Becoming A Landlord

Becoming a Landlord
Rewards, Risks, and Responsibilities
October 2008
© 2008 Fannie Mae. No part of this publication may be reproduced, stored in a retrieval system or transmitted in
any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without prior per-
mission of Fannie Mae.
Table of Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Chapter 1: Making the Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Chapter 2: Finding Reliable Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Chapter 3: Taking Care of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Chapter 4: Getting the Tenant Moved In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Chapter 5: Maintaining Your Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Chapter 6: Taking Care of Your Financial Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . .35
Chapter 7: Ending Rental Tenancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Chapter 8: Hiring a Property Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Chapter 9: Earning Your Certifi cate of Achievement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Resources and Worksheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Monthly Rental Rate Calculator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Seasonal Home Maintenance Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Operating Budget for Rental Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Monthly Personal Spending Planner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Life Expectancy of Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Self-Study Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Certifi cate of Completion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
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© 2008 Fannie Mae. Becoming a Landlord. 1
Overview
You have applied for a mortgage loan to fi nance the
purchase of a home that can house several families.
When you buy that home and start renting units in it
to others, you’ll be taking on the role of “landlord.
You will be a special type of real estate professional,
entitled not only to collecting rent, but also to enjoy-
ing certain tax advantages and selecting some of the
people who’ll live side by side with you.
You have a lot to look forward to — many rewards,
but also lots of responsibilities. You’ll need to make
sure your tenants’ living quarters meet health and
safety codes. You’ll be responsible for abiding by
federal, state, and local landlord/tenant laws. It will
be your responsibility to fi nd tenants, collect rent,
and manage your property within a budget. You’ll
need to keep careful records documenting both the
income you collect and the expenses you pay. And
all the while, you’ll be responsible for making timely
mortgage payments — whether or not your rental
units are occupied, and whether or not your tenants
pay their rent on time.
At Fannie Mae, our job is to help those who house
America. To help you succeed as a landlord, Fannie
Mae has prepared this guide. The guide’s purpose is
to help you and other fi rst-time landlords understand
the risks and responsibilities involved in the business
of being a landlord, and to share some proven ways
of handling them successfully.
Note: The information in this guide is not intended to
substitute for the professional advice of attorneys, tax
preparers, public offi cials, or others. Federal, state,
and local laws prevail over the information provided.
placeholder
© 2008 Fannie Mae. Becoming a Landlord. 3
Chapter 1: Making the Decision
Do You Really Want to be
a Landlord?
Owning a small rental property is one way of achiev-
ing the dream of homeownership. But, in buying a
small rental property you not only become a new
homeowner, you also take on the responsibilities
of becoming a landlord. Your rental property is not
only your home, but also your business. As a busi-
ness owner, you must adhere to the laws, rules, and
regulations that govern rental housing, and have a
clear understanding of appropriate rental rules and
practices.
Prior to making the decision to buy a small rental
property, you should assess your willingness to:
share your home with others,
devote time and hard work to manage your
business,
make repairs and maintain your property,
provide services to your tenants,
deal with dif cult tenants,
become familiar with state, local, and federal laws
and regulations regarding landlord and tenant
relationships, and
consult and hire professionals, such as attorneys or
tax preparers.
You also should take a realistic look at what you can
expect as a landlord — the rewards as well as the
increased responsibilities of operating a business.
Advantages of Owning a
Small Rental Property
There are many good reasons to own a small
rental property. Some of the benefi ts that you may
expect are:
A place of your own
Owning property gives people the feeling of perma-
nence and involvement in the community.
Financial incentives
Monthly mortgage payments may be more man-
ageable due to rental income. A portion of the
rental income also may be used to make repairs
and maintain the property.
Rental income may enable a household to become
homeowners that otherwise could not afford to
own a home.
In addition to the deductions for mortgage interest
and taxes, landlords are eligible for additional tax
advantages.
Possible Drawbacks of
Owning a Small Rental
Property
Along with the benefi ts of owning a small rental
property, there also are increased responsibilities and
possible drawbacks.
Financial obligations
You are responsible for the full mortgage payment
even if your tenant does not make his/her rental
payment or your rental unit(s) is vacant.
4 © 2008 Fannie Mae. Becoming a Landlord.
You will need to budget for unexpected expenses.
For example, you may experience problems with
tenants and may have to incur legal expenses.
Repairs and maintenance
Maintenance and repair costs often can be substan-
tial. However, you must keep rental unit(s) in good
condition; you’re responsible for providing safe and
decent units for your tenants. Also be sure that your
building meets all local codes before renting any units
to tenants. For example, restrictions may apply that
may make it ILLEGAL to convert the attic or basement
of a single-family home into a 2-unit home or to rent
out a converted attic or basement, even if the prior
owner was renting it.
Legal obligations
You must have a clear understanding of laws, rules,
and regulations that govern rental housing. You may
be liable for any lawsuits and may end up before a
state or federal housing agency for complaints fi led
as a result of your failure to adhere to these laws,
rules, and regulations.
24-hour availability
You must make yourself, or someone you designate
to act on your behalf, available to your tenants 24
hours a day in the event of an emergency.
Landlord Responsibilities
and Obligations
Your responsibility goes beyond simply keeping a safe
and decent place for yourself; the law requires that
you provide safe units for your tenants. You could be
liable for lawsuits that may arise because of injuries
sustained as a result of unsafe conditions.
Maintaining “habitability
At all times during a tenancy, owners must maintain
the premises in a “habitable” condition. “Habitability”
may be defi ned differently from jurisdiction to juris-
diction, but at a minimum you usually must:
maintain all common areas, such as hallways and
stairways, in a safe and clean condition;
ensure that the electrical, plumbing, sanitary, heat-
ing, ventilating, and air conditioning systems are
running and properly maintained;
ensure that the tenant has access to a supply of
running water, hot water, and heat in reasonable
amounts at reasonable times (in units where the
tenant has control over heat or is responsible for
the utilities, this will not be the landlord’s obliga-
tion, except to ensure that the plumbing and HVAC
systems are in good working order); and
provide trash receptacles and arrange for the
removal of trash.
In some jurisdictions, a landlord and tenant can agree
that the tenant will take care of some or all of these
responsibilities. Make sure to check your local laws.
State, Local, and Federal
Statutes
You are legally responsible for compliance with state,
local, and federal laws and regulations. Before you
decide to rent one or more of your units, make sure
that you know what these laws are. If you discover
that you haven’t met these requirements, you will
need to take immediate action to do so. Failure to
comply with these laws can result in legal actions
such as fi nes, lawsuits, and complaints fi led with the
U.S. Department of Housing and Urban Development
(HUD), or state or local housing agencies.
If you do not understand a particular state, local, or
federal law or regulation, you should consult with an
attorney. You are responsible for complying with the
law, even if you do not understand it.
© 2008 Fannie Mae. Becoming a Landlord. 5
State statutes
You should obtain a copy of and carefully read your
state housing laws. State laws typically regulate
landlord-tenant issues such as security deposits, land-
lord’s right of entry, housing standards, rental rules,
repairs and maintenance, and evictions. You may be
able to obtain pamphlets or brochures on state laws
that affect landlords from your state Consumer Pro-
tection Agency or Attorney General’s Of ce at little
or no cost. Copies of the laws and statutes also may
be available in your public library and in most law
libraries. Remember to periodically request updated
information on rental laws and statutes because cer-
tain aspects may change annually.
Many states have made their statutes available online.
However, not every statute is available online and the
statutes or ordinances may be diffi cult to fi nd without
code section numbers. Be aware that online statutes
and ordinances may not be be up-to-date. When
searching the Internet you may fi nd it helpful to use
the Internet search engine known as Findlaw
(www. ndlaw.com) to fi nd your state statutes online.
The Cornell University Web site (www.law.cornell.
edu/states/index.html) also provides free access to
state statutes and links to other Internet sites with
state and federal housing laws.
Local laws and ordinances
You should obtain a copy of laws or ordinances
that affect landlord-tenant relationships for your
local area. Every landlord needs to know what the
local housing code calls for in the way of structural
requirements, facilities, and essential services, such as
plumbing and heat, and health and safety standards.
In some places, local laws also regulate many of the
same things that are covered by state law, such as
how often or how much you can raise the rent, when
or how you can evict a tenant, and how security
deposits must be handled. You usually can obtain
this information from your local building or housing
authority, health or fi re department, public library, or
your city manager or mayor’s of ce.
Federal laws
In addition, you should become familiar with federal
laws that affect landlord-tenant relationships. Federal
laws cover discrimination and landlord responsibili-
ties related to environmental health hazards, such as
lead paint and asbestos. In some instances, the cost
to bring the building in compliance with these federal
laws may be substantial. Any federal funding pro-
gram from HUD that you may plan to use will require
compliance with federal lead paint regulations. If
you rent to a tenant who receives a Housing Choice
Voucher (Section 8 Voucher), there are special federal
laws and regulations that apply to your relationship
with that tenant. You can fi nd these laws in the U.S.
Code, which is available in some public libraries. Most
federal regulations also are published in the Code
of Federal regulations. You also may access the U.S.
Code through the www.law.cornell.edu Web site.
Court decisions
In many states, cities, and counties, the courts have
made decisions about what the law is when the
published laws and regulations do not cover a certain
subject. Courts also decide what local, state, and fed-
eral laws and regulations mean. These court decisions
become part of the law. The law created by these
cases is called “case law.” Although these cases are
published in books called “reporters,” reporters are
not organized by subject, and it can be dif cult for a
non-lawyer to fi nd all of the case law that might make
a difference in how you conduct your business. You
may want to consult with a lawyer who is an expert in
landlord/tenant law to fi nd out if there is any case law
that will affect how you run your business.
6 © 2008 Fannie Mae. Becoming a Landlord.
Operating Your Business
As a landlord, you will need to know how to:
advertise for and attract good tenants,
keep good tenants,
determine how much rent to charge,
collect the rent on time,
budget for expenses,
maintain and make repairs,
keep detailed and accurate records, and
deal with people.
