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

Life Expectancy of Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

Overview

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

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.

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.

provide services to your tenants, •

become familiar with state, local, and federal laws •

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.

There are many good reasons to own a small

rental property. Some of the benefi ts that you may

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

even if your tenant does not make his/her rental

payment or your rental unit(s) is vacant.

For example, you may experience problems with

tenants and may have to incur legal expenses.

Maintenance and repair costs often can be substan-

tial. However, you must keep rental unit(s) in good

decent units for your tenants. Also be sure that your

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.

You must make yourself, or someone you designate

to act on your