I love being a landlord, but I had to take 4 steps before a tenant ever set foot in my home
- When I decided to rent out my first home, I got into the landlord mindset by listening to financial and real estate podcasts.
- Then, I carefully screened tenants to mitigate my risk, learned the laws governing the landlord-tenant relationship, and built an emergency fund to cover any expenses at my rental property.
- An insurance professional also helped me adjust my homeowner's insurance policy to ensure I had adequate coverage.
- Read more personal finance coverage.
Earlier this summer I finally achieved that goal. I stayed professional as I shook hands and signed a lease with my new tenants, and then did a celebratory dance when they left.Still, my joy at becoming a landlord was tempered by the gravity of the situation. Renting out my home could help me get ahead financially, but it also brought a lot of new risks into my life.
If tenants didn't pay rent, if I unintentionally discriminated, or if someone got hurt on my property, I could be dealing with serious financial repercussions.
I am a type-A personality who loves to be in control of everything. Although that's never entirely possible, I set my mind to mitigating the risk associated with becoming a landlord. Here's what I did to protect myself.
Educating myself on the issues
I knew around March that I would be moving during the summer, and that I wanted to rent out my house when I moved into a bigger one. I took those months to educate myself on the different issues that landlords encounter, and how they keep their risks minimal.
For me, this meant listening to podcasts. "How to Money" and "Best Ever Show" with Joe Fairless gave me an honest glimpse into the good, bad, and ugly of being a landlord. This helped me think about issues ahead of time, such as how to screen potential tenants and my rights as a landlord. I took notes, and considered how I would respond in different situations. That helped me get into the landlord mindset.
I also talked to more experienced landlords, although I learned to take their input with a grain of salt. It seemed the loudest advice-givers were the ones for whom being a landlord didn't work out. While their horror stories kept me grounded, I also learned from their mistakes, like not properly screening tenants or renting to friends.
Getting the legal overviewFrom podcasts, I learned that it's incredibly important to understand the rental laws in your state. Luckily, my husband had studied some of these laws in relation to his job training. Still, I wanted to know exactly what I was dealing with, so I read through an overview of the state's rental laws. Here in New Hampshire, that was available online through the Department of Justice.
Of course, I'm no lawyer. However, having a general working knowledge of the laws let me know my responsibilities, and my tenants'.
When I eventually posted the rental listing asking for first, last, and security, someone emailed to say I was in violation of the state law, which limits how much landlords can collect for security. However, I knew that because my husband and I only own one rental property, we are an exception to this rule, and were within our rights to ask for a security deposit.
Building an emergency fund
As a landlord, you need to respond quickly if something goes wrong at the house. In the months that I was preparing to start renting, I built an emergency fund of about $10,000. With that much money on hand, I know that I will be able to respond quickly to most issues.
Everyone dreads the middle-of-the-night calls from renters, but I know that if there is an unexpected issue at my house, like a boiler blowing or a water heater malfunction, I have the money to fix it promptly so that I will not miss out on rental income and my tenants will be safe.
I knew that getting the right tenants could make or break our rental experience. Because of that, I put in the effort to screen tenants before even taking an application. I listed our rental on Facebook Marketplace and Craigslist and had about 30 responses within the first day.
I decided to prescreen people who were interested, a tip I had learned from podcasts. I sent a short Google Doc questionnaire, asking about criminal history and past evictions. Fewer than half of the people who wrote to me filled this out, and I was able to cut the pool in half again based on their responses.
I only showed the home to three sets of tenants, who had shown on prescreen that they were qualified.I then had them fill out a full application, which asked for references and a background check, through My Smart Move. The site gives input on renters based on their credit and background check.
Through the site, I found inconsistencies in the background of one prospective tenant who had seemed like a good fit, and ultimately declined that person. The tenants we chose had a clear background check and great credit.
Adjusting insurance coverage
Once I had screened tenants in place, I had one more step to take. I called my credit union to speak with an insurance representative, and she gave me the options for adjusting my insurance coverage for the new situation. My homeowner's insurance policy was adjusted to cover just the dwelling (since we no longer owned possessions inside).
On the recommendation of the agent I also bought an umbrella insurance policy. Being a landlord means increasing my risk, so it made sense to increase my coverage. And, although I hate paying for insurance, at about $150 a month the umbrella policy seemed like money well spent.
Try as I might, I know I can't control everything. However, taking these steps has helped me minimize the financial risks of becoming a landlord, and has made me comfortable moving forward with that decision.