Just as in any other business, you also will need to
keep good records of applications, rent payment
dates, notices, agreements, etc.;
maintain receipts for purchases, repairs, general
maintenance, advertisements, professional services,
etc.;
le taxes and report income and expenses to the
Internal Revenue Service;
comply with local and state licensing and permit-
ting laws; and
maintain various types of insurance.
These topics are covered in detail in later chapters.
Accounting records
There are many tools available to maintain account-
ing records, including a wide variety of inexpensive
journals and ledger sheets to keep records of your
income and expenses that you can obtain from your
local of ce supply store. If you own a computer, you
may use it to establish an accounting system for your
business. You can use programs such as Microsoft
Excel
®
and Intuit Quicken
®
. You also can purchase a
software package designed specifi cally for property
management.
You may want to retain the services of a tax accoun-
tant to prepare your taxes. Tax laws are more
complicated for rental property and include additional
requirements for interest paid on the mortgage,
rental income, and property depreciation. If you
decide to hire a tax professional, you should employ a
certi ed public accountant or some other accounting
professional with the expertise and experience in tax
preparation for rental properties.
Emergency funds
All business owners need to plan for the unexpected
so that they do not lose their investments. For
example, there may be times when you are unable
to fi nd suitable tenants or when your tenants stop
paying the rent. For this reason, you may want to
keep money in reserve to help you continue paying
your mortgage and other expenses during this time.
In some jurisdictions, the eviction process can take
a few months and you may not be able to collect
rent during the process. You may also incur legal
fees while trying to evict a tenant. It is a good idea
to have at least three months of expenses in reserve.
In some jurisdictions, where the eviction process can
take longer or if it is hard to fi nd good tenants, you
may want to keep more in savings.
It is also important to budget for major repairs to the
property, such as replacing a furnace or roof. Because
your tenants depend on you to keep the property
habitable, you cannot put off repairs just because
you don’t have the money to make them. While you
might be able to predict when some maintenance
will be required, you should be prepared to deal with
emergencies such as a furnace that stops working in
the dead of winter, a sewage backup in the base-
ment, or an appliance that stops working.
Legal services
There may be times when you will need to obtain
legal advice. In such cases, you should select some-
one who specializes in landlord and tenant law. You
may want to consult an attorney before you begin
renting your property, to make sure that you are
© 2008 Fannie Mae. Becoming a Landlord. 7
ARE YOU SURE YOU’RE READY
TO BECOME A LANDLORD?
To help determine whether youre ready to take the
next step toward becoming a landlord, complete
the following checklist:
Landlord Readiness Checklist
1.
Are you willing to share your home
with others? Y N
2.
Are you willing to learn the state, local,
and federal statutes regarding landlord/
tenant relationships and abide by them? Y N
3.
Are you willing to spend money to
bring the building into compliance with
lead paint and asbestos regulations? Y N
4.
Are you willing to take the risks associ-
ated with being a landlord? Y N
5.
Will you be able to make mortgage
payments during months when you
have no rental income? Y N
6.
Have you investigated the costs of
keeping the units “habitable? Y N
7.
Are you willing to make yourself or
your agent available to tenants 24
hours a day to handle emergencies? Y N
8.
Have you considered the cost of hiring
a tax accountant to prepare your tax
returns and provide advice on account-
ing practices? Y N
9.
Are you willing to maintain detailed
records of your transactions or to hire
an accountant or bookkeeper to main-
tain your records? Y N
10.
Have you considered the cost of hiring
a lawyer if legal problems occur? Y N
If you can answer “yes” to all of these questions,
you are ready to take the next step toward
becoming a landlord.
complying with all local, state, and federal law. An
attorney can also review your lease to make sure that
it protects you and does not contain illegal terms. If
you are sued by the tenant, it may be a good idea to
consult an attorney so that you can protect yourself
and your assets. If you are planning on evicting a ten-
ant, you may want to consult an attorney, which may
save you a signifi cant amount of time and money by
helping you avoid mistakes in the eviction process.
When selecting a lawyer, you may want to shop
around and get information or referrals from other
landlords, your local landlords’ or community associa-
tion, or your states bar association. Before retaining a
lawyer, you may want to meet with the lawyer face-
to-face to determine whether you are comfortable
with him or her. You also may want to consider talk-
ing with some of the lawyer’s other landlord clients
to discuss the type and quality of services provided.
When you hire a lawyer, consider signing a written
agreement that spells out exactly what the lawyer
is going to do for you and how much the lawyer is
going to charge for his or her services.
© 2008 Fannie Mae. Becoming a Landlord. 9
Chapter 2: Finding Reliable Tenants
When looking for tenants, you need to seek people
who are willing and able to pay their full rent on
time each month. They also should be people likely
to keep their units in good condition – and likely to
abide by any policies you may have regarding pets,
acceptable noise levels, use of common areas, or
other matters. This chapter suggests certain criteria
you can use to help identify such tenants. It also
discusses state and federal Fair Housing laws that you
need to follow when you conduct your tenant search.
How to Look for Tenants
Sometimes a simple “For Rent” sign in your window
will draw enough attention to bring in tenants. Post-
ing notices on bulletin boards also may work. Placing
ads in local publications or online sites can bring you
renters, too. Or, a real estate sales or property manage-
ment professional can help you. You might ask friends
or acquaintances for recommendations. What works
best for you may depend on a number of factors,
including your budget, the property location, whether
you’re in a hurry to rent, or the local rental market.
No matter how you go about your tenant search, it is
important to know that there are federal, state, and
sometimes local laws that explicitly prohibit landlords
from discriminating against particular groups when
choosing tenants. These laws apply both to wording
and placing ads, and to interviewing and selecting
applicants.
It is critically important to understand and comply
with all fair lending laws, whether on the federal,
state, or local level. You need to become familiar with
your federal, state, and local laws.
What Fair Housing Laws
Require of You
There are two federal laws that you must follow
when selecting tenants: the Civil Rights Act, which
specifi cally prohibits discrimination based on race;
and the Fair Housing Act, which prohibits landlords
from discriminating against prospective tenants
because of race, color, sex, national origin, family
status (including families with children), disabilities, or
religion. The Fair Housing Act also prohibits landlords
from setting different terms or conditions for tenants
based on the tenants’ background.
No landlord is exempt from the Civil Rights
Act. However, landlords who rent one, two, or three
units in homes that double as their own residences
may be exempt from many of the provisions in the
Fair Housing Act. All landlords are required to follow
those provisions of the Fair Housing Act that prohibit
discrimination in advertising. You can obtain more
information abut the Fair Housing Act from HUD’s
Web site, www.hud.gov. You also can access the Civil
Rights Act from www.law.cornell.edu.
Many state and local governments have fair hous-
ing laws of their own. And sometimes these state
and local laws also may include provisions that go
beyond the requirements of the federal law. For
example, in some cities, it is unlawful to discriminate
against applicants for rental units because of their
occupation, source of income, sexual orientation, or
immigration status.
The Fair Housing Act, along with many state and local
laws, addresses the issue of housing for tenants with
disabilities. This legislation requires landlords to rent
to applicants with disabilities even if it means
10 © 2008 Fannie Mae. Becoming a Landlord.
remodeling — or allowing the tenant to remodel
— entrances or other aspects of their homes. Addi-
tionally, this legislation requires landlords to make
reasonable exceptions to their lease terms, rules,
and policies to allow tenants with disabilities to live
in their units. For example, landlords who otherwise
prohibit pets on their property must permit tenants
with a severe vision or hearing impairment to keep
guide dogs.
Follow the spirit of the law
The purpose of these laws is to give everyone equal
access to available housing in your area. The laws
are not intended to prevent you from turning down
a prospective tenant for a legitimate reason. For
example, you can turn down a rental applicant of
any background if that person has a record of bad
debt or too little income to pay the rent, as long as
you treat all applicants the same, regardless of their
background.
Be sure your ads do not
discriminate
As previously mentioned, the federal Fair Housing
Act prohibits advertisements that discriminate against
particular groups or that express a preference for a
particular group. Essentially, it sets forth two require-
ments: 1) You may not make any statement in an
ad or notice — through oral or written wording or
possibly even through pictures — that indicates “a
preference, limitations, or discrimination” based on
race, color, sex, national origin, family status (e.g.,
number of children), disabilities, or religion; and 2)
You may not post ads or notices only in publications
or on bulletin boards accessible only to limited groups.
Keeping this law in mind, you need to avoid state-
ments like “suitable for adult couple” or “desirable
for Spanish-speaking individual.” Ads should focus
on the rental property and be clear, concise, and
describe the propertys features, required rent, and
availability. And, if you advertise in the newsletter of
an organization that serves only one particular ethnic
group, you also should put additional ads in other
publications that have a more diverse circulation.
A sampling of acceptable ads follows:
SAMPLE ADS
Cleveland Park – 3-bedroom unit on second fl oor.
$700 per month, utilities included. Newly reno-
vated and near transportation. Available 6/1.
Quiet neighborhood close to downtown area.
2-bedroom unit. $550 per month, utilities included.
Available immediately.
Large 3-bedroom unit in Dupont Circle area.
$725 per month, utilities included. $500 deposit
required, will check references. Available 8/1.
Treat all applicants the same
One way to demonstrate fairness when screen-
ing applicants is to follow the same procedures for
everyone who expresses interest in your vacant units.
For example, if you ask one person to fi ll out a writ-
ten application, ask all applicants to do so. If you ask
one applicant to leave a returnable deposit with the
rental application, ask all applicants to leave one. You
may want to put your application policies in writing
and hand every applicant a copy to show that you are
conducting an even-handed search.
Consider requiring written
applications
Another way to show that you are treating all appli-
cants the same is to use a standard application form.
The application can be very simple. You can even
create your own and make photocopies. You may
even want to have application forms in more than
one language.
