Owning a rental property can be a good way to generate extra recurring revenue and develop wealth over the long term. But even with the demand for rental property as strong as it is today, there’s a lot more to renting out a house than putting up a sign, finding a tenant, and collecting the rent.
While there are numerous advantages to owning a rental property, it pays to follow a systematic approach to keep revenues strong and cash flowing. In this article, we’ll take an in-depth look at how to rent a house by following 10 simple steps.
- Thinking of a rental property as a business can attract a good tenant, keep rental income up, and keep expenses under control.
- Before renting out a home, a landlord should reduce debt and increase savings to ensure the business starts on the right foot.
- Determine the fair market rent, create a budget, screen for a good tenant, and track income and expenses.
How to rent a house in 10 steps
When renting a house out, it helps to think of the rental property as a business. Landlords and tenants have obligations to one another, as well as to the neighbors and city.
To get your business off on the right foot, here’s how to rent a house in 10 steps.
1. Know yourself
There’s a tremendous amount of responsibility in being a landlord. Life often doesn’t go as expected, and owning a rental property is no exception. Some questions to consider before renting a home out include:
- What is your reason for renting a house – extra cash flow, long-term appreciation, tax benefits, or a combination?
- Do you have what it takes to deal with tenants, vendors, and government regulators, or is it better to delegate to a local professional?
- Is there extra capital available to pay the bills when expenses or vacancy are higher than expected?
- Have you done the necessary prep work before buying a rental property, including paying off high-interest debt, fully funding retirement accounts, and creating a personal rainy day fund?
2. Know the law
Some of the local and federal laws to know include local and federal landlord-tenant laws, fair housing laws, fair credit reporting, zoning (especially important if the home will be a short-term rental, or STR), business and tax licensing requirements, and homeowner association (HOA) rules and regulations if the property is located in an HOA. Resources for learning more about laws to follow when renting a house include:
- Stessa Tax Center: tax resources, how-to articles, and a TurboTax discount
- Nolo.com: state landlord-tenant laws
- Federal Fair Housing Act: list of protected classes for which a landlord may not screen
3. Decide how to manage property
Some investors who own rental property locally begin by doing their own management, while remote real estate investors usually decide to hire a local professional property manager.
One of the potential risks in self-managing a property is becoming emotionally attached to a tenant. When this occurs, rent can end up getting paid late and a tenant’s problems can become a landlord’s.
On the other hand, a good property manager will represent a landlord, negotiate a lease, take care of day-to-day details like tenant relations and maintenance, and ensure compliance with state landlord-tenant and fair housing laws.
4. Determine fair market rent
In order to turn a profit when renting out a house, annual income has to be greater than the expenses. While that may sound elementary, it can be far too easy to overestimate rental income and under budget for expenses.
Setting a rent price that’s too high may result in a property sitting vacant for a long time or frequent tenant turnover when renters leave for a more affordable place. On the flip side, a monthly rent that’s too low could result in leaving money on the table or even negative cash flow.
Three good, online tools to use to determine a fair market rent price are:
- Stessa Rent Estimate is an optional, premium service for Stessa users. The service identifies opportunities to increase cash flow by determining a fair asking rent based on current listings, rent comparables, and market trends. Each Rent Estimate report is $19.99 and includes a detailed look at criteria like rental unit comps, median rental analysis, and rent trends by ZIP code, city, county, and state.
- Rentometer: Use this tool to decide if the monthly rent price is too high, too low, or just right, based on similar properties in the same area.
- Zillow Rental Manager: Rent Zestimate provides a starting price point for setting the rent, based on comparable homes and market trends.
5. Create a budget
Now it’s time to crunch the numbers and create an income and expense budget to make your rental property profitable. Having a pro forma budget also is a good way to identify areas where income can be increased or expenses can be decreased to improve positive cash flow.
Here’s a simple example of what an annual budget for an SFR property might look like:
- Rental income: $18,000
- Other income (such as pet rent): $1,200
- Total annual rental income: $19,200
- Property management: $1,536
- Maintenance and repairs: $1,200
- Pest control: $600
- Insurance: $1,000
- Property taxes: $2,500
- Mortgage (principal and interest): $7,000
- Total expenses: $13,836
- Annual cash flow: $5,364
In this example, the home has a positive cash flow of $5,364 per year. However, it’s important to note that income and expenses aren’t always consistent. Sometimes it can take longer than expected to find a good tenant, or operating expenses can be higher than anticipated.
Stessa, a Roofstock company, provides a software option for creating a rental property pro forma budget with different income and expense scenarios. The program works for an unlimited number of SFRs, small multifamily properties, and short-term rentals. After signing up for a free account, head over to the Property Details page to put together a Pro Forma.
6. Build a real estate team
Investing in real estate takes a team effort. Think of an investor as the coach and various members of a real estate team as players. Key members of a real estate investing team include:
- Certified public accountant
- Business partner/spouse
- Contractors and handypersons
- Insurance broker
- Property manager
- Real estate agent (investor-friendly)
7. Get the home rent-ready
Perform an inspection by completing a pre-move-in checklist and making any needed updates and repairs. A rent-ready home that is available for immediate move-in increases the odds of finding a good tenant.
Tasks for getting a home ready to rent include repainting, detailed cleaning, landscaping, making sure all appliances are clean and in good working order, testing smoke detectors, servicing the heating, ventilation, and air conditioning (HVAC), and making repairs. A landlord also may consider hiring a plumber and electrician to ensure that everything is in good working order.
Obtaining landlord insurance is another part of making a home rent-ready. A landlord policy provides extra coverage for a rental property, such as landlord liability protection from claims made by a tenant or a tenant’s guest and personal property used in a rental, such as appliances owned by a landlord.
8. Advertise for and screen applicants
Some of the best ways to find a good tenant include print and social media advertising, a “For Rent” sign, an open house, and online rental listing services. Some of the best online rental listing websites include:
- Zillow Rental Manager
It’s important to treat applicants fairly and equally when screening for the best tenant. General tenant screening steps to follow include:
- Set minimum requirements, such as credit score and household income.
- Require a completed rental application.
- Run tenant screening reports, such as a credit and background check.
- Speak with references and interview each applicant in person.
- Conduct a pet interview if the rental property is pet-friendly.
9. Use a written lease agreement
A lease agreement is a legally binding contract between a landlord and a tenant and outlines the responsibilities of both parties. Generally speaking, a lease must be in writing in order to be enforceable. Some of the other benefits of a lease agreement include:
- Detailed rental terms, such as the monthly rent, deposit amount, late fees, and move-in and move-out dates
- Terms, rules, and conditions of occupancy to prevent misunderstandings
- Protection of the rights of both a landlord and a tenant
- Liability protection for a landlord
- Procedures for notices and eviction
Good resources for obtaining a lease agreement include a local real estate attorney, a property management company, and free online templates from eForms, LawDepot, and Zillow Rental Manager.
10. Track income and expenses
Tracking income and expenses can feel like a full-time job, even with a rental home. While it’s possible to use a basic spreadsheet or general purpose software, it can make better business sense to sign up for a free account with Stessa to automate income and expense tracking.
Stessa works with an unlimited number of single-family, residential multifamily, and STRs. Financial performance can be monitored in real time via the online owner’s dashboard, monthly reports, like income and cash flow, can be generated, and the all-important paper trail needed for real estate investing is automatically created.