What Should I Know Before Renting Out My House For The First Time?

When it comes to renting out a house, Belong encounters a lot of people who feel like they “got it wrong” the first time, or took on more than they bargained for. As a company who works with homeowners who are looking for a better alternative to self-managing a rental or are ditching property management, we hear a lot of gripes! Things like “I didn’t realize I would be taking on another part-time job”, or “I wish I had known my insurance policy wouldn’t cover my home when I moved out”.

So what do first-time landlords wish they knew before they started? What should you know before putting your home on the rental market for the first time? We’ve put together a list of 7 questions you should consider.

7 questions first-time landlords need to ask before renting their home

Before putting your home on the rental market, consider these 7 questions.

1. How much work does it take to be a landlord?

Short answer: A lot!

This is the first question you should ask yourself before taking on the job of being a “landlord”. Rental homes are seen as an opportunity to earn passive income, yet the amount of work required is anything but! Self-managing a rental home can be like having a new part-time job.

If you’re not up to the challenge of finding the right people to live in your home, fielding calls at any time of day or night, fixing leaky taps and broken garbage disposals, or chasing down rent every month — you should find someone to help. This could be from hiring a property manager or a modern alternative like Belong. This lets you outsource everything from placing residents to collecting rent and dealing with legalities like lease agreements.

2. How should I set up my accounting for a rental home?

A common mistake that homeowners make is not to establish separate bank accounts and bookkeeping for their rental home. This means that expenses become muddied with your own personal finances, making bookkeeping and tax time a headache.

The IRS treats rental homes like a business, so from a financial perspective, you should too. Even if you once lived there, when you put it on the rental market, it’s time to create a separate identity for the home. This means a fresh bank account too. Keeping personal and rental accounts separate will provide clarity, simplify your record keeping, and make reconciliation much easier.

For the full rundown on how to establish your accounting for a house that is going on the rental market, check out How to Manage Accounting as a First-Time Landlord: 5 Best Ways.

3. Does my home insurance cover my home for damage by tenants?

No one wants to be caught out in an emergency or disaster, which is why we have insurance. But what happens when that insurance isn’t enough? Many homeowners don’t realize that when they put their house on the rental market, their existing policy no longer covers them for everything they need.

This is because homeowners insurance only offers protection for owner-occupied properties. To cover a tenant-occupied home, you need specific landlords insurance. This extends coverage to include liability and damages that could arise from residents.

Renters insurance is different again, held by tenants to cover their own possessions and liability — not you or your home.

So if you move out to rent, buy an investment home, or rent out a house you have inherited — it’s time for a new insurance policy. If you are a homeowner and have a house on the rental market, you will need both types of insurance — one for your home and the other for your rental.

When you join the Belong network as a homeowner, you’ll need a landlords insurance policy, either through our network or a provider of your choice. This protects you as a homeowner and keeps a roof over the head of your residents. For peace of mind, we ask the same of your residents, with renters insurance a requirement for everyone we place.

Read More: What Type of Insurance Should I Get For My Rental Property?

4. What expenses should I budget for on a rental home?

The costs of maintaining a rental home will vary based on a variety of factors from the condition of your home to who you hire to help.

To determine how much it will cost you to be a landlord, begin by identifying and calculating your fixed costs. Things like mortgage repayments, insurance, taxes, HOA fees, and rental licenses or inspections. These fixed amounts will account for most of the costs of being a landlord.

If you are self-managing the home, you will need to budget for marketing, tenant screening and other costs related to managing the property. If you are paying a property management company, make sure you have a full understanding of the costs you’re likely to incur. Many of them hide in the fine print such as lease renewal fees, vacancy fees and early termination fees.

To help budget for maintenance costs, read How to Predict a Property’s Annual Cost of Maintenance.

Our last piece of advice would be to “expect the unexpected” when it comes to home expenses. Every homeowner should have an emergency fund to use if the worst happens, such as a storm hit or a water heater dies. Belong covers homeowners for these dramas, with finance options to cover the cost of things like maintenance and repairs. Repayments are spread over the term of your resident’s lease, creating a simple way to fund expenses and manage your cash flow.