© 2008 Fannie Mae. Becoming a Landlord. 11
Basic information to include on the application
would be:
the prospective tenant’s address, phone number,
and Social Security number;
the length of time the applicant has lived at his or
her current address;
the names and telephone numbers of current and
past landlords;
the address and phone number of the applicant’s
employer;
whether the prospective tenant is a member of the
armed or uniformed services, either active
or reserve;
the applicant’s current income and, if necessary,
other sources of funds; and
the names of personal and credit references.
Make sure that applicants complete the entire appli-
cation. You may want to require an application from
each prospective tenant, roommate, or co-tenant
over the age of 18. To verify identity, you may want
to ask each applicant to provide photo identifi cation,
such as a driver’s license, green card, or government/
military identifi cation card.
You also may ask questions regarding other tenant
issues of importance to you — for example, whether
the applicant plans to bring in pets or appliances, or
what parking needs the applicant may have.
At the bottom of the application, you may want to
have each applicant fi ll out a statement authorizing
you to contact his or her references and check the
information he or she has provided. Some employers
will not verify information if you do not have written
authorization.
Establish uniform standards for
accepting tenants
To be sure you don’t discriminate against any group,
you can develop uniform minimum standards on
which to base your choice. For example, you can
require that applicants have a certain reasonable
income level to be sure that they can pay the rent.
You also may choose to establish policies that pro-
hibit tenants from moving in with certain possessions
— perhaps pets, motorcycles, waterbeds, or large
appliances.
If you put such standards in writing, you will have a
uniform checklist you can use for every applicant. If
you distribute photocopies of the list to applicants,
you will be demonstrating that you are considering
everyone according to the same criteria.
Also, be conscious of the risks and rewards of renting
to family members and friends. Although it may be
comforting to have these individuals living nearby, it
may be dif cult to deal with problems such as late
rental payments.
Consider a “fi rst-come, rst-
served” policy
One way some landlords establish fairness in select-
ing tenants is by accepting applicants on a fi rst-come,
rst-served basis — subject, of course, to the out-
come of credit and reference checks. Remember to
date and time-stamp each application that is submit-
ted. Under such a system, you would accept the fi rst
applicant whose references and credit history proved
satisfactory.
Establishing Selection
Criteria
You may want to develop basic criteria for select-
ing tenants, not only to be fair to others, but also to
satisfy your own needs. Generally, the three most
12 © 2008 Fannie Mae. Becoming a Landlord.
important things most landlords look for when you
choose a tenant are:
1. The tenant’s willingness and ability to make timely
rental payments every month;
2. The tenant’s willingness and ability to abide by
the provisions in any lease or other rental agree-
ment you have him or her sign; and
3. The landlord’s reasonable expectation that the
tenant is not planning to engage in illegal activi-
ties on your property.
Determine the tenant’s ability and
willingness to pay rent
When you are a landlord, you are running a business.
To be successful, no matter how much you may like
a prospective tenant, you must make sure that he or
she will pay the rent. Most landlords will not accept a
new tenant without fi rst taking certain basic steps to
make sure he or she can and will pay.
Verify the applicant’s sources
of income
You need to verify income information provided by
your applicants. Because a person’s salary is generally
the major source of his or her income, you need to
verify the applicants place of employment or salary
source, as well as the information he or she gives you
regarding salary and other income sources, such as
Social Security, disability, and child support.
Consider income ratios
Once you’ve verifi ed an applicants salary and other
sources of income, you would be wise to take a look at
this fi nancial information in terms of certain standard
ratios between income and expenses. When lend-
ers evaluate whether borrowers will be able to make
their mortgage payments, they use a benchmark, or
standard, to measure borrowers’ housing expenses,
which should be no more than 33 percent of the bor-
rower’s gross monthly income (income before taxes
or other items are deducted). And they often prefer
that a borrower’s overall debts — including housing
expenses and other debt — not exceed 38 percent of
that income. You might want to use similar ratios as
guidelines when trying to establish whether a rental
applicant will be able to pay the rent each month.
To measure the ratio between an applicants housing
expenses and income against the 33 percent bench-
mark, multiply the applicant’s gross monthly income
by .33; then compare the result with the rent you
are charging. For example, if John Black’s gross
monthly income is $3,000, and you are charging
$1,000 for rent, the rent would slightly exceed the
benchmark test.
HOUSING EXPENSE RATIO
Total Gross Monthly Income $3,000
Multiply by 33% x 0.33
Benchmark $990
To measure the ratio between an applicants gross
monthly income and his or her “total housing
expense/outstanding monthly debt” against the 38
percent benchmark, fi rst multiply the applicant’s
gross monthly income by .38; then compare the
result with the sum of the amount of monthly rent
you are charging and the applicant’s monthly debt.
For example, suppose that John’s monthly payments
on outstanding debts are $140. His total housing
expenses and outstanding monthly debt would equal
$1,140 or 38 percent of his gross monthly income.
TOTAL DEBT RATIO
Total Gross Monthly Income $3,000
Multiply by 38% x 0.38
38% Benchmark $1,140
When looking at statistics such as ratios, it is impor-
tant to view them in the light of your own judgment.
© 2008 Fannie Mae. Becoming a Landlord. 13
Keep in mind that some applicants may be living on
xed incomes or low salaries, but have excellent credit
histories and a proven ability to manage money well.
Also consider the rental amount an applicant is cur-
rently paying. He or she may already be handling
rental payments as high as — or higher than — what
you are asking.
If you consider low-income applicants who receive
subsidies from rental assistance programs, you should
be aware that some state and local fair housing
laws prohibit discrimination against applicants based
solely on the fact that they receive such subsidies. If
an applicant who is receiving a subsidy is capable of
paying the rent each month on time, has satisfactory
references, and meets your other acceptance criteria,
he or she may be a reliable tenant.
You should try to fi nd out how an applicant’s subsidy
works. In some cases, people receive a fi xed subsidy
and are responsible for meeting any remaining por-
tion of the rent themselves. In other cases, they are
responsible for paying a certain percentage of their
income as rent, while the subsidy makes up the dif-
ference. Sometimes the agency providing the subsidy
pays the tenant, who, in turn, must pay the landlord.
In other cases, the subsidizing agency pays the land-
lord directly.
Check the applicants credit
Just as the lender you applied to for your mortgage
researched your credit history, you should research
the credit history of your potential tenants. When
possible, try to get credit information in writing, and
try to get more than one creditor’s opinion. A single
negative report could be the result of a dispute unre-
lated to your applicant’s actual ability to pay debts;
a single positive report could represent an isolated
incident in which a generally uncreditworthy appli-
cant happened to pay a debt on time.
If you can obtain a credit report, you can get a more
detailed picture of an applicant’s credit history. Land-
lords can obtain credit reports from tenant screening
agencies, which get the reports directly through
credit reporting agencies. There are also local and
regional companies of this kind. One way to locate
such companies is by looking on the BRB Publications
Web site of “Free Public Record Sites” at
www.publicrecordsources.com in the “Tenant
Screeners” section.
You also may order credit reports from the credit
bureaus listed below for a small fee. If you own
several rental units you may want to consider joining
one of these credit reporting agencies, which charge
about $20–30 in annual fees plus $1015 per report.
CREDIT REPORTING AGENCIES
Equifax: www.equifax.com
Trans Union: www.tuc.com
Experian: www.experian.com
An of cial credit report generally lets you know of
any debts the applicant has outstanding, how much
the applicant owes, and how timely the applicants
payments have been on credit card bills, car pay-
ments, or other debts. The reports typically provide
general directions and guidance on how to read
them. To obtain such a report, you will need to
provide the agency with a copy of the deed to your
property and with your applicant’s Social Security
number. To comply with the Fair Credit Reporting
Act, screening agencies also may require you to pro-
vide them with an applicant’s written permission to
obtain a report on his or her credit. Although you will
have to pay the agency for any reports you order, the
cost may be tax deductible.
Because not everyone has had an opportunity to
develop a credit record, you may need to check some
applicants’ credit histories in less traditional ways. It
is worthwhile to do this, as you may fi nd applicants
who have not had dealings with banks or institutions
that usually report on credit, but who have always
paid their bills on time, and often in cash.
14 © 2008 Fannie Mae. Becoming a Landlord.
One way to check credit histories for such people is to
contact previous landlords or electric, gas, or phone
companies the applicant has used. When talking
with utility company representatives, ask whether the
applicant paid monthly bills when due and whether
he or she typically paid in full. If you are unable to
obtain this information directly, you can ask the appli-
cant to provide you with cancelled checks or paid
receipts to document that bills were paid on time.
You also may encounter applicants who have been
evicted from their previous rental homes. In such
cases, it is especially important to obtain and review
a full, up-to-date credit report. Your state or local
apartment association may be able to provide you
with such a report or refer you to a company that
specializes in providing landlords with information
about tenants who have been evicted.
Contact previous landlords and
references
No matter how much time you spend checking on an
applicant’s income and credit, it’s worth putting in
a little extra effort to make sure you can reasonably
expect the tenant to show consideration for you and
other neighbors and follow any rental policies that
you establish.
One way to discover an applicant’s payment record
is to talk to his or her previous landlords. While
talking about the applicant’s credit, you also can
nd out other information. Did the applicant give
proper notice when planning to move? Did he or she
observe the landlord’s rental policies? Was the tenant
considerate of neighbors? Would you rent to this
person again?
Ask for an application fee
Where local law permits, try asking for a return-
able application fee. Check with your local housing
authority to fi nd out if application fees are allowed in
your area. Generally, serious rental applicants will be
willing to put down the money. In addition, you may
be able to require the applicant to cover the cost of
credit checks.
Conduct a short interview with
the applicant
Instead of asking applicants to complete rental appli-
cations and return them to you, you may want to sit
with them and fi ll in the application yourself. Be sure
to have the applicants review the information and
sign the application.
