The housing market has tanked, you can't find a buyer and you're stuck. Your best option is to rent out your house, to at least help cover the mortgage. You are about to become a "reluctant landlord."
"Thousands of military members and their families more every year. In today's real estate market, we know it's more difficult for those who serve our nation to sell their homes," says Christopher Villa, USAA's senior product manager for rental home insurance. "When members can't sell and decide to rent their home out, it's critical they let their insurance provider know. It's also vital that they take action to educate themselves on property management basics."
Before you rent out your home, use these six tips to help protect your property.
1. Find a Good Tenant. You can find tenants by advertising in local newspapers, both in print and online. Also spread the word through friends, relatives and coworkers. Ask potential tenants to fill out an application form, listing their basic information: name, employer, salary, previous landlords and references. You'll also need their Social Security number and signed authorization to check credit reports and criminal history. If you hire an online agency to provide background checks, make sure it is accredited by the Better Business Bureau. The BBB Military Line® focuses on information and resources specifically for servicemembers and their families. Do your own background checks by:
• Pulling credit reports. You can conduct your own research through one of the credit reporting agencies - Equifax, Experian or TransUnion - as long as you follow the guidelines of the Fair Credit Reporting Act, or FCRA.
• Checking criminal history. Search state and local records online or find an agency. Landlord.com offers tips on conducting tenant screening.
• Checking references, contacting employers and talking to previous landlords.
2. Determine How Much Rent to Charge. Get an idea of rent amounts by checking newspapers, online resources or neighborhood rental signs. Be realistic about rent levels. The rent may be lower than your mortgage payment, but if you want to find a tenant, the rent must be comparable to what's in the market.
3. Protect Your Rights with a Lease. "Have a written lease so that each party understands their rights and obligations," says Dianne Coscarelli with the American Bar Association. A good lease complies with fair housing, rental, tenant and insurance laws of your region. These laws differ across states, counties and cities, so you are safer working with a local lawyer, says Coscarelli. Avoid using blank leases from the Internet, she warns, because they may not comply with the laws of specific areas.
A lease should spell out the following:• Lease term: A month-to-month lease offers more flexibility if you are selling, while an annual lease provides more stability if you are holding on to the property. • Security deposit, usually one month's rent or more • Rental due date and late penalties • Repairs and who's responsible for what • Routine upkeep and maintenance responsibilities, such as lawn care • List of tenants • Rules of behavior, including noise levels, neighborly conduct and smoking • Pet policies and related deposits • Who pays homeowner association dues • Association rules that the tenant must follow • Arrangements for showings, if you plan to put your home on the market while it's being rented • Eviction terms, such as not paying the rent or damaging the property
4. Protect Your Property with Insurance. "Protecting your property with the correct insurance policy is extremely important. You need a different policy if you're renting a property to a tenant versus using it as your primary residence," says Villa. While you were living in the house, your insurance was a homeowner's policy, which covered the structure, damages and your belongings in the house. As a landlord, you'll need rental home insurance, also known as fire insurance." This policy typically covers your home's structure, legal costs, medical expenses and loss of rental income, if repairs are needed. Since you are not responsible for the tenant's belongings, you should encourage tenants to buy renters insurance.
5. Hire a Management Company. Fees are charged primarily for two services: finding a tenant, which includes advertising and background checks, and managing the property. The fee for filling a house can range from 50 percent to 150 percent of one month's rent, depending on the area. Monthly management includes collecting the rent, charging late fees, handling repairs, and dealing with early vacancies and evictions. If you hire a property manager, find a licensed professional, urges Candice Estey Swanson with the National Association of Residential Property Managers. To locate a manager in your area, go to NARPM's website and type in your ZIP code. Your real estate agent also may offer property management.
One big advantage of using property managers is emotional distance. "Often the owner will get involved with the tenant emotionally," says Swanson. "Even though (property managers) take good care of tenants and they're sympathetic, their job is to make sure that owners get the rent."
6. Evictions. You'll need an attorney to evict a tenant. "If the tenant doesn't leave willingly, you can't just go and move their personal property and kick them out," Coscarelli says. "You have to go to court, and the sheriff needs to come out and physically remove the person if they don't move out willingly." How much is an eviction? Legal fees alone can range from $300 to $1,000, says Coscarelli. But when all other costs are added, "You could end up spending easily a month's rent," she says.
"By taking a little extra time up front to do their research, military families can better protect one of their most important investments," say Villa.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.
USAA Financial Planning Services® refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.