The Casual Landlord: Some Advice for First Timers
Being a landlord is not an easy line of work. And in this market where some homeowners opt to become landlords “temporarily” and rent their empty home until market conditions improve, it’s easy to end up in a far worse financial situation than you were in before taking on the landlord role. Here are a few things to remember before turning your home into a rental:
Tell The Bank: Remember all those mortgage documents you signed when you bought or refinanced your property? Probably not, but buried in there is a prohibition against converting your home from non-owner occupied. That means that your bank needs to know that you plan to change the use of the property, and they have a right to adjust the interest rate accordingly. If the change in use is temporary, for say a year, then likely the bank will not care. But to be safe, give them a call.
Tell The Insurance Company: Insurance companies are friendly people, when it comes to collecting claims. But paying claims they get a little more, shall we say, formal. The homeowners policy that you bought and paid on each year protects you if your home burns down, or if someone slips and falls and sues you, or if a tree crashes through your roof. But it only does so when the homeowner is in “occupancy” of the home or apartment. Once you rent, you need to update the policy to a landlord’s policy. Which is more expensive but covers situations involving a tenant. Forget to do this important step and you may be left in a financial disaster if the home is severely damaged and the insurance company will not pay.
Learn About Credit: Try to buy a car without running a credit report, and you’ll be paying cash only. So why would you turn your $500,000 investment over to someone without knowing their credit score? You must run a full background check on a tenant before putting them in possession. While you might be anxious to get someone in place to “pay the rent,” your eagerness will backfire if the tenant is not who they seem. Talk to prior landlords, verify employment, run a credit check. Do all the things that a bank would do before lending someone money. Remember, you are “lending” out your home.
Don’t Forget About Selling: Many casual landlords are doing so for a short term until they can sell their property. If that is your plan, be sure to deal with it in the lease. A tenant with a one year lease cannot be dispossessed even if you sell the property. So if your plan is to continue to market it, then you have to include a provision that requires the tenant to leave on notice if there is a sale. Many tenants won’t want to go through the expense and aggravation of moving into a property if the possibility is that they will have to quickly move out. So think about this term carefully. Some leases provide for showing during the last 60 days, and that is usually fine but be sure that the tenant agrees to provide reasonable access during that time. Very few buyers in this market will sign a contract before actually going in the home!!
Keeping Up Appearances: Remember all the beautiful landscaping you paid to install? Who is going to maintain it while a tenant is there? Don’t assume a tenant likes to garden as much as you do. Be sure to lay out exactly who deals with each aspect of property upkeep. If you have been using a professional landscaping service, then include that obligation in the monthly rent payment. What about the oil tank? Are you handing over a full tank? Then the oil used needs to be part of the payment, or security posted for the same. Who pays for the broken washing machine? Leaking dishwasher? Flooded basement?