In today's hot housing market, rents are on the rise, which may have you wondering whether it's time to consider becoming a landlord. After all, who doesn't like the idea of raking in rent checks every month? Still, being a landlord isn't a cakewalk; it takes work, and sometimes it may seem like you're shelling out more than you're bringing in.
Just so you know what you're getting into, here are the steps on learning how to get into the landlord game.
Step 1: Figure out what you can afford
Renting out an apartment on which you're paying a mortgage is a balancing act: You have to make sure that the money coming in covers what goes out -- or else you're operating at a loss.
Prepare for the worst: Since your place may sit vacant occasionally or require repairs, having a decent financial cushion is key. Most experts say that properties should be able to rake in enough rent in 10 months to cover your yearly costs.
Another rule of thumb is the 2% rule, where your monthly rent should be least 2% of the price of the property. So if an apartment cost you $100,000, the rent should be at least $2,000 to cover your costs. Crunch your own numbers on what you can afford with our home affordability calculator, then compare that to what places are renting for at realtor.com/rentals.
Step 2: Pick the right kind of property
Many components go into property selection, so make sure you identify your primary goal, says Ed Laine, partner/broker of Miller Laine Properties in the Seattle area.
"Is it good cash flow that you're looking for, or do you just want something that's low maintenance?" he asks. All other things being equal, you will want to choose a property close to your home, which allows you to check on tenants and house maintenance easily.
Laine recommends asking yourself, "If the wind blew a tree limb through my tenant's window at 2 a.m., how far would I be willing to drive to deal with it?"
You'll also want to make sure the property meets all applicable codes. This handy rental property checklist helps you to assess a property with a critical eye to make sure it's "rent-worthy" and -- later on -- helps you to double-check the property once your renter leaves to make sure it was left in the condition in which it was found.
Step 3: How to screen tenants
Having good tenants can make or break your experience, Laine notes. Make sure to interview and screen them thoroughly. Tenant screening companies make that easy, but there are some steps you can take yourself. First, ask prospects to agree for you to check their credit: Section 604 of the Fair Credit Reporting Act requires that landlords ask permission before running a credit check. You can also check your state and county's website, since most court information is public record.
Last but not least, you will want tenants to sign a lease delineating the rent, when it's due, and actions that could lead to late fees and eviction .
Step 4: Understand landlord liabilities
Also know that you can be held liable for tenant injuries, so be sure you seek adequate coverage, such as landlord liability insurance and landlord property insurance. These are different from a regular homeowners policy and should be obtained if you are renting out a home regularly. Check with your insurance agent to see the options you can add to your regular homeowners policy.
Step 5: Know a landlord's responsibilities
You can't just give tenants the keys and check out. Landlords are legally required to make repairs to their property -- but that doesn't mean you need to jump every time a lightbulb needs replacing, either. The key is whether the issue affects habitability. For example, if a property is without electricity, water, or heat for more than 24 hours, it will generally be considered uninhabitable, and you're responsible for finding alternative temporary housing for the tenants until this issue is fixed.
But if the flaw doesn't make living there unbearable or is merely cosmetic, then the landlord is under no time constraint or any obligation at all to fix it.
"So if your tenants say the floor squeaks and it's driving them crazy, or if they've asked for the ancient shower head to be replaced, if it still works, the landlord doesn't have to fix it," says Laine.
However, happy tenants tend to stay put, so you may want to consider responding to smaller requests if it's no big deal.
"If as a landlord you are responsive and address concerns," Laine says, "they will take better care of your property, guaranteed."
Step 6: Weigh the pros and cons of a property manager
Did the responsibilities above give you pause? You have to know your limits. If this all sounds like too much hassle, consider hiring a property manager, who can handle those details. It might be well worth the investment -- typically 8% to 12% of the monthly rental fees -- for the headaches it could save you down the road.