Using credit reporting agencies,
tenant screening services, and
reference checking services in the
right way
If you use a commercial service, like a credit report-
ing agency or agency that screens tenants or checks
references for you, you have certain obligations to
applicants if you turn the applicant down or decide to
treat an applicant differently (for example, charging a
higher security deposit or requiring a co-signer) based
on information in the reports you receive. This is true
even if the report only played a small part in your
decision. For more information about your obligations
under the Fair Credit Reporting Act, the Federal Trade
Commission provides information at www.ftc.gov/
bcp/conline/pubs/buspubs/landlord.shtm.
Making the Final Choice
When you fi nally choose a tenant, it will be your own
judgment that counts the most. Eliminating appli-
cants who obviously can’t pay the rent, who gave
false information on their applications, or who have
poor credit histories will be easy. The hard part will be
sorting out the applicants who seem acceptable.
As previously mentioned, some landlords simply
accept tenants in the order in which they applied for
the vacancies. Once you have chosen a tenant in this
way, you might want to offer other applicants with
equally good credit histories, references, and income
© 2008 Fannie Mae. Becoming a Landlord. 15
the opportunity to be kept on a waiting list for future
vacancies.
Make sure you turn down an
applicant the “right way
You are not required to rent units in your home to
applicants who have unsatisfactory credit histories or
who do not have enough resources to make timely
rental payments. When you reject an applicant for
one of these reasons, it is often wise to let him or her
know. An applicant rejected because of information
in a credit report, a report from a tenant-screening
service, or a report from a reference checking service
is entitled by the Fair Credit Reporting Act to fi nd out
the name of the credit bureau, screening company,
or other organization that provided the report. This
is required even if the credit, screening, or reference
report was only part of the reason you rejected the
applicant. The applicant also can request that the
company correct mistakes and submit a new applica-
tion to you for future vacancies.
You may use the following sample language when
notifying the applicant:
“Based on information in your credit report, you do
not meet our rental criteria. If their information is in
error, you may work with the credit reporting agency
to correct the problem and resubmit an application
for future vacancies.
You must also provide a rejected applicant with the
following information:
the name, address, and telephone number of the
agency that provided the information, including a
toll-free number if the agency maintains nation-
wide fi les;
an explanation that the agency providing you the
information did not make the decision to reject
the applicant and that the agency cannot give the
applicant the specifi c reasons the applicant was
rejected; and
information that the applicant has the right to
dispute the accuracy or completeness of any
information furnished by the agency and that the
applicant has the right to request a free report
from the agency within 60 days.
Although you are not required to provide this infor-
mation in writing, if you give a rejected applicant a
written notice and keep a copy for yourself, you will
have proof that you followed the law. In the event
that you reject someone based on information other
than data from a credit report, you are not required
to volunteer the basis for rejection.
Also, you could one day be called on to show that
your decision did not refl ect illegal discrimination
against any group protected by Fair Housing laws. If
you document all conversations and maintain appli-
cations and other documentation in your fi les for at
least three years, you will have proof that you did not
discriminate against any protected group.
Return application fees
In some jurisdictions, you must return application fees
or deposits to applicants you reject. Some states have
laws with regard to the promptness with which you
must do this, which would be included in your state
statutes or local ordinances. In other jurisdictions,
you are allowed to keep application fees that you
have spent to evaluate the applicant, such as the cost
of obtaining a credit report. Check with your local
landlord association to determine if state or local laws
govern if and when you must return these fees.
Immediately inform applicants you
plan to accept
When you decide that you want an applicant to
become your tenant, notify the person immediately.
Otherwise he or she may fi nd another place to live,
leaving you to resume your tenant search. But before
asking prospective tenants to sign leases or rental
agreements, you should discuss your rental policies
with them once again to be sure there are no mis-
understandings. It is a good idea to make sure that
16 © 2008 Fannie Mae. Becoming a Landlord.
a prospective tenant has viewed and inspected the
exact unit they are going to rent before signing the
lease. You may also want to give a prospective tenant
a chance to read the lease or rental agreement before
it’s time to sign it. You will fi nd information about
establishing and enforcing rental policies in Chapter 3.
AFTER READING THIS CHAPTER
DO YOU UNDERSTAND:
How the Fair Housing laws may apply to you?
What your three important criteria for tenant
selection are?
How to fi nd employment and credit information
about applicants?
How to notify an applicant you’ve accepted or
rejected?
© 2008 Fannie Mae. Becoming a Landlord. 17
Chapter 3: Taking Care of Business
The moment your tenants move in, they’ll be expect-
ing certain services from you — and you’ll be in the
business of accommodating them. At the same time,
you’ll be responsible for enforcing any rental policies
you’ve established, and collecting rent. To handle
these responsibilities comfortably, you’ll need to
know what you have a right to ask of your tenants —
and what they are entitled to expect from you. This
chapter identifi es both. It also explains how to set
rental amounts, create leases, and follow health and
safety codes.
Knowing What a Landlord
Needs To Do
The success of your business will rest in maintaining a
good landlord-tenant relationship. Once you’ve found
good tenants, you will want to keep them. Your
chances of doing so will be greatest if you provide
them with a clean, safe, comfortable home at a price
they can afford.
Generally, satisfi ed tenants will follow any reasonable
rental policies you establish — especially if you ask
them to sign leases or rental agreements that clearly
spell out those policies. You need to make sure that
what you ask of tenants is within your rights, accord-
ing to local housing laws. As you will see throughout
this chapter, such laws have many provisions that pro-
tect tenants. Landlords who are ignorant of these laws
are held just as responsible when they disobey them as
those who know the laws and refuse to follow them.
Collecting Rent —
and Other Money
Collecting rent is an important business skill. It
involves deciding how much rent to charge, ensur-
ing that tenants pay their rent on time, and knowing
when and how you are allowed to raise the rent to
cover cost increases and make more money.
Where local law permits, you may be able to collect
money other than rent for various reasons — usually
advance rent to protect you if a tenant vacates your
unit without notice or a security deposit to cover any
damage a tenant might do to your unit. The laws that
allow you to do this often require you to follow strict
procedures. Laws in some areas require you to pro-
vide the tenant with dated receipts for each payment.
Set competitive rents
Your lender made some assumptions about rental
income in approving the mortgage for your property;
but there are no legal or other obligations to charge
that amount. On the other hand, it may provide
guidance on what is common and customary in your
rental area. When determining how much to charge
for rent, you should focus on covering your operating
expenses, earning a reasonable return on your invest-
ment, and being competitive. Ideally, you could just
set your rent at whatever amount would earn you a
profi t and cover major costs like mortgage payments,
property taxes, utility charges, maintenance expenses,
insurance premiums, or rent loss due to vacant units.
(See Monthly Rental Rate Calculator worksheet for
a formula on how to calculate monthly rental rates.)
Laws in some areas may regulate what you can
charge for rent in your building. And there’s another
factor to consider – competition.
18 © 2008 Fannie Mae. Becoming a Landlord.
If the rent you want is higher than that charged by
other landlords for similar units in your neighbor-
hood, you may fi nd it diffi cult to attract desirable
tenants. Because you need to have tenants to get
rental income, you want to be sure that your rental
rates are competitive enough to attract tenants and
keep your units occupied.
When considering competition, do not base your rent-
setting decision on assumptions or hearsay. Try to fi nd
out — perhaps by reading ads in local newspapers
or talking with neighbors — how much neighbor-
hood tenants are actually paying to live in rental units
similar to yours. Then, based on what you believe to
be the value of your units in comparison with others,
decide what you will charge. You also should be care-
ful to fi nd out about any rent control laws that may
affect you and take them into consideration.
Increase rents when appropriate
If your tenants have signed leases, you generally can-
not raise their rents until their leases expire unless the
lease allows you to raise it sooner. The lease usually
will specify the amount of prior notice that must be
provided before you can increase rent. State or local
laws might also require certain notice before you can
increase the rent. Even if laws in your area and the
lease doesn’t require it, you may want to give tenants
written notice a month or two in advance of any rent
increases. For tenants renting on a month-to-month
basis, you can usually raise the rent as often as you
want to — so long as you give the amount of notice
required by law. In jurisdictions with rent control, there
may be limits on how often you can raise the rent.
In some areas, a landlord can include a clause in a
lease that permits him or her to raise the rent — or
collect a surcharge in addition to the rent — before
a lease expires. Such clauses, which are sometimes
called “escalator clauses,” usually apply only in the
event that property taxes or utility bills increase by
more than a specifi ed amount. Landlords who use
these clauses are usually required to give tenants
a certain minimum amount of notice before any
increases go into effect.
Consider collecting a
security deposit
States and sometimes local ordinances strictly regu-
late security deposits. If laws permit, you may want
to collect a security deposit for each unit. This deposit
can be used to cover any damage beyond normal
wear and tear that you might discover after a tenant
leaves. In some locations, state or local law limits the
amount of the security deposit.
Generally, “damage” refers to things like burns in
plastic countertops; missing items such as faucet
handles, refrigerator shelves, light fi xtures, keys, or
doorknobs; chipped enamel or ceramic tile; carpet
burns; tears in linoleum; large holes in ceilings, fl oors,
or walls; major stains; do-it-yourself wallpaper jobs
that need replacing; damaged blinds or screens; or
destruction caused by movers. It usually does not
include normal rust, discoloration, loose grouting,
worn carpet, lime stains from hard water in bathroom
and shower facilities, chipped or cracked paint, or the
effects of the natural settling of the building.
Usually, laws that allow you to collect security
deposits specifi cally identify the types of damage the
deposit can cover, and state how and when you are
required to return any part of the deposit you don’t
use. These terms and conditions should be clearly
stated in the lease or rental agreement, if applicable.
In many areas, you are required to put security depos-
its you collect in escrow and give the tenant any
interest the deposit has accrued. In some places, local
law specifi es the amount of interest you must pay on
the security deposit.
