Rentals are not something I often blog about, but my blog always come from things that I come across, and I am seeing more and more homeowners opt to use a Realtor when it comes to renting out their space. I also see more home buyers wanting a rental income in their new home, and not many are educated on what to look for and what they should be staying away from.
Renting Your Space Tips
The very first thing I have to say to all the homeowners is be considerate to your Realtor, just because the tenant is paying the commission you should still understand you are signing into a contract with a company to work for you. If you think a family member/friend is going to rent from you find this out BEFORE you list your home, don't call us a few weeks into all our work to inform us you don't need us because you found someone close to you to rent. We will never express to you that we are upset because we are professionals, but imagine going into work for weeks knowing you would have to wait for week 4 to get paid, and when week 4 comes your told that they won't be paying you. Of course there are sometimes where circumstances arise and this happens as well, and I have willingly withdrawn some rentals because the homeowners were upfront and honest with me.
Picking your tenant is always a tough decision, sometimes you will have tons of applicants and other times you will only have a few. I always suggest choosing your tenant based on Credit Score, Background Check, Proof Of Income, and Current Landlord Reference.
When looking at someones credit score their are a few things you should keep in mind. In today's economy many potential tenants may have a low credit score, if they do you can ask them to share the entire report and base your decision on their entire report but keep in mind legally you are ONLY allowed to see the score itself. Many tenants looking for whole house rentals in recent months are coming out from a short sale on their own home, which is what caused their score to drop. If that is the only blemish on their credit I would recommend still considering them as your tenant. Many people fell on tough times, and if they are pro-actively trying to fix things I believe that it does say something about their character.
Another big concern is for those tenants who are working off the books because proof of income becomes a little more difficult. Even if you are being paid in cash neither the Broker or the Landlord is the IRS, we are not concerned about you not paying taxes. Many employers are willing to write a letter stating that you are paid an average amount weekly, or if you frequently deposit a specific amount of money simply showing us the account deposits with your personal information blacked out (ex: Account #, SS #)may be enough for the homeowner. Another time when Proof of Income can come into question is for those who are Independent Contractors, like me because we don't receive checks weekly or sometimes we will have a ton of business and other times they may be less. If you have tax returns, or some sort of quarterly statement available from either your business account or employer, even tax returns can work for proof of income.
References and checking with their current landlord must be done, and documented. Your real estate agent will be making the calls for you so before they begin making the calls be sure to review with them any specific questions you want them to ask. No one will purposefully give someone a bad reference, what you want your agent to look for is how naturally they answer the questions. There is a reason why we ask on the application how long they have known their reference, if someone has only known the tenant for say 2 years they may be unsure of certain things like the length of someones employment if they worked there for a very long period of time prior to the friendship. If a reference is unsure of things like if their friend smokes, has any pets, or current employment status that could possibly be a red flag for your agent to make note of. Any red flags that come out in the course of checking references should be communicated to you and your agent should call the prospective tenant to discuss them. I once had someone unsure of their friends pet situation because the prospective tenant had not yet told their friend that the older dog they did have would not be making the move with them. Again communication is always key in just about every aspect of buying, selling, or renting your home!
Tips For Buyers Looking For Rental Income Potential
Now let's talk about one of the myths about renting and that is it's legal to rent out your basement .......... I am here to burst many bubbles when I say in the Town Of Babylon that it is illegal to have a basement apartment !! What is legal, is to have your basement converted to living space, so you can have everything except a kitchen and it be legal. There are many reasons they will not allow for a apartment in your basement, and the most important reason in my opinion is it is NOT safe!
For those first time home-buyers the ability to have rental income plays a very important part of what their new home must have. Most first time buyers are not aware that there are many home styles that can easily obtain a rental permit.
- High Ranch
- Expanded Capes
There are a few reasons why I recommend making sure that you have a legal rental. Most important is you can never predict what could possibly happen to you or your home. If you have a issue in your home such as a fire or a flood and your insurance company comes in and discovers your home has a rental and that is not legal there is a very good possibility they will not help fix damages because your home is not what you were representing it to be. If your home is in close proximity to another dwelling and a fire occurs in close proximity the fire marshall can request that your home is checked to make sure it sustained no damage. No good will come of the Fire Marshall coming into your home that contains illegal rentals. The legal fees, time, and bringing your home up to code can be costly.
If your buying a home and you are really depending on the rental income to make ends meet month to month, be aware you may have a few months of vacancy or even worse a bad tenant which is a risk you take when you are renting out part of your home. Many homeowners get pre-approved for a higher purchase price than they may be comfortable with paying out each month, and assume the rental income will be their safety net. Sometimes I find that buyers think their rental income will be much higher than it really is, when your looking at homes with that income potential make sure you get a professionals opinion on what the rental income will be. When I say professional opinion I am talking about your Buyers Broker, I am sure none of my readers are shocked or surprised that I am mentioning yet another reason for you to have your own agent !!
Another question buyers often have is what do you do if the home your purchasing has an illegal rental in it already, can you still buy it? Of course you can, their are a few things that protect you as a buyer from getting into a bad spot with an illegal rental. Banks have become very strict about their inspections if they see an illegal rental they will raise an issue, so before placing an offer you will want your agent to make sure the homeowner will be removing it. It is important to know that most banks will only require the homeowner to remove just the stove out of an illegal kitchen, and if you want more done than that you must get the homeowners agree to it and have it in your contract! Many homeowners will say they will be removing the kitchen for the home inspection, and buyers unfortunately do not clarify what exactly they will be doing and issues can arise. You also will have your title search where they will check to make sure their are no current C/O or permit outstanding on the house. If the homeowner is in the process of correcting these things they will have to do so before closing, and as long as they are working with a reputable attorney will not hinder the sale being closed.
Tenants Looking To Rent A Home With A Broker
The most common question I get from tenants is why is the brokers fee so high ? The common broker fee is an additional months rent, on top of your 1 Months Rent & Security to the landlord. When we actually do the math the broker is not really making all that much so here is the breakdown based on a $1200 Fee: $600 To Landlords Agent $600 To Tenants Agent now you have figure the average amount that the agent actually ends up recieving from the proceeds is about half which is about $300. The higher the rent, the higher the brokers fee but the bigger the home the harder it is for us to find a qualified tenant.
The best advice I can give prospective tenants is to be prompt, and timely when it comes to making it to your appointments and bringing in the required paperwork. Before I even begin the search I ask for your credit report, if you do not have a recent copy I am able to obtain that thru our Credit Report Company. By looking at the report prior to actually submitting any rental application we are able to see if any red flags will be raised, and how we can handle them. Once you have one copy of the credit report it can be used for all applications you will be putting in, so you will not need to constantly re-run it.
If you are planning on using a broker or renting from a home listed on MLS, the most important thing is to make sure you are not waiting for the last minute to begin your search. This is very important here in the Village where the apartments are in such high demand many will only stay on the market for a few days, and than they will be rented. If you plan on moving I suggest start working with a broker about 90 days before your lease is due to expire. Based on your wants, and needs the realtor will be able to tell you roughly how long it will take to find your new home.
My best recommendation to all those tenants is similiar to the advice I give to my buyers and that is to get your own broker! Your going to be paying that one months brokers fee no matter what, so why wouldn't you have someone doing all the legwork that goes into finding your new home !