As the homeowner with the property you no longer plan to use as your home, the possibility of selling your home to free up your equity is usually very tempting. Immediately receiving the proceeds from a sale of your property would definitely be a good thing in many instances. But, in many cases, holding on to your home to earn the rental income could be the better option for you financially.

Here are some things to consider before deciding to rent or to sell your home and have a clean start with new money in your bank account.

When Renting Makes More Sense Than Selling

If the local market is currently declining, and you would be selling at a loss or for less than what you owe, renting will give you time for the property to appreciate back to value. If you have substantial equity in your property, and you have a low interest rate on your mortgage, the rental income will more than likely cover your monthly expenses, and you can reap the long-term appreciation of your property.

Renting a home also can make sense if you’re planning to return to an area and just need to make some money meanwhile. Or if you want to hold onto the home as a family asset. In many cases, homeowners nearing retirement also can use rental income to supplement their fixed income in retirement.

Owning a rental property is a business and should be treated as such. Landlords must be proactive to manage the daily affairs of the business and address any problems that may arise at any time. Issues may arise with tenant rental payments, rental property maintenance, tenant behavior, and conflicts with tenants. For many, the risks and responsibilities of renting out a home far outweigh any potential return on investment. If one is not ready to run a business as a landlord then perhaps selling a home is the better option for that homeowner.

Understanding Local Regulations Before You List

Check Local Landlord-Tenant Laws. As a landlord, you must learn about and comply with the local and state landlord-tenant laws. These laws vary from state to state and often from city to city, so it is essential to research the laws that apply to your situation.

Typical laws that a landlord must follow include:

• Security deposit limits and how funds must be held.
• Notice requirements for entry and lease termination
• Habitability standards and required disclosures
• Rules around late fees and rent increases
• Eviction procedures and timelines

For information on state-specific laws, prospective landlords should refer to the U.S. Department of Housing and Urban Development information on tenant rights, and in addition, local municipalities. Some cities have landlord registration schemes and rent control policies.

Even unintentionally failing to comply with a local law can lead to a landlord being involved in costly legal disputes or even having a lease cancelled out.

Pricing the Rental Correctly

Pricing is one of the more nuanced aspects of becoming a landlord. Setting rent too high leads to prolonged vacancies; too low and you leave money on the table or attract applicants who may not respect the property.

Effective rental pricing should account for:

• A review of currently rented similar homes in the local market, (found on sites such as Zillow Rentals, or through the use of local rentometer) to provide a comparison base for the rental price of the home in question.
• The property’s condition, size, and amenities relative to comps
• Seasonal demand patterns in your local market
• Your holding costs (mortgage payments, taxes & insurance, and the amount that you anticipate needing for repairs and maintenance) as a percent of the home’s value (1% or more for some homes).

Generally speaking, experts say you should hold aside at least 1% of the purchase price of your rental for maintenance costs every year. As a rule of thumb, that would be $1,000 per year for a $100,000 home. However, for older homes or properties with special systems (heating, cooling, etc.) that need to be repaired or replaced from time to time, this figure can end up being much, much higher. The Consumer Financial Protection Bureau does a great job at breaking down all of the costs to own a home, and these figures can generally be applied to finding a good rent for a property.

Tenant Screening and Why It Matters

Getting the right tenants in a rental property is key to success. A quality tenant will pay rent on time, treat the property with respect, and respond to needed repairs in a timely manner. On the other hand, a poor quality tenant can result in lost rental income for months or even years, major repairs to the property, and stress of an eviction.

A sound screening process typically includes:

• A written rental application with employment and rental history.
• Credit checks through a reputable screening service
• The amount of verifiable income the applicant has to pay rent on time (usually 2.5 to 3 times the monthly rent).
• Landlord references from previous rentals
• Background checks conducted in compliance with Fair Housing laws.

The Fair Housing Act is designed to prevent discrimination in the rental, sale, financing, and servicing of dwellings (including condominiums and housing provided by government programs) based on the following protected characteristics: race, color, religion, national origin, sex, disability, and/or familial status. The criteria that you choose to use for tenant screening must be applied consistently to all applicants for all rentals. It is very important to keep a paper trail of all information that you use to evaluate your applicants.

Maintenance Responsibilities and Long-Term Upkeep

There are many things to consider when it comes to being a landlord and taking care of your rental property. There are many things that can go wrong at a rental property, and as a landlord, you are responsible for fixing them. A big part of taking care of a rental property is making sure that the major systems are in good working order. This includes the plumbing, heating, and electrical systems. If these systems like these fail, they can cause serious problems at a rental property. In addition to the potential for damage, failing systems can also pose a risk to the health and safety of your tenants. Because of this, it is very important that you make sure to take care of any problems with the systems at your rental property as soon as possible.

You might assume that as a homeowner, you’ll be able to handle the rent of your new tenant in full. But as a landlord, you must remember that it takes a lot of time and resources to keep your property in good repair. This means scheduling contractors to fix things and answering the calls of worried tenants in the middle of the night. Unless you live next door to your property and have a lot of extra time on your hands, it makes sense to hire a property management company to handle everything for you. Companies like WeLease approach this by handling the full spectrum of work related to your property, including renting it out, screening tenants, fixing things when they break, collecting rent, and managing lease renewals. This will allow you to earn money from your property without being too involved.

Other investors benefit from rental income by hiring a property management company to handle the day-to-day operations of their investment rental properties.

Planning for Vacancy

The property will likely have a vacancy from time to time. To avoid losing money due to the cash flow requirements of your investment, it is essential to have saved the funds to cover two to three months of carrying costs for your property. This would include the mortgage payment, taxes, insurance and any reserve requirements for maintenance and repairs.

Another factor to consider with regard to vacancy loss is the current state of local rental property markets. Markets with strong employment, restricted supply of rental properties, and increasing population are less likely to have periods of high vacancy than are other markets experiencing decline. For example, the vacancy rate for rental apartments in the Denver, CO metropolitan area as of mid year 2018 was less than four percent. For apartments in the Miami, FL metropolitan area the vacancy rate was near seven percent. Clearly, a vacancy loss is a greater risk in the latter market.

Making the Decision with a Clear Picture

Turning a property into a rental property can be a very financially rewarding investment. But first you must go into it with your eyes open as to the extent of the time, money and physical demands that you will encounter.

New landlords would benefit from gaining an understanding of local laws regarding rentals and then will need to be sure they are charging the correct rental amounts. By conducting thorough Tenant Screening, and keeping a reserve for expected Maintenance and Vacancy periods, new landlords will ensure their first foray into rental properties are the best they can be. Also, do not forget that there are companies that can take that burden off your hands.

Chris Highland 
eXp Realty
Frederick, Maryland
Cell:  301-401-5119
Broker:  888-860-7369