When you collect a security deposit, you may want to
have the new tenant complete a checklist describing
the condition of the unit when he or she moves in
(see Chapter 4). Later, when the tenant moves out,
you can use this checklist to determine any damage
done to the unit and how much money you should
deduct from the security deposit for repairs (see
Chapter 7). You may also want to take pictures of the
unit before the tenant moves in.
© 2008 Fannie Mae. Becoming a Landlord. 19
Consider collecting advance rent
In some locations you can collect rent in advance
for the last month of a lease. That rent would offset
any rental income you might lose if your tenant
were to leave your unit without notice. Most states
allow you to treat “last months rent” as part of the
security deposit and will allow you to use part of
or all of it for cleaning or repair, provided that the
security deposit is insuffi cient to cover these costs. A
few states restrict the use of “last months rent” to
its stated purpose. If you use any of these funds for
repairs or cleaning, you will be violating the law. In
some locations you can use the security deposit to
cover these expenses as well.
Collecting monthly payments
Most leases or rental agreements clearly state when
rent is due each month and where payments should
be made. You will need to decide which form of
payment you will accept — check, money order, or
cash. If you are going to require a certain form of
payment, you can state this in the lease. When col-
lecting cash payments, most landlords issue a written,
dated receipt, stating the name of the tenant and the
amount paid. Local law may require you to issue a
written receipt, even if payments are made by money
order or personal check, and you may be required to
state on the receipt the amount of any unpaid bal-
ance on the rental account.
Establish late fees and penalties
for “bounced” checks
If laws in your area permit, you may be able to
protect yourself from late rent payments or checks
returned for insuffi cient funds. To protect yourself
from late payments, you may be able to charge a
late fee for payments made after a certain cutoff
date each month. In most states, there is no maxi-
mum amount of late fee you may charge; however
it should be “reasonable” and stated in the terms
of the lease or rental agreement. Check your local
laws because some states have strict limits on late
fees. To protect yourself from checks that “bounce,
you may be able to require tenants to pay a specifi c
at amount in addition to their rent each time their
checks are returned. If a tenant habitually gives you
bad checks, you may be able to restrict the form of
payment to either money orders or cash.
Providing a Safe, Clean Home
The things you do to keep up the condition of your
house for your own benefi t also will benefi t your
tenants. Even if you are able to tolerate postponing
certain types of maintenance for yourself, do not
assume that you also can put off these repairs once
they affect your tenants’ units. State laws frequently
take the view that any landlord renting a unit auto-
matically gives his or her tenant an “implied warranty
of habitability” ensuring certain minimum standards.
Failure to maintain those standards could result in
nes and/or other penalties. In some jurisdictions,
tenants may be legally entitled to stop paying the rent
or can open court-monitored escrow accounts if a
landlord does not make necessary repairs in a timely
fashion. In many locations, tenants can sue their
landlords and ask for damages and/or a court order
requiring the landlord to make repairs.
Know what makes a rental unit
safe and sanitary
Generally, you will not need to worry about de ning
what makes a rental unit safe and sanitary, because
state and local laws will defi ne it for you. Standard
maintenance required by law generally includes:
adhering to local health and safety codes;
keeping all common areas safe and clean;
making sure that plumbing, heating, cooling, and
ventilation systems are in good repair;
ensuring that gas or electrical appliances in ten-
ants’ units are in good working order;
supplying hot and cold running water connected to
an adequate sewage system;
20 © 2008 Fannie Mae. Becoming a Landlord.
providing receptacles for garbage and arranging
for garbage removal;
keeping fl oors, walls, ceilings, stairways, railings,
and common areas in good condition; and
keeping doors and windows in tenants’ units
weather-tight.
In some locations, laws may go beyond these general
maintenance requirements. For example, some places
have laws requiring landlords to provide window
guards; install peepscopes in doors; recycle newspa-
pers and/or glass, plastic, and aluminum containers;
or remove lead paint. Some areas also require land-
lords to supply tenants with screens, storm windows,
or blinds.
Strictly follow laws and codes
Generally, if you do not maintain your property
according to the law, you can be held liable for dam-
ages resulting from your negligence. There are some
circumstances under which landlords are not usu-
ally held accountable for interruptions in service or
postponement of repairs. Consult an attorney if you
have any questions about the standard maintenance
required for your property.
Sometimes, for example, landlords are not held
responsible if tenants refuse to allow the repair
worker to enter their units or if they neglect to notify
their landlords of the need for repairs or are them-
selves the cause of the problem. And in many places,
a landlord is not held accountable for any repairs that
a lease clearly states are the tenant’s responsibility. In
some jurisdictions, however, a landlord is not allowed
to shift the responsibility for repairs to a tenant. In
these locations, lease terms that require tenants to
make repairs are not enforceable even if the tenant
originally agreed to the terms.
There also are areas that exempt those landlords who
rent only one, two, or three units in their own homes
from certain housing laws. These laws vary from loca-
tion to location. You need to check with your local
housing agency to fi nd out which laws apply to you.
Enforcing Rental Policies
It is up to each landlord to create a list of rental poli-
cies and to communicate those policies to all tenants.
The more clearly you explain your rules, procedures,
and expectations at the start, the less chance that
you’ll experience misunderstandings later.
State and local laws may prohibit you from enforcing
your rules if your rules confl ict with state and local
laws. In most locations, you cannot ask tenants to
give up their rights — to repairs, to due process, or
to the return of any part of their security deposits
you don’t use, for example. You also cannot usually
demand the right to enter a tenant’s unit — even to
show the apartment to prospective tenants or buyers,
to inspect the premises, to supply necessary services,
or to make repairs — without giving proper notice.
Explain your policies personally
Keep in mind that while you are communicating your
needs to a tenant, you are also starting a relationship.
So although you are not required to give reasons for
your rules, you may be able to build better relation-
ships with tenants if you give them the opportunity to
comment or ask questions when you explain the rules.
During this conversation with your new tenant, you
should clarify whether you, the tenant, or both of you
are responsible for certain tasks like snow removal
or the maintenance of common areas. In addition,
you may want to include this information in the lease
or rental agreement. This meeting would be a good
time to offer any special instructions for using appli-
ances such as microwave ovens or washing machines,
and to explain what to do in case of fi re or other
emergencies. You may want to provide your new ten-
ant with written instructions to refer to in the future.
Don’t be afraid to be fl exible if a tenant makes a
reasonable request. Be sure to let tenants know how
and where to reach you when its necessary.
© 2008 Fannie Mae. Becoming a Landlord. 21
Know what you have the right
to require
You can require tenants to behave according to your
needs — so long as your demands fall within the law.
You can usually ask tenants to:
dispose of garbage in a sanitary manner;
maintain their units safely and responsibly;
use the unit only for legal, residential purposes;
park only in designated parking areas and keep
boats, additional cars, or other vehicles off your
property;
use only those parts of common areas — like
porches, yards, or basements — that you explicitly
make available to tenants; and/or
make sure overnight visitors do not turn into co-
tenants without your permission.
At your discretion, you also can usually ask tenants to
refrain from
altering or adding to the unit without your consent;
using parking areas for storage space;
destroying or removing any part of the unit or the
facilities in it without your permission;
bringing in items that harbor insects, rodents, or
other pests;
making noise that disturbs you, other tenants, or
neighbors;
smoking in places you designate as non-smoking
areas;
keeping pets (or particular kinds of pets);
bringing in water beds, certain types of appliances,
or heavy furniture; or
using outdoor cooking equipment on porches,
balconies, or other areas.
Asking Tenants to Sign
Written Agreements
Although some landlords and tenants have oral
agreements, you may want to enter into a written
lease or rental agreement with your tenants. Using a
written agreement can be a good idea because these
agreements specify the terms of the landlord and
tenant relationship that bind both parties and protect
both landlords and tenants by establishing their rights
and obligations. For landlords, they provide a legal
basis for enforcing rental policies, including rent col-
lection procedures.
You will need to decide whether its better for you to
use a lease or rental agreement. Each type of tenancy
offers advantages and disadvantages. You will need
to determine what works best for you. Keep in mind
that in some jurisdictions, there is no legal difference
between a lease and a rental agreement.
Written rental agreements spell out the obliga-
tions of both the tenant and the landlord, and the
terms and conditions of tenancy. In jurisdictions
where rental agreements are recognized as a differ-
ent type of contract than a lease, such an agreement
does not establish a period of time for tenancy.
Written agreements generally provide tenancy for a
short period of time — usually under a year, often
month-to-month. In the majority of jurisdictions,
they may be automatically renewed each month
unless you or the tenant provides the other with
proper written notice of intent to end the agreement.
Month-to-month agreements usually allow you the
greatest amount of fl exibility. Under a month-to-
month agreement, you usually may increase the rent
or change other terms of the agreement at any point
provided you give proper notifi cation. Because ten-
ants also have the right to terminate the agreement
with relatively short notice, you may be exposed to
higher tenant turnover. You may prefer to use month-
to-month rental agreements in rental markets where
there is large demand but a low supply of rental units.
22 © 2008 Fannie Mae. Becoming a Landlord.
You should be aware that in some jurisdictions, a
landlord cannot end a month-to-month tenancy
without a legal reason, even though the tenant can. In
locations that have rent control, there may be limits on
how often and how much you can raise the rent, even
with a month-to-month tenant. You should check
your local laws to see what is allowed in your area.
Written leases also spell out the obligations of
the tenant and landlord, but set a stated period of
time for tenancy, usually a year. Rental increases or
other changes in tenancy cannot be made until the
lease expires, unless there is a specifi c clause allow-
ing increases or changes at an earlier time. Written
agreements may increase your chances of having
longer-term tenants but may limit your fl exibility. You
may prefer to use written leases in markets with low
or seasonal demands for renting and high vacancies.
Know what should be included in
a lease
What goes into a lease is generally up to you. If your
community has any laws regarding what leases can
or cannot require, you need to follow them. For
example, in some places the law limits the amount
of late fees that can be charged or forbids a landlord
from including a requirement that a tenant pay the
landlord’s attorneys’ fees.
