Five Tips for Becoming a Successful Landlord
The crisis in the housing market has changed the game for many would-be sellers.
If you’ve tried unsuccessfully to market your home, perhaps it’s time to hang out the “for rent” shingle and give the title of “landlord” a try.
Before you take this bold step, though, consider these five important tips to help make your venture more successful:
1. Understand the financial and tax implications.
If you are a homeowner with a mortgage, you probably already know that owning real estate can have benefits at tax time. By deducting your home loan interest you may be able to lower your taxable income and the federal income taxes you owe. In addition, by renting your home you may be able to state and deduct such items as insurance, taxes, maintenance costs, advertising expenses, rental management fees, utilities, travel to and from the property and legal fees. The property can also be depreciated over a period of years, making the tax situation even more attractive. (Keep in mind that there may be limitations on the losses you can deduct from renting property. Consult a tax advisor for help working through these issues).
On the other hand, there can be negative tax consequences when you sell the property. The IRS provides a generous tax break for sellers who have owned and lived in the home as their principal residence for at least two of the past five years. However, if they sell more than three years later, they generally lose the tax exemption. The three year clock starts ticking once you rent that home. If you have a significant capital gain on your property, you’ll want to consult a tax expert to determine whether renting your property makes sense if it impacts the exclusion and to help you establish your timeline for selling without losing your tax incentive.
2. Do your homework.
Getting your property competitively priced for rental is among the most important steps you’ll take. Check newspaper ads, call property management agencies and look at online resources like craigslist.org to check the price range for similar properties in your area. You may also want to visit a few competitors to hone your research.
Since tenant and landlord laws vary from state to state, you’ll want to check the legal requirements in your area. Federal law governs such things as fair treatment for tenants and Americans with Disabilities Act requirements. You’ll also want to visit with someone at your local municipality to determine if a rental permit is required.
Before you start your search for renters, download, edit and print rental applications and leases to have on hand for prospective tenants. If you are uncomfortable preparing such legal documents, you may want to consult with an attorney knowledgeable in fair-housing issues.
3. Establish the ground rules.
Once you’ve decided what you’ll ask for rent, you’ll be ready to establish the ground rules for potential tenants. Make decisions about allowing pets, smoking, yard maintenance, lease terms and other issues unique to your home.
Many landlords require first and last month’s rent and a security deposit at the time of lease signing, but these are only guidelines. You might find a renter who is financially unable to comply with these requirements, but fits the bill perfectly otherwise. That’s where your judgment comes into play.
4. Find the right renter.
Low cost or free options for advertising your rental include simply putting out a “for rent” sign or placing an ad on craigslist.com. You can also place an ad in the classified section of your local paper or on an online rental site.
Have prospective renters complete an application and ask them to submit it along with a recent credit report. Review all applications and rank them from most to least desirable based on their rental history, income and credit. Check references and criminal records for the finalists. If two candidates seem equal, your instincts may help you make a final decision.
5. Keep your expectations realistic.
Once the property is rented, your work is not done. Expect the phone to ring with questions and repair requests. If you’re not the handyman type, establish good relationships with electricians, plumbers and carpenters who are willing to work within your budget and do repairs on short notice. The good news about today’s job market is that many freelance handymen are hungry for the type of jobs you’ll have as a landlord, and are willing to work at a reasonable rate.
Being a landlord can be financially and personally rewarding if you are prepared for the ups and downs of your new position. Don’t forget, while it’s still your home, it’s someone else’s now too.
James C. Hanna, CFP®, MBA, Financial Advisor, Certified Financial Planner ™ practitioner. Advisor is licensed/registered to do business with U.S. residents only in the states of Kansas, Missouri, Colorado, Nebraska, Oklahoma, Texas and Indiana.
Ameriprise Financial and its representatives do not provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues.
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