I'm a landlord and I'm glad I'm renting out my home, but I'd warn anyone to watch out for 4 pitfalls
- When my husband and I bought a larger home, we decided to rent out our 900-square-foot property in New Hampshire.
- We planned to charge almost double the cost of our mortgage, thinking we had a cash cow on our hands. But hidden costs cut our profits way down.
- We also learned the importance of pre-screening tenants and weighing our long- and short-term options before renting out our home.
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Becoming a landlord is a lot like being pregnant: When you make your announcement, everyone wants to tell you their horror stories.
There was the aunt who had not one, but two tenants die unexpectedly during her first year as a landlord. Or, my personal nightmare, the neighbor whose tenants let their pet snakes roam freely about the house. Then, there's the run-of-the-mill disaster stories about tenants who trashed a home or didn't pay their rent.Despite hearing all these, my husband and I decided to move ahead with renting out our first home when we upgraded to more square footage earlier this year.
We had bought the house - a 900-square-foot ranch in a medium-sized New Hampshire town - largely because we knew it would make a great rental when we outgrew it. We wanted to try our hands at making money from property, and this simple, cozy home seemed like the perfect first rental.
I've only been a landlord for a few months, but already I've learned a lot. Here's what I would urge others to consider before jumping into becoming a landlord.
Consider the hidden expenses
On paper, our home is a lucrative rental. We rent it out for $1,550, and our mortgage is only $850 per month. When we first talked about renting the property, I saw dollar signs.
That lasted until I crunched the numbers and considered all of our hidden expenses. Like most landlords in our area, we cover the water and sewer bill. We also included trash removal, since there's no city trash collection and we didn't want to risk tenants letting garbage pile up.
Then, there's budgeting for unexpected maintenance costs, like repairing leaky faucets or a broken outlet, and the increased cost of our homeowner's insurance.
When I factored in these expenses, I realized that our rental wouldn't be a cash cow. Instead, it would give us a slim profit every month. Having an honest inventory of expenses helped us make a well-informed business decision about whether or not to rent.
Weigh long-term vs. short-term benefit
Right as my husband and I were committing to renting, our neighbors sold their house (which was essentially identical to ours) for full asking price the day they listed.They sold for $140,000, and we only owed $55,000 on our home. That sent us for a loop. We needed to decide whether to sell for a potentially large profit, or stick with our plan of renting.
Again, we turned to the numbers. We calculated that it would take us about 10 years of renting to generate the profit that we could walk away with if we sold the home now.
However, if we held onto the house we would have that cash, plus an appreciating asset. It was temping take the money and run, but we decided the long-term payoff was more in line with our financial goals.
Pre-screen all prospective tenants
When I listed our home on Facebook Marketplace and Craigslist, I was inundated with requests for showings. To identify the best applicants, I pre-screened everyone before a showing.
I used a Google Doc to ask simple questions: Are you employed? Do you have references? Can you pass a background check? About half of people didn't even fill out the form and I eliminated more based on their answers.
I ended up showing the home to four sets of prospective renters. Pre-screening ensured I wasn't wasting a prospective tenant's time or my own by meeting with people who had too many pets or an insecure job, for example.
As a final step, I used another Google Doc as a full application and My Smart Move to easily conduct background checks on the two sets of tenants who were interested in the property.
Don't let yourself get personal
After spending most of my life as a renter, it was strange to hold the power and be able to decide who would get to live in the home. This was amplified by the fact that finding a single-family home, especially one that is pet-friendly, is difficult in our area.
We knew that one prospective tenant, in particular, had been looking for a new home for a while to no avail. That tenant was polite and kind. And yet, when the background check was returned it didn't line up with what the tenant had told us. The tenant's credit history was less than ideal.
My husband and I both wanted to give this person a chance, but had to firmly remind ourselves that this was strictly a business decision. To mitigate our risks, we went with a set of tenants who surpassed what we were looking for in terms of income and credit.Being a landlord doesn't give you access to free or easy money. You still have to put in the effort, proactively finding quality tenants and dealing with everyday headaches that are bound to arise.
So far, however, my husband and I are happy with our decision to rent our home - and we become a little more confident in our decision each time rent is deposited.