The housing market is in bad shape. The most recent Case-Schiller home price index, which is widely considered to be the most accurate measure of home prices, showed only a modest 0.1% increase in July of 2011, but that still leaves many areas of the nation at 2002 prices, and even lower in others.

TUTORIAL: Exploring Real Estate Investments: Introduction

Maybe your home has been on the market for a long period of time and you've determined that you can't sell it at a value that allows you to break even. Maybe you have an extra home due to an inheritance or other gift that you don't want to sell or maybe you want to supplement your income as a landlord.

Regardless of your reason, you'll first need to get your house in order both financially and physically. There's a lot to do before you take on your first tenants but very few come with extensive cost.

Although you have homeowner's insurance on your home, that isn't enough if your home serves as a rental property. Any time you have people on a property that you own, you take on some degree of responsibility for their safety. What if a tree falls on the home injuring your tenants? What if there is a gas leak causing an explosion? What if something relatively minor turns in to a major legal headache?

Next, what if you purchased this property for the sole purpose of renting and that tree caused so much damage that extensive repairs have to be made making the house unsuitable for renting? A homeowner's insurance policy for renters will often include reimbursement for lost rental income. (For related reading, see The Beginner's Guide To Homeowner's Insurance.)

The requirements will vary by locality, but in order for a residential property to serve as a rental property, a permit is required. The purpose of the permit is safety oriented. Often, an inspector from the local government will inspect the house for various safety hazards including electrical, heating, adequate exits from the home, and other health and safety concerns. These permits aren't expensive, but they are required.

Repairs and Upgrades
In addition to the basic requirements, remember that just as you would if you were selling your property, anything you repair or upgrade adds value to the home and makes it more appealing to those who are comparing your rental property to others. Make sure it is clean, freshly painted, and anything that looks severely dated should be replaced providing the cost isn't outlandish. You have to build the costs of the upgrades into your rental rates so don't go overboard.

What Will You Charge?
List all of your costs and what you would like to see as a monthly profit. Don't forget to add in to your costs a premium for any repairs you'll have to make during the course of the lease. Once you arrive at a rental rate, check rental rates in the home's area for a house as close to the same as yours. This gives you an idea of how competitive your rate will be to others.

Finding a Tenant
Before you look for tenants, be sure to understand Fair Housing laws, which originally came about as a way to prohibit discrimination based on sex and race. Those laws have changed and are now more complicated. On top of Fair Housing laws, you have to run a credit check which is more difficult for individuals.

Even if you were legally allowed to judge them based on your intuition, experienced landlords will tell you that first, there is never a perfect renter and second, gut feelings are often wrong. You will most likely need the help of an attorney if you plan to make your own application and contract, but a property management group can help you with the rental paperwork.

Property Management Group
If your rental property is not a short distance from where you live or you don't want the headaches that come with the day to day tasks of being a landlord, consider hiring a property management company to serve as the landlord for you. A property management company will handle all paperwork, take care of the repairs, collect rent and communicate with the tenants. The company will often charge an average of 10% of your rent for this service.

Property Management companies will also assist you with the legal procedures for evicting tenants. One of the largest worries that comes with renting a property is when a tenant doesn't pay. Evicting a tenant is a legal process that takes a lot of time and resources to complete. Although the landlord can't control the actions of their tenants, avoiding eviction procedures whenever possible is advisable due to the cost, time and potential damage to the property as a result of disgruntled tenants. (Find out why this job more closely resembles the role of a CEO than an asset manager. For more, see A Career In Real Estate Portfolio Management.)

TUTORIAL: Buying And Owning Real Estate

The Bottom Line
Finding horror stories of landlords who found more headaches than profits isn't difficult. Before you decide that renting your home is the best solution, take an adequate amount of time to talk to other landlords and do a detailed analysis of the costs involved. You may find that selling your home is a better use of your time, and could ultimately save you money.

Related Articles
  1. Home & Auto

    Should You Buy A House At Auction?

    In theory, many of the best properties are auctioned. But auctioned properties aren’t always hidden gems.
  2. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  3. Entrepreneurship

    Top 10 Features Of a Profitable Rental Property

    Find out which factors you should weigh when searching for income-producing real estate.
  4. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  5. Retirement

    Using Your IRA to Invest in Property

    Explain how to use an IRA account to buy investment property.
  6. Investing Basics

    8 Numbers For Evaluating A Real Estate Investment

    Having a strong grasp of a real estate investment’s finances can mean the difference between a lucrative position and possible bankruptcy.
  7. Professionals

    Alternatives: Will a Market Correction Lift Them?

    When were are surging, advisors and their wealthy clients asked why they should bother with lagging alternatives. Will that change with a correction?
  8. Investing Basics

    Water Investments: Will They Sink or Swim?

    Will these water-related investments sink or swim?
  9. Stock Analysis

    In Focus: Water Scarcity

    After a discussion, sponsored by CDP, we share the importance of water disclosure as it relates to businesses operating amid increasing water scarcity.
  10. Entrepreneurship

    Behind the Hair: How To Build an Empire, Trump-Style

    Who is the man behind the hair? The crucial steps that Donald J. Trump took to build his real estate and celebrity empire.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Why might landlords require renters insurance?

    Landlords can require renters insurance to lower their own liability and insurance costs. According to data from the Insurance ... Read Full Answer >>
  3. Can hedge funds outperform the market?

    Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>

You May Also Like

Trading Center