To inform yourself of laws regarding leases in your
area, contact the of cial local government offi ce that
handles landlord/tenant relations. Sometimes this is
handled by local offi ces of rental accommodations,
zoning, housing, or consumer affairs.
You will fi nd that nearly all leases contain the follow-
ing basic information:
the names and signatures of both the landlord and
the tenant;
the date on which the lease was signed;
the address of the unit the tenant is renting;
the beginning and ending dates for the period dur-
ing which the tenant has the right to rent the unit;
the amount of rent the tenant must pay;
the time when rent is due, procedures for collect-
ing rent, and any policies regarding late fees or
penalties for returned checks;
the amount of any security deposit or advance rent
the tenant must pay, and the circumstances under
which the landlord will collect or return such
payments;
the policy concerning whether a security deposit
can be used as the last months rent;
the amount of notice required to terminate
the lease;
where and how such notices should be sent; and
required disclosures, such as lead-based paint or
other hazardous conditions.
Many leases also contain provisions covering the
following:
whether the cost of providing heat, hot water,
electricity, or other utilities is the responsibility of
the landlord or the tenant;
whether the tenant may sublet the unit;
how many people may reside in the unit at
one time;
whether the landlord or the tenant must take
responsibility for making various types of repairs;
whether the property can be used for business, car
repairs, or other purposes;
any policies regarding pets, overnight guests, park-
ing, extended absences, or other issues;
any types of alterations the tenant may be allowed
to make and any restrictions against making
alterations;
tenant responsibilities for maintenance and dam-
ages caused by tenant;
© 2008 Fannie Mae. Becoming a Landlord. 23
policies regarding illegal activities, disturbances,
violations of laws, and ordinances;
when the landlord may enter the premises (in com-
pliance with local law);
any circumstances under which the tenant may be
asked to grant access to exterminators, painters, or
maintenance workers;
any storage space(s) a tenant may use and any
restrictions on items that can be stored; and
late payment fees and attorneys’ fees for evictions.
Determine clauses that allow you
to raise rent
As mentioned earlier, in some locations, laws allow
you to include an “escalator” clause in a lease. Such
a clause allows you to raise the rent — by either a
specifi ed amount or by a stated percentage — if your
real estate taxes or utility costs were to increase.
Consider making mutually
agreeable changes to an
unexpired lease in writing
There may be occasions when you and/or your tenant
want to change provisions in a lease. For example, a
single person may eventually want to share the unit
with a roommate. Or a tenant who originally planned
to live in his or her unit for the duration of the lease
may later want to sublet it to accept a work assign-
ment abroad. Generally, you may make a change
in a lease if both you and your tenant agree to it in
writing. There are some cases when an unwritten
agreement might be enforced by the courts, so do
not assume that a tenant cannot hold you to a prom-
ise just because it is not in writing.
Seek help when creating a lease or
rental agreement
If you prefer to write your own lease or rental agree-
ment, you can fi nd sample leases online or in stores,
real estate of ces, public landlord/tenant offi ces,
and apartment owners’ associations. You may want
to consider having an attorney familiar with landlord
laws review the lease or rental agreement to make
sure that the lease protects your interests and to make
sure that it does not include illegal terms. Some lend-
ing institutions that make mortgage loans for homes
like yours also may have materials that contain sample
leases or information on how to create a lease or a
rental agreement. You also can hire a real estate attor-
ney to prepare a lease or rental agreement for you.
If you are modifying the format of an existing lease,
make sure that all blanks are completed or deleted. If
you write in changes, be sure that both you and the
tenant initial the changes.
Evicting Problem Tenants
If you have tenants who do not pay the rent, fl a-
grantly ignore the terms of their lease, or conduct
illegal activities on your property, you may have the
right to have them — and their belongings — forcibly
removed from your property. The legal procedure for
doing this is called eviction.
Because eviction can be a lengthy, expensive, and
often unpleasant process, you may want to fi nd an
alternative method of removing a problem tenant if
you can. If you must evict a tenant, you need to fol-
low every step of the eviction process to the letter of
the law. Chapter 7 explains the basic steps involved in
a typical eviction and describes some alternatives to
eviction that could enable you to avoid the process.
24 © 2008 Fannie Mae. Becoming a Landlord.
AFTER READING THIS CHAPTER
DO YOU UNDERSTAND:
What to consider when setting your rental rates?
Why you need to follow health and safety codes?
What the differences are between a lease and a
rental agreement?
What you’re not allowed to include in a lease?
What you should include in a lease?
When you can raise your rental rates?
© 2008 Fannie Mae. Becoming a Landlord. 25
Chapter 4: Getting the Tenant Moved In
Establishing Landlord and
Tenant Relationships
Developing and maintaining a professional relation-
ship with your tenant is very important. Some basic
steps include:
establishing, communicating, and enforcing rules
and regulations;
knowing and fulfi lling your responsibilities;
conducting periodic inspections to ensure the ten-
ant is living comfortably and your property is being
well maintained;
monitoring and recording all activity, including any
problems you may be having with the tenant or
the rental unit; and
communicating often so your tenant knows that
you’re approachable and interested in whats
occurring on the property.
Of course, the fi rst step in establishing a productive
relationship begins with both parties understanding
clearly the rental or lease agreement. When the ten-
ant moves into the rental unit, review key terms and
consider providing a welcome package that highlights
those terms, as well as a list of the house rules and
regulations. You also may include a move-in letter
with information related to emergency contacts, pro-
cedures related to repair and maintenance problems,
and other important information. Have the tenant
sign and date the move-in letter and keep a copy of
the letter for your records.
Holding a tenant orientation
To help your tenant get settled, you may want to hold
an orientation at the beginning of the tenancy to:
provide a tour of the premises and identify com-
mon areas;
demonstrate the use of appliances, security sys-
tems, heating and air conditioning systems, etc.;
review the areas services, such as garbage collec-
tion, recycling requirements, newspaper delivery,
etc.; and
provide information on local cable services and
neighborhood conveniences.
Inspecting the Property
You and the tenant should perform a joint inspection
of the rental unit to identify and document the condi-
tion of the unit and its appliances prior to the tenant
moving in. Once you and the tenant have completed
the inspection, you both should review the checklist
for accuracy, being sure to sign and date each page.
Keep the original and provide the tenant with a copy.
Be sure to update the checklist as repairs are made
to the unit — indicating what was done and the date
that the repair was made. Both you and the tenant
should initial any changes to the original checklist.
When the tenant moves out, this checklist may serve
as documentation or evidence as to why you with-
held all or part of a security deposit.
26 © 2008 Fannie Mae. Becoming a Landlord.
Establishing a Tenant File
Documenting all activities and transactions may
be important in the event that a tenant takes legal
action against you, or you need to take legal action
against a tenant.
Therefore, you should maintain a fi le for each of your
tenants to include:
the rental application, credit and employment
information, and references;
the signed lease or rental agreement and a copy of
the house rules and regulations;
the signed inspection checklist and move-in letter;
the date and amount of all transactions, including
the security deposit and rent;
repair requests and repairs made;
complaints by and about the tenant; and
all correspondence between you and the tenant.
AFTER READING THIS CHAPTER
DO YOU UNDERSTAND:
What information to provide the • tenant when
moving in?
How to conduct a move-in inspection?
How to set up a tenant fi le?
© 2008 Fannie Mae. Becoming a Landlord. 27
Chapter 5: Maintaining Your Property
When you buy your home with a rental property
or properties, the lender who provides your mort-
gage will take an objective approach to determining
your property’s value and will obtain information
on its appraised value (which will likely include a
report from a professional appraiser). When you sell
the property, the buyer’s lender will require a new
appraisal to determine its updated market value. This
chapter tells you how appraisers estimate the mar-
ket value of properties so that you’ll know what you
need to do to maintain your propertys value.
How to Keep Your Propertys
“Market Value” Up
The “market value” of your property is essentially the
price an independent buyer will pay for it. This sounds
simple on the surface. But there are many factors
that can infl uence what a buyer believes a property
is worth — the architectural style, the landscaping,
the school district, the convenience to shopping and
transportation, and the prices that comparable prop-
erties sell for in the neighborhood.
For a property like yours that includes rental units,
additional factors also can affect market value.
Among these are the number of rental units, the
amount of rent your tenants do and are willing to
pay, the occupancy rate, and maintenance expenses.
In the best of circumstances, the market value of your
property will increase by the time you are ready to
sell it. While you never can be sure that this will hap-
pen, you can increase the likelihood by maintaining
your property properly while you and your tenants
live in it.
Although careful maintenance will generally contrib-
ute to the value of your property, there sometimes
may be factors outside your control that also infl u-
ence its market value.
Sometimes you also can add value to your property
by improving it. For example, you can make your
property more attractive to both buyers and tenants
by building an addition, replacing an old roof, putting
up a fence, or repaving the driveway.
Improvements are not guaranteed to bring you a
higher price for your property. Many different factors
come into play and professional appraisers make their
living by observing and evaluating these factors to
determine what a property is worth.
Understand what appraisers
are looking for
When you sell your property, the buyer’s lender will
ask for a new appraisal because many factors that
affect market value can change since your property
was last appraised. The outcome of the new appraisal
is likely to be favorable if the economy in your area
has remained stable and you have taken care of your
property. The more you know about the factors that
appraisers consider, the more control you’ll have over
the market value of your property.
Essentially, an appraiser’s job is to determine whether
there is an active market in your neighborhood for
properties like yours and to estimate what your
property is worth in that market. To accomplish this,
the appraiser assigned to your property will compare
the sale prices of properties in your neighborhood of
comparable age, type, and design. The appraiser will
examine the outside of your property and possibly the
inside, including such features as windows, screens,
insulation, heating and cooling systems, kitchen appli-
28 © 2008 Fannie Mae. Becoming a Landlord.
ances, attic space, and car storage facilities. Also, the
appraiser may check the materials used to construct
oors, walls, bathrooms, replaces, and doors to see
if they are safe, durable, and common within the
neighborhood. For a home with rental property like
yours, the appraiser also will assess how your rental
units compare with others in your neighborhood.
