Wednesday, December 19, 2012

Renting Your Home - My step-by-step instruction manual

For the last three years I have been renting our home in Baltimore City. I'm not a professional property management firm, nor did I have any prior experience as a landlord. I've had a number of friends ask me about this experience and for guidance about the process. Below are the steps I went through to rent our home with some sample forms and tips throughout.

Prep the house:
If you are living it in while listing, clear out everything non-essential during a photo shoot. We packed bins and moved them to a storage unit to clear our home out. Be sure to use a nice wide angle lens to capture each room. Quality photos of each room are essential in generating interest in the listing. If you don't own an SLR camera w/wide angle lens it's worth hiring a photographer for a day. Be sure to include pictures of the area including any community play grounds, shopping centers, attractions, etc.

Determine rent:
Scan Craigslist rentals in your area for comps a few days/weeks before listing. Also, try, type in your address, and see what estimate they come up with. Assuming you have the time, it's better to start your listing on the high side and work your way down each consecutive week.

Create your listing:

I have found it helpful to create a website showcasing the property. For this process I use a simple HTML5 editor to drag and drop using default templates. Be sure to included all the home info, pictures, room dimensions, map, any special rules on pets, smoking, parking, etc. Next I purchased the domain name for my address. I use NameCheap but there are thousands of registrars out there and you can use Wix directly for this but it may cost more. As an example you want, Wix premium listing allows you to link your wix page with your custom domain for ~$5/month. For reference, here is my wix page property showcase. (I unlinked from the street address domain as it is tenant occupied.)

Publish your listing:
Craigslist is a great (and free) way to advertise your home. Create a post and include the asking rent, 2-3 nice pictures, and a link back to your custom webpage. As you receive questions about the home, go back and update your wix page with additional info.

Many real-estate agencies offer rental listings and charge a months rent to publish. Personally, I don't think this is worth the price unless you are really having trouble reaching an audience. Try your free options first.

Schedule Showings:
An AWESOME tip my property management friend told me: schedule all showings on the same day. Have a Saturday walk through extravaganza!  You can prep/clean the house and for security put away everything of value. This will also allow you to evaluate all applicants at the same time. If you cater to on demand showings you will be forced to decide on a renter without options. This is not the same as selling a car where the first buyer with a check book wins, you will be trusting an individual with your home.  Make sure the showing date is a decent number of weeks out to generate significant interest. Don't list it Wednesday and expect to book up a Saturday showing.

The Wix page has a contact form and map included. I had people contact me via the site form, phone, or respond directly to the CL ad. Have your calendar ready at any moment to book a showing. I scheduled people first in 30 minute increments. Be sure to get their name (first/last), phone number, and e-mail address at the time of the booking. Two days before the showing e-mail/txt everyone a reminder with their scheduled time slot. I had about a 60% turn out rate even with confirmations. If you schedule fills start breaking them into 15 minute time slots. I ended up a Saturday booked from 9am to 4pm every 15 minutes. It was crazy. A lot of people said the date didn't work for them and requested a separate showings; I declined and took their contact info should a second showing be scheduled. This worked well to have a backup list should in case further showings are required.

Practice your "tour" ahead of time, consider giving a friend/spouse a tour and get their feedback. Be sure to discuss the area, access to highways, community events, parking, schools, downtown, and restaurants. Some folks may be re-locating and not familiar with your area. Don't just say, "two bedrooms with closets...any questions."

Have your home in move-in condition (no kids toys, dirty dishes, or "I still need to paint that"). Be ready to open every closet and kitchen cabinet. Think of a model home from a developer, try to mimic that feel. Dress nice, you're now in sales. Be mindful of blinds, lights on, temperature, scent, etc. I had two packets at the door, the application, and an information packet. Most prospects were looking at a number of properties throughout the day and the info packet helps keep your home top of mind.

Welcome each prospect and hand each adult over 18 an application and info packet whether they ask for it or not . You are subject to discrimination laws so be sure everyone is treated exactly the same. Don't ask questions related to age, sex, religion, or gender. These items have no bearing on their ability to pay you rent and care for your home. I did ask about their reason for moving, current residence, employment situation, pets, smoking, and how many persons they expected to occupy the residence. After each tour jot down any notes/observations you may have had. After 20 showings you will have no idea who Bob and Erin are.

If two appointments show at the same time, have the other wait outside or seat them in the living room, don't let folks wonder around your home unescorted! Mainly for security reasons but also you want to sell each feature, room, view, appliance, etc.

Print out a few months of utility bills and have those ready in a binder as many people ask about average utility costs. Have a move in date ready, "lease is one year and begins February 1st". Decide ahead of time how flexible you are with dates so if someone asks about March 1st you can be ready with a response, "I'd be happy to take your application but preference will be given to applicants ready February 1st."

I was originally concerned about what type of individuals would show up at my door. Obviously this may vary by location but I was really surprised by the quality of individuals. Out of 20+ showings I met doctors, nurses, teachers, architects, engineers, and students; all of which I would be comfortable renting our home to.

Be sure to have to have each adult tenant complete a rental application. Applications should include a copy of valid ID,  two pay-stubs, signed credit consent form, and an application fee. Do not feel bad about requiring a application fee (I used $20). It's not necessary but it weeds out folks who are not actually serious. Running a credit/Criminal check will cost you. Carry a few large envelopes with you to seal applications in, you don't want loose pay-stubs around. Protect the privacy of each applicant.

