After the nice little bump in sales activity during the tax credit era of 2009 and 2010, the end of the year has seen slowing sales across most of the country. Here in Orange County, CA many homeowners are once again left wondering what they are going to do with their property. Many homeowners who would like to move on, but don't want to sell in a down market, are exploring the option of leasing out their homes. Leasing out your home can be a great option for many, but most people currently exploring this option will be first time landlords. As such, renting your home to strangers is not something you should carelessly jump into. The following should serve as a good starting point in deciding whether this option will work for you.
Will Your Home Make a Good Rental?
Do the Numbers Work? - The first thing to analyze is the amount you spend on the property per month (mortgage, tax, insurance, hoa, mello roos, etc) vs. how much rent money your property will bring in the current market. Much of this depends on how much you owe but you will also find homes in some areas just make better rentals and bring in more rental revenue per dollar in expenses.
Ideally, you will want your rental income to be well in excess of your expenses but these days we are seeing many people completely happy with rental income that lets them break even or even take a small loss each month. To them, it is often a better alternative to selling and losing a couple hundred thousand dollars.
Fragility - To us, this means how easy it will be for a tenant to cause damage. Very fragile homes would contain things like priceless painted frescoes while the most durable would have concrete floors and rock landscape. Most homes fall somewhere in the middle and it is worth noting that durability is a desirable trait for rentals and time should be taken to reduce your properties vulnerability.
Finding Good Tenants
There are many ways to find tenants these days, some people utilize the traditional methods like newspaper ads and yard signs while many modern landlords post their homes for rent on classified sites like Craigslist. Many more will enlist the help of a real estate agent to post their home for lease on the local multiple listing service. So which of these work? The answer is: they all can! The biggest issue lies though in how fast will they work and what kind of tenants they will draw.
Yard Signs - Yard signs are aimed at drawing the attention of passers by. The upside is that most inquiries from this source will already be interested in the area. The negative is that you are limited to only people who happen to drive by the property.
Free Online Classifieds -There are many of these today, the largest being Craigslist, and there are also many people that use them to find rental homes. The great opportunity here is that the ads are free and gain exposure from a large online audience, the downsides are that everybody else uses them and your ad can get buried in just a few hours. Also, the classifieds have many "tire kickers" with an uncanny knack for wasting your time and missing appointments.
Friend of a Friend - This is one of the most popular ways that new landlords experiment with leasing their property. We've seen it work, however, more often than not the landlord will have uneasy situations where the risk of ruining a friendship always lingers. When renting your home we recommend treating it like a business and if a friend just happens to be the best tenant for your business, that's fine. Just exercise extreme caution and avoid doing this if you have any doubts.
MLS - The MLS is the local REALTOR database of homes for sale but it also includes homes for lease. There are very few apartment community listings on the MLS and a large percentage of the tenants viewing homes on the MLS are also working with an agent. The pluses are that most tenants with an agent have already been qualified, the users are usually just looking at homes (not apartments) for lease, it offer a wide net of online exposure, and hosts a very large pool of prospective tenants. The downside is that you as a landlord will need to offer compensation (money) to the agent bringing a tenant that leases your home. This ranges anywhere from a few hundred bucks to a few thousand depending on the price of the rental.
Showing The Home
There are two types of showings. Those done by licensed real estate agents using a lockbox keysafe and those done by appointment with prospective tenants. The agent showings are usually not a problem, but for whatever reason, we have many more "no show" appointments in the rental market than the sales maket. For this reason, we prefer to book consecutive blocks of appointments (maybe 2 hrs at a time) and confirm with all interested prospects via phone call ahead of time. All the phone tag and no shows can be very draining and time consuming, but with rental showings, it is just part of the process.