Think of your property as part
of the neighborhood
In many instances, properties maintain their value
best when they are similar to other properties in the
neighborhood. For example, if you build a swimming
pool or install designer skylights and similar proper-
ties in the neighborhood do not have these features,
buyers looking for properties in your neighborhood
may not necessarily be willing to pay extra for them.
Making Repairs and
Improvements
As a landlord you are responsible for ensuring that
your property is maintained in accordance with safety
and health standards. To ensure that your property
continuously meets standards, you should perform
periodic and seasonal inspections of the property.
Mark the calendar at the beginning of each year to
schedule maintenance and improvements.
“Do-it-yourself” repairs
Expensive tools or lots of experience aren’t always
required to make many basic home repairs. Taking
care of small repairs before they become big projects
can save you both time and aggravation. Preventive
maintenance can actually extend the life of appliances
and systems and avoid expensive repairs. Some hard-
ware or home improvement stores also offer basic
repair courses.
You may be able to obtain information and tips on
how to make some of the basic repairs from various
resources in your area. Before getting started you
may want to determine if:
the local community college or Cooperative Exten-
sion Service of ce offers home repair courses;
your local utility company offers courses in basic
plumbing or other repairs;
any local nonprofi t groups offer training in making
basic repairs; or
your public library or local bookstore stock home
maintenance books.
There are many Web sites devoted to home mainte-
nance and repair topics. Here are several to try:
HOME REPAIRS
Home Depot
www.homedepot.com
Lowe’s
www.lowes.com
SPECIFIC REPAIR AND
MAINTENANCE PROJECTS
U.S. Government sites
www.access.gpo.gov
www.pueblo.gsa.gov
American Society of
Home Inspectors
www.ashi.org
Major repairs/home improvements
Sooner or later, you’ll need an expert to address
one or more major repairs. Perhaps the washing
machine is broken or the hot water heater stops
working. Or maybe you want to make some major
home improvements to one or more of your units
prior to renting them.
© 2008 Fannie Mae. Becoming a Landlord. 29
Hire a contractor
You can use the following guidelines to help get such
a project done right for a fair price.
Interview several contractors. Begin by asking
other landlords, friends, neighbors, or a local landlord
association to recommend companies or individu-
als that have provided them with good service. You
should get an idea of which contractors are doing
work in a particular area, the quality of their work,
and the amount charged.
Ask for references and check them. If your county
or city has a licensing process for home improvement
contractors, are the contractors licensed? Also ask
for a copy of their insurance and license. Contact the
Better Business Bureau to fi nd out about possible
outstanding complaints.
Get cost estimates and fi nd out whether these are
estimates or a fi rm bid. Often, especially on older
houses, contractors will not give a fi rm bid because
it’s impossible for them to know until they start the
work what they’ll fi nd and how diffi cult the work will
be to complete. You should ask at least three contrac-
tors to provide bids for a home improvement project
and give all of them the same information about the
job. The more defi nite the specifi cations, the more
realistic the bid will be — and the less likely that you
or the contractor will run into unexpected problems.
Be sure that each bid includes a work write-up and
specifi cations that describe all of the work that will
be done and how much it will cost. Make sure that
the contractors specify which type, brand, and/or
grade of material they plan to use so that you’ll know
if you’re receiving the quality you requested.
As a protection, especially for a larger job, be sure the
contract speci es exactly what work is to be per-
formed and when payments are due. Your contract
also may include a dollar limitation that caps the
amount you will pay the contractor. Your contract
also should include start and completion dates, and
possibly some remedy in the event the contractor
fails to perform on time. If the job is extensive, the
contract should also include a schedule for payments
to the contractor. You should always hold back part
of the payment, usually 30 percent, until after the job
is fi nished.
Obtain answers to the following critical questions:
Does the job require building permits?
If so, who is responsible for obtaining them?
Will the work need to be inspected and by whom?
Is the contractor insured and bonded?
Also, request copies of the contractor’s liability
insurance coverage, worker’s compensation, and if
required in the area, licenses or certifi cations.
Need help fi nding the names of
contractors?
The National Association of Home Builders (NAHB)
and the National Association of the Remodeling
Industry (NARI) offer brochures that provide advice
for consumers on selecting a reputable and quali-
ed professional remodeler, writing a contract, and
resolving disputes. Both groups have affi liated local
associations nationwide that can be contacted for
the names of their members who offer remodeling
services and provide information and assistance.
RESOURCES
National Association of Home Builders
www.nahb.com
National Association of Remodeling Industry
www.nari.org
Establish a repair and
maintenance system
You should establish fi rm policies and procedures
related to repair and maintenance. In addition to
providing a process for tenants to report repair
30 © 2008 Fannie Mae. Becoming a Landlord.
and maintenance problems to you, the procedures
should include steps for you to perform frequent
maintenance inspections and track requests made
by tenants. A good repair and maintenance system
allows you to prevent potential problems by iden-
tifying and fi xing them before they become major,
maintaining effective communication with tenants,
and reducing potential legal liability.
The following steps should be part of your repair and
maintenance process:
Clearly set out the responsibilities for both you and
your tenant for repair and maintenance in your
lease or rental agreement. Remind tenants of your
policies and procedures to keep your building in
good repair in every written communication by
printing it at the bottom of all routine notices, rent
increases, and other communications.
Use a written Landlord-Tenant Checklist, inspect
rental units, and fi x problems before new tenants
move in. Once a year, inspect all rental units and
keep copies of the completed checklist in your fi le.
Don’t assume your tenants know how to handle
routine maintenance problems, such as changing
light bulbs or blown-out fuses, or unclogging a
sink drain.
Make it a point to explain the basics when the
tenant moves into the unit. Include a brief list of
maintenance “dos and don’ts” as part of your
move-in materials.
Encourage tenants to immediately report plumb-
ing, heating, weatherproofi ng, or other defects, or
safety or security problems. Handle repairs as soon
as possible but de nitely within the time required
by state law. Keep the tenant informed.
Keep a written log of all complaints. This should
include a space to indicate your follow-up. Keep
a fi le for each rental unit with copies of all com-
plaints and repair requests from your tenants, and
your response.
Twice a year, give your tenants a checklist on which
to report any potential safety hazards or mainte-
nance problems that might have been overlooked.
Respond promptly and in writing to all requests,
keeping copies in your fi le.
Especially for multi-unit buildings, place notices in
several places around your property about your
determination to operate a safe, well-maintained
building and list phone numbers for tenants to call
with maintenance requests.
Handling requests for repairs
When you’re not available by phone, make sure that
you have some type of answering or paging service
available at all times. You also should provide all
tenants with a Maintenance/Repair Request form.
Include several copies in the materials provided when
tenants move in and make additional forms readily
available to your tenants. You should complete the
form for all telephone requests. Make sure that the
disposition of the problem is indicated on the form,
which you should fi le in the tenant’s records.
Respond promptly to all complaints. You may want
to verbally follow up and then provide a written
response. For personal security and safety problems,
you will want to get the repairs completed immedi-
ately — it may even require that you use a 24-hour
repair service. As a rule of thumb, you should gener-
ally attempt to get the work done on problems that
are major inconveniences to the tenant within 24
hours, and less serious requests within 48 hours.
Because state and local laws may vary from place to
place, be sure that you are familiar and comply with
the laws and ordinances for your local area.
It is important that you take action promptly to
address the tenant’s requests. In some cases the ten-
ant may be entitled to withhold rent and you could
be held accountable for personal injuries as well.
© 2008 Fannie Mae. Becoming a Landlord. 31
How to Protect Your Home
Against Emergencies
No matter how limited your fi nancial resources are,
it’s essential to have a realistic strategy for dealing
with emergencies. In some areas, government and
nonprofi t agencies offer grants or low-interest loans
to landlords who are faced with large repair bills as
the result of natural disasters or emergencies. But
don’t wait until youre faced with an emergency to
nd out what resources might be available.
Keep phone numbers for local emergency services,
such as the fi re department, police precinct, and
hospital emergency room, where you can fi nd them
easily. If possible, get the names of electricians,
plumbers, roofers, and others that have worked on
the house for previous owners. Keep all warranties,
owner’s manuals, or other documents relating to
appliances or utilities in a safe place you can get to
easily. Take preventive measures, too. Anything you
can do now to prevent an emergency later will ulti-
mately save you money.
Know your home
Be familiar with safety features such as smoke alarms
and circuit breakers in your home. Install smoke
detectors outside every bedroom door and in or near
the living room and inspect them on a regular basis
to make sure that they are in proper working condi-
tion. As soon as you move in — if not earlier — take
some time to familiarize yourself with your home’s
and the rental units’ safety features and danger areas.
For example, you should know the location of the
main cut-off valves for the water and gas supply, and
label them. Find and study the fuse or circuit breaker
box and make labels or charts to identify particular
power sources. And learn where the main electrical
switch and the thermostat for the hot water heater
are located.
Take necessary safety measures
The old saying, “an ounce of prevention is worth a
pound of cure” is particularly true for landlords. You
could lose not only your property, but also months of
rental income in the event of a fi re or other avoidable
catastrophe.
Purchase fi re extinguishers and keep them where
they are easily accessible. Identify potential hazards
— like frayed electrical cords, loose wires, or ill-
placed fl ammable materials — and take care of them
immediately. Make sure nothing is blocking the exits
to your house. And let your tenants know what you
would expect them to do in the event of a fi re.
You also should take precautions against theft.
Be sure all windows and doors have secure locks.
Replace the cylinders in door locks when tenants
leave. Keep the area around your property well lit at
night. If you keep important papers or cash at home,
store them in a safe place. If you need to rent a safe
deposit box for that purpose, the cost may be tax
deductible.
Abide by local health and
safety codes
Most states, counties, cities, and towns have hous-
ing and safety codes that landlords must follow. If
you maintain your property properly and take the
safety precautions discussed earlier, your property will
probably meet the standards set forth in those codes.
