Others may be willing to put up a greater commitment. The parties should include a bank, attorney, or financial planner in these negotiations in the early stages to eliminate ambiguity. A documented portion of the rent payments may go toward the eventual down payment. For instance, on a home where the rent is upwards of $3,000 a month, $1,000 might be earmarked for the down payment.
Still think playing landlord is for you? The Landlord Association, the National Association of Realtors, and other real estate sources contributed to this list of considerations:
• First, are you able to rent out the property? If you're part of a homeowners association, there may be restrictions preventing you from renting out your condo or home to another party.
• When determining rent, include mortgage payments, insurance, taxes, utilities, repairs, and the services of a property management company if you decide to use one. Check out prevailing rental rates in your area so that you're competitive. Keep in mind that you may need to factor in the amount of time the home could be uninhabited. Each quarter, the U.S. Census Bureau issues quarterly rental vacancies. Nationally, if the rental vacancy rate is near 10 percent, for instance, you may need to knock off 1.2 months from expected annual rent. Plan to set aside 25 to 30 percent of the rent for maintenance, repairs, and other unexpected expenses.
• Follow the Fair Housing Administration Act when you screen prospective tenants. A discrimination lawsuit is extremely costly and completely avoidable. Give everyone an equal chance to rent your property, regardless of their race, religion, or beliefs. You have the right to run a credit check and talk to references, but you must apply your screening equally. Floss, the Chicago-area agent and property manager, says he offers to bring information and paperwork to the current residence of a prospective renter so that he can get a sense of their housekeeping and maintenance habits. And he always calls references.
• A visit may be the best time to address whether pets will be making the move and if a deposit is necessary to cover their potential damage to wood floors or other assets.
• Protect yourself and keep an open mind. Take a careful look at the circumstances that drove a prospective renter out of the housing market, such as a foreclosure. But depending on income and other factors, these folks might make for good rental candidates, says Floss. Divorce or other circumstances often push someone out of a home unexpectedly—not necessarily financial hardship. Meanwhile, some people walk out of a foreclosure with hardship cash that could be turned into a few months of rent with an option to buy.
• For rental situations other than rent-to-own, Floss recommends trying to limit the deal to a month-to-month lease (your rental charge will likely have to reflect the short-term nature of the contract.) Floss says if tenants delay or skip rent payments and eviction proceedings follow, this can take a long time to resolve, depending on state rules. Dealing with evicting a tenant while trying to sell a home should be avoided.
• Get everything in writing. This means everything from a rental application to a code of conduct. If a tenant needs to have something fixed in their dwelling, ask for the request in writing in addition to telling you on the phone or in person. This will help you with income-tax deductions and create a history for each tenant.
• Get insured. Make sure you have the maximum amount of rental insurance, property liability insurance, and any other type of insurance that may be required in your state. This can help protect you from devastating losses.
• You're responsible for providing a clean and secure residence. This will help you with property liability and keep your rental property looking its best. Depending on the location, extra security measures can help keep your tenants safe and may even lower your insurance premiums.