional, knowledgeable, and friendly. If you like talking to them, your tenants will too.
Step 4: Put Your Home Up for Rent
This one is fairly straightforward. Whether you are doing everything yourself or having a property manager do it for you, here are a few ways to let the world know that your home is for rent.
- Sign in the yard – Simple and effective, but there are two downsides. For one thing, it lets people know the home is vacant. The second is that you’re relying on people driving by the home, which is very passive.
- Classified sites like Craigslist – Also passive, but at least you’re opening it up to many more people.
- Zillow – The vast majority of both renters and buyers find their homes on websites like Zillow. It’s clean, it works, and it shows a lot of important information. And it’s free to post, so why not?
- Tell friends and family – This is getting into a more active realm. Tell your friends and family that you’re renting your house. That way, if they happen to know someone looking to move into your area, they can refer you to a potential tenant.
However, marketing isn’t the hardest part of learning how to rent out your house. Let’s move on to perhaps the most critical thing to do.
Step 5: How to Screen Tenants
Your house has been on the market for a while now. You’ve had a number of people apply, and now you have to figure out which ones are the best fit. Even though it may be tempting to select the first one or two applicants, it’s best to talk to as many potential tenants as possible before moving forward.
Because you want to make sure you’re getting a tenant that 1) has the means to pay and 2) will take decent care of the home. They probably won’t treat it as well as you would, but many great tenants out there won’t just destroy everything.
There are a few things you must include in the application process:
- Request references
- Steady employment
- Two occupants or fewer per bedroom
- Application fee (to make up for the time you’re investing in screening them)
- Credit/background checks
All of these are done, so you get a better feel for the tenant. It’s also not a bad idea to go ahead and set limits for yourself.
For example, Bigger Pockets recommends that you immediately screen out any occupant who doesn’t make at least three times the rent. So if rent is $1,000 a month and they only make $2,500 a month, that’s not good enough.
Another popular rule is regarding the length of employment. It’s not uncommon to require the person has been at the same employer for at least six months (if not longer.) This is to show the tenant is responsible enough not to be fired from their job and can commit to something for an extended period of time.
Now, this section alone can be thousands of words long. Because I know you don’t want to read that much, let’s move on. But hopefully, you understand the importance of having a solid system in place to filter out bad tenants so you can find the great ones.
Step 6: Signing The Lease Agreement
The final piece of the puzzle to rent out your house is the lease agreement. This somewhat simple document is extremely important, as it is considered legal. If either you or the tenant breaks it, lawyers can (and often do) get involved.
That’s why we recommend you don’t just “wing it.” You can download a lease agreement for free somewhere, but you may want to have a lawyer look over it to make sure it’s solid. A few options are the EZLandlord and US Legal websites.
Along with the agreement, we also recommend including a Move-In Condition Report. This is something the tenant fills out when they first move in to record the condition of the property. Scratches on the appliances, small holes in the walls, etc. This is then compared to the condition of the property when the tenant moves out to identify what they caused vs. what was already there.
Oh, and here’s one last important thing. Never let a tenant start moving things in before they’ve signed the agreement and you’ve received the first month’s rent and security deposit.
There you have it—the ultimate guide to renting out your house. It’s not the most uncomplicated process, but it’s a great way to start your real estate investing portfolio.