To be sure it does, you should call the appropriate
government of ce to fi nd out what standards you’re
required to follow.
In general, housing and health codes require
minimum standards for the cleanliness of kitchens,
bathrooms, ventilation units, plumbing, water sup-
plies, garbage and sewage disposal systems, and pest
control. They also may set forth when, and at what
temperature, heat must be provided for your tenants.
Other housing and safety codes generally set stan-
dards for fi re prevention, the condition of electrical
wiring and equipment, and security. They also
frequently require additional precautions with regard
to lead paint. In some areas, special laws require
32 © 2008 Fannie Mae. Becoming a Landlord.
landlords to have lead paint removed and replaced.
It is especially important to be aware of laws regard-
ing lead paint when children will be living on your
property, because paint or plaster containing toxic
levels of lead can cause permanent retardation, brain
and kidney damage, and even death, if accidentally
absorbed into the body. In fact, lead paint removal is
itself dangerous. So it is advisable to hire profession-
als to do it, rather than to try to do it yourself.
You should follow health and safety codes because:
It’s the right thing to do
Your welfare and that of your tenants is at stake.
Even if you’re willing to take chances on your own
health and safety, you cannot afford to develop a
reputation for keeping rental units below standard.
If you do, you will not be able to attract and keep
tenants.
It’s the law
The law holds you responsible for knowing the
health and safety standards you must follow —
and for making sure the units you rent out meet
those standards. You can be fi ned, or even jailed,
for not adhering to these standards (or codes).
In many areas you need certifi cates or permits
showing that certain facilities on your property
are up-to-code. In some states, tenants have the
right to withhold rent payments if the units they
are renting do not meet code requirements. And
your tenants can sue you for negligence if they can
prove they have been injured or made ill because
of substandard conditions in the home they rent
from you.
How to Make Your Home as
Energy Ef cient as Possible
Try to include money in your budget to make energy-
ef cient upgrades whenever you can. Such upgrades
will not only make your property less expensive to
maintain while you and your tenants live in it, they
also will contribute to its market value when you sell it.
At the very least, be sure your property is well insu-
lated and equipped with heating and cooling systems
that work properly. If you can afford to buy more
energy-ef cient appliances or revamp heating and
cooling systems to save energy, your investment will
pay off. But even less expensive steps, like insulating
doors and windows, will save you money and help
conserve energy.
RESOURCES
“Energy Star
®
windows”
www.energystar.gov
Ef cient Windows Collaborative
Lets you compare energy costs among different
window frames and glazings for your climate.
www.ef cientwindows.org
In many locations, utility companies, nonprofi t orga-
nizations, or government agencies provide advice,
information, and sometimes even subsidies to help
landlords make their properties more energy ef cient.
In some places, landlords who rent to low- and moder-
ate-income tenants may participate in a site assistance
program that includes an energy-ef ciency audit and
nancial help for making a home weather-tight.
RESOURCES
U.S. Department of Energy’s Energy Ef ciency
and Renewable Energy Web site
For information on energy audits
www.eere.energy.gov
Home Energy Saver
Offers a do-it-yourself energy audit tool online
www.hes.lbl.gov
A call to your local electric company could be a good
start for fi nding resources of this kind in your area.
Some utility companies distribute publications that
describe energy conservation products and ideas that
can save money. A state or local energy of ce also
may offer other helpful publications on subjects like
© 2008 Fannie Mae. Becoming a Landlord. 33
buying energy-ef cient appliances, improving the
ef ciency of oil and gas heating systems, or insulating
homes against cold air.
RESOURCES
National Association of State Energy Of cials
For a list of state energy of ces
www.naseo.org
Cooperative Extension Service
Select your state on their “State Partners of the
Cooperative State Research, Education, and Exten-
sion Service” Web page to fi nd an offi ce near you
www.csrees.usda.gov
You also can hire energy-ef ciency consultants to
inspect your property and suggest long-term energy-
saving measures. The fees for their professional
advice are tax deductible, as Chapter 6 will explain.
AFTER READING THIS CHAPTER
DO YOU UNDERSTAND:
What factors — inside and out side your control
— infl uence the market value of your home?
What you can do to maintain or increase the
value of your house?
How to establish a repair and maintenance
system?
Why it’s important to observe local health and
safety codes?
How you can save money by making your home
energy ef cient?
What resources are available to provide informa-
tion to make your home energy ef cient?
© 2008 Fannie Mae. Becoming a Landlord. 35
Chapter 6: Taking Care of Your Financial
Responsibilities
Most people would like to spend less and save more
but just don’t know where to start. For many of us,
creating a budget is like starting a diet — there’s
always tomorrow! This is a critical step in manag-
ing your business. Don’t delay — take that fi rst step
TODAY!
A budget doesn’t have to be painful or scary or com-
plicated. It’s simply a picture of money — the money
that’s fl owing in and the money that’s fl owing out.
And the goal is to have more money fl owing in than
owing out.
You should be prepared to incur various types of
expenses. For example, you are likely to have:
xed costs — like your mortgage payment, taxes,
and insurance premiums;
monthly utility bills;
costs for services like garbage collection, pest con-
trol, or annual furnace upkeep;
occasional maintenance expenses — like the cost
of repairing the roof, plumbing leaks, or broken-
down appliances, and the cost of painting and
cleaning units between tenants; and
emergency expenses — like the costs of fi xing
pipes that freeze in winter or replacing a cooling
system that breaks down in mid-July.
It could be overwhelming to consider all the types of
expenses you could encounter while you own your
home. But by creating a budget, you should be able
to manage the upkeep of your home more easily.
Each year, create a new budget for repairs and main-
tenance. Include the cost of predictable expenses,
some money for occasional repairs, and a fi nancial
cushion” for emergencies. If at all possible, try to
budget resources each year for some preventive
maintenance work.
To create your budget, you will need to fi gure out
what portion of your property expenses applies to
your personal budget and what portion applies to
rental for the housing, utilities, homeowners insur-
ance, household maintenance, major improvements,
and professional services. For example, if you pur-
chase a 3-unit property and live in one unit, one-third
of these expenses probably are personal; the other
two-thirds probably are rental. You may use the
Monthly Personal Spending Planner worksheet for
your personal budget and the Operating Budget for
Rental Property worksheet for your rental business.
Both worksheets are included in the Resources and
Worksheets section of this publication.
Preparing Your Operating
Budget for Rental Property
Section 1: Determine your monthly
rental income
Your rst step is to enter the amount of rent that
you expect to receive for each of your units. Add
the amount of rent for each unit to obtain your total
Monthly Rental Income.
Section 2: Determine your monthly
expenses and cash reserves
Item 1: Mortgage, Taxes, and Fees. Indicate the
rental unit(s) portion of the monthly mortgage pay-
ment and any mortgage-related taxes that are not
included in your monthly payment, e.g., real estate
taxes, personal property taxes, county taxes, and
sales taxes.
36 © 2008 Fannie Mae. Becoming a Landlord.
Item 2: Insurance. Homeowners insurance is gener-
ally included in the mortgage payment. If it is not,
indicate the rental portion of that expense in this
section. If you purchase mortgage credit life insur-
ance, only refl ect the rental portion of the cost. If you
have “loss of rents” insurance that reimburses you for
loss of rent from rental units that have been sidelined,
the full expense should be indicated. For example, if
there is a fi re or other disaster that prevents you from
renting out the property, the premium paid for this
coverage is solely for the benefi t of the rental property.
Item 3: Utilities. Only budget those utilities for
which you are responsible. If the utility services both
your unit and rental units, divide the expense accord-
ingly; otherwise indicate the full expense. To estimate
costs, talk to the previous owner or contact local
utility companies.
Item 4: Maintenance. Heating/cooling system
maintenance; carpet cleaning; carpentry; landscap-
ing/gardening; appliance, electrical, and plumbing
repairs; and paint, cleaning, offi ce, and general
supplies, including tools, light bulbs, fi xtures, hard-
ware, etc. — anything that you would use toward the
upkeep of your rental unit should be listed here. As
a general rule of thumb, set aside 2 percent of your
total property value annually to cover maintenance
expenses.
Item 5: Major Improvements. Identify improve-
ments that you plan to make. Determine how soon
the improvements need to be made. Once you’ve
set the time frame, divide the cost by the number of
months to determine a monthly amount.
Item 6: Vacancy Reserves. You’ll need to advertise
your property to attract tenants. If you plan to adver-
tise in your local or community newspapers or use a
rental/property management company, contact them
to obtain their rates. You’ll also need to set aside
an amount equal to two or three months of rental
income in the event of a vacancy.
Item 7: Professional Services. You may need to
retain the services of an attorney who specializes in
real estate to help you prepare your lease(s), interpret
and comply with local and state landlord-tenant laws,
or facilitate an eviction. You may need an accoun-
tant’s services to help with tax code compliance and
tax fi ling, as well as for advice regarding methods
for separating personal and rental expenses. These
expenses for legal or accounting consultation are tax
deductible.
Item 8: Other. You should enter miscellaneous
expenses not listed above here.
Section 3: Compare your total
monthly income and expenses
Enter your total Monthly Rental Income from Section
1 and the total of your Monthly Reserves from Sec-
tion 2.
If Monthly Rental Income is greater than Monthly
Reserves, add the difference to your Monthly Net
Income total in Section 1 of your Monthly Personal
Spending Planner.
If Monthly Rental Income is less than Monthly
Reserves, treat the difference as an expense. Enter
the amount on your Monthly Personal Spending Plan-
ner, Item 13, Household Operations/Maintenance.
Once you have a picture of where your money is going,
it’s usually easier to see where changes can be made.
Preparing Your Monthly
Personal Spending Planner
Section 1: Determine the
household’s total monthly
net income
Your rst step is to add up all sources of income,
including your take-home pay (the amount left after
taxes and deductions have been subtracted).
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