Fees? - We recommend collecting a reasonable screening fee. Screening is labor intensive as you must call from 4 to 6 people/business for each applicant and the resulting phone tag can be very consuming. Many will require all questions to be faxed over in writing. Then, you'll need to run a full tri-merged credit report (*Please note that "free credit reports" are only free because they are incomplete) on the prospective tenants and this will cost you $20-$30 for each tenant. Finally, when when you've decided on a prospective tenant, we'd advise a full background check looking for bad check writing history, evictions, and criminal convictions. This alone ranges from $30-$50 so in reality the $35 screening fee doesn't even cover your expenses, it simply shows you who is serious enough to spend your time screening.
Be careful with the screening - The fee and screening procedure are things you need to advertise and have written permission to collect. Many areas have maximum amounts permissible by law. We would also advise "Pre-screening mandatory minimum requirements" be set forth and delivered to prospects in writing prior to accepting their fees. Landlords should be familiar with these in order to prevent being falsely charged with discrimination for not leasing to a prospective tenant.
Another thing to be cautious of is the questions you won't get answers to. When calling references, you should be able to get answers to questions verifying their employment, tenancy dates, and current status. The details though can be tough. Past landlords and employers will usually not say outright that the applicant was "bad." There is major liability in saying so. Employers aren't the only ones who need to be careful with what they say. It is also a very bad idea for a landlord to do or say anything that can be seen as discriminating against a tenant based on age, race, religion, marital status etc. For example, asking "Do you have children?" is out of bounds while asking "How many are in your party?" is seen as as acceptable and relevant. Knowing how to ask the appropriate questions to get the answers you need is such an important skill, it could be the subject of an article all by itself.
Security Deposits - We always recommend security deposits to protect not only against damage but also against unpaid rent. Typical security deposits will be equal to one months rent and are generally refundable at the end of the lease term provided no damage is done.
Pets or no pets - You as the landlord have the decision to allow as many and the type of pets you'd like, however, you also have to power to say no to pets. Saying yes runs the risk of damage to your home so many owners will require an additional pet deposit or increased rent rate with pets. The downside of not allowing any pets is that you will be limited to only those that do not own pets. You'll be surprised how much of the tenant market owns pets!
Section 8 - This is what's known as subsidized low income housing. The good part is that the government pays all or a significant portion of their rent and it really is the closes thing to a guaranteed rent. The downsides are that it can be difficult to evict a Section 8 tenant, they often still have to pay a portion of the rent, and your home will have to become Section 8 approved housing.
Foreclosures/Bad Credit - Particularly in today's market landlords are running into many tenants with poor credit scores, short sales, and foreclosures on credit history. While ideally you'd want a tenant with zero negative credit history, the fact is that a very large segment of the renting population lost their home to foreclosure. We have successfully leased many properties to people both with poor credit and foreclosures. If you come across this scenario, the real important thing is finding what kind of payment history they have with other bills and what type of references they can provide from past landlords.
How to Make a Decision
Deciding to lease out your home should not be taken lightly but, if the numbers work for you and you have a home that isn't fragile, it can be a very good option in the current market.
When renting your home, it should be noted that time is not your friend. Missing just one months worth of rent can be very costly. Still, jumping too fast into a deal with a tenant you don't know enough about can be even more expensive. When we lease homes for our clients, we like to go with a method that will generate the largest amount of quality tenants in the shortest amount of time. This keeps the landlord from making unnecessary payments without compromising long term happiness with their tenant. To do this, we really have to do almost everything, a healthy mix of proven traditional media as well as top performing modern ones.
Not only is it of paramount importance to find prospective tenants, but based upon conversations with some of our clients, we also find landlords value professional leasing services in helping them evaluate their home as a rental, handle all showings, screen applicants, make tenant recommendations , as well as provide the owner with a fully executed lease contract which will be enforceable in court.
Hopefully this has helped answer some questions about renting out your home in Orange County, you can ask us up some more questions here or just leave a comment.
**Be sure to catch the follow up to this article which will detail the Rental Realities and Property Management Horror Stories. It will be a must read if you are even considering renting out your home.