Make the process transparent, "I'm accepting applications starting today which will be considered in the order they are received. After all showings I will process all completed applications. Once a tenant is approved all other applicants will be notified of the pending contract. Once a final lease is signed all applicants will be notified the property is no longer available."

If possible, it may be good to have a scanner/laptop handy for anyone who does not have access to a copier. Some applicants may want to complete an application on the spot. (This has happened twice to me).

Application review:

For background/credit checks I use Advantage Tenant. There are a number of similar providers. Creating an account takes a little work as you need to verify your listing with them by faxing a copy of your listing, lease, and application form to create a new account. Set this account up one week prior to the showings to allow set up time. Running the actual report takes only a minute. Never runs a credit check on someone who did not sign the application and credit check authorization! Advantage Tenant site includes a forms section with a disclaimer form I include in my application packet. This is the cleanest way to avoid any complications with running a credit & criminal check on applicants.

I did showings on Saturday, screened Sunday, and notified the applicants Monday. I sent the selected applicants the lease (PDF) and requested it signed and returned within 2 days with the security deposit. I use one month's rent as a deposit, others require additional deposits for pets. Do not accept or countersign a lease until you have received/deposited the security deposit checks.

Maryland law requires that the security deposit be placed in a separate interest bearing account within 60 days of receipt. I used to create a completely separate account. At the end of the lease you must return the security deposit with interest earned.

Once both parties have signed the lease and the security deposit is in the account you are done the hard work! Be sure each tenant has a copy of the countersigned lease. For reference I've attached my lease template.

Time to pack up, get your stuff out, and treat your property like a business. Finish cleaning, touch up paint, clean appliances, etc. Once empty, go back in and photograph each room again. You will need these photos to advertise again next year while it is tenant occupied. Also, take a photos of walls, carpets, fixtures, etc. Hopefully your new tenants are great; but if not, you need to document any damage that was done. Make extra copies of all access keys, purchase a year supply of air filters, make sure every floor has an accessible (mounted) fire extinguisher. Do a final walk through and maybe invite a friend for a second look.

Welcome tenants:
Day 1 of the lease, meet the tenants and perform a joint walk through inspection. Inspect each room and document any existing damage. I've attached a walk through inspection form for reference. Both parties should sign the final form. Turn over the keys, any applicable owner's manuals for appliances, and show them any safety features like the breaker box, water shut off valves, etc. You may want to have a welcome package with a gift card, bottle of wine, or something equivalent.

Other Considerations:

I check in every few months to see if my tenants need anything repaired/replaced. Each month, ensure the rent checks arrive in a timely fashion, deposit immediately, and record the cash flow.

Side note, the IRS looks at cash flow for taxes so for example January rent is due December 25, it will actually be counted in December calendar tax year even through the money was intended to cover January.

Home Warranty:
If your appliances are older or if you will be out of state a home warranty might be worth it. It gives the tenants someone to call 24/7 when the fridge stops working. I found the cost was not really worth it since my appliances were new and we are local.

Document and segregate any and all expenses related to maintenance, repairs, travel, improvements, etc. You can write off repairs/improvements necessary to put the property into service. I keep track of my expenses on a spreadsheet with a tab for each year (provided at the end of post). The IRS will dictate a reimbursable mileage rate each year.

The most significant impact of renting your home is your ability to claim depreciation on your taxes. To determine your annual depreciation, simply divide  your basis value by 27.5 (IRS residential depreciation schedule). Determine your basis value by using your purchase price (original loan value) - land + improvements. Your land value can typically be determined by looking at your property tax assessment. Maryland has all this data available in the SDAT database. For example a $300K home with land assessed at $100K would depreciate at $7,272/year (200K/27.5). Prorate year one for however many months the property was in service (this can include vacant time). IRS allows 1/2 month increments. For 8.5 months of being in service, you would write-off $5,151 year one, and $7,272 each year there after until the entire basis value ($200K) has been depreciated. Keep in mind this will impact your taxes owed (capital gains) should decide to sell the property. See IRS publication 527 for additional info.

Be sure to notify your home insurance provider that your home is no longer your primary residence.Your rate may increase.

Some local governments require you to disclose your rental property status. For example, Baltimore City requires you to file an annual disclosure with a fee ~$30. Also, if you have an HOA you may have to notify them or follow certain rules.

Homestead Tax Credit:
In Maryland, changing your primary residence will have an impact on any existing homestead tax credit. Depending on your tax assessment this could have a significant impact on your property taxes. We experienced a $200+ jump in our monthly property taxes with the elimination of our homestead tax credit.

Contact info:
Make sure your tenants have your contact info, cell, home, work, and another contact number. It may also be helpful to talk to your immediate neighbors and provide them your cell should any problems arise.

Being a landlord can be a great option. Alternatively, you could hire a property management company which typically charge one months rent + 10% of the rental fee each month. On a $2,000/month rental property you would pay $4,400/year. If you are re-locating to a different state, have a high maintenance single family home, or are simply too busy, a property management firm may be a great option.

I've attached a number of forms/templates for reference. Hopefully this info helps to get you started.

Rental Application
Depreciation Schedule
Expense Registry
Inspection Report