5. How do I figure out cash flow on my rental home?

If you take your rental income, minus your mortgage repayments, that’s the cash flow, right? Unfortunately not! For an accurate rental property cash flow analysis, you’re going to need to do some math.

How to calculate cash flow on a rental property:

• Determine how much income your house produces, i.e. rent and any other payments such as services provided or storage charges.
• Deduct the weeks/month when your home is vacant (or make an allowance for potential vacancies at the end of a lease).
• Figure out your gross rental income, which is rental income + additional income – vacancy rate = gross rental income.
• Tally current and predicted expenses from management fees and maintenance costs to property taxes and local utility fees like garbage disposal. This will determine your gross operating expenses.
• How much you earn on a rental after expenses is the ‘net operating income’ or NOI. Take the figure from step three (gross rental income) and subtracting the figure from step four (gross operating expenses).
• The final step in your rental home cash flow analysis is the amount of debt you need to repay against the home. This could be your mortgage repayments for the year or home equity loan repayments.

For example, if your gross rental income is $36,000 a year and your gross operating expenses are $4,000, your net operating income = $32,000 per annum. If you had mortgage repayments of $18,000 per year, your final cash flow figure would be $32,000 - $18,000 = $14,000 per year in cash flow (or $1,116 per month).

You can find a more detailed breakdown of these steps and calculations in How To Do An Accurate Rental Property Cash Flow Analysis.

6. What local laws do I need to follow when I rent out my home?

Did you know that tenant-landlord laws vary from state to state? Depending on where your house is will have an impact on how you manage your home as a rental. For example, some parts of California are subject to rent control laws. In San Diego you need a permit to use the home as a short-term rental. Many states have even legislated approved reasons to evict a resident from the home.

Your home's location even impacts the documentation you’ll need and when/how you need to dispose of it due to privacy legislation.

This means that before your house goes on the rental market, you should be looking at your local government websites to ensure that you’re up to date with laws and responsibilities that will impact you and your residents. This is another area where a property manager or alternative can help, by providing local expertise and reducing your liability by handling communication and the day-to-day decisions. 

7. What happens if my tenants stop paying rent?

Every year millions of Americans are behind in their rent. Which also means that millions of homeowners are chasing down payments while their rental income has stalled. Without income, it won't take long for that cash flow to stop looking healthy.

How your house is managed will determine what your options are in this scenario:

• If you self-manage your home, you will need to check local jurisdictions for rules on grace periods. Once you have confirmed rent is late and in violation of your lease agreement, you will need to notify your resident and ask for payment. Keep a record of all contact and serve a written notice to support your documentation. The next step is to issue a notice to “pay-or-quit” their lease, in which case you will need legal support as this is the first step toward eviction.

• If you hire a property manager, they will manage the issuing of notices on your behalf and do the legwork for following up on rent. Check the fine print on your agreement, as terms will vary on whether the company will pay your rent when it’s due or when it’s received from the tenant. If it comes to the point where you need to evict, they will also guide you through this process, but be aware that most charge for this service and that eviction protection is often capped at around $500 in costs to file notices.

• If you partner with Belong, this will never happen! Belong vets  residents and approves them for guaranteed rent, which means we pay rent on schedule, even if they don't. If the worst happens and a resident needs to be evicted, Belong will cover homeowners with up to $15,000 in eviction protection.

Before renting out your house, speak to Belong

Belong loves renting out homes for the first time, ensuring you start on the right path to achieving financial goals and passive income.

Whether you’re new to real estate investing, have recently inherited a house, are dealing with a problematic property management company, or burnt out on self-managing your rental homes, Belong can help.

Belong is simplifying the rental experience and helping more homeowners reach their financial goals through real estate. Visit our homeowner's page to find out more about how our services are helping people to ditch property management in Seattle, San Francisco, San Diego, Los Angeles, Tampa, Orlando, Jacksonville, Miami and many more.

Disclaimer: We don’t enjoy using the word ‘landlord’. We prefer to refer to members in our network as homeowners and residents, not landlords and tenants, since we’re on a mission to upend and redefine the traditional landlord-tenant relationship. That said, this article is for homeowners taking the leap for the first time who are looking for answers with more common industry terms like ‘landlords’ and ‘tenants’, so in some instances we have had to stick to the old moniker for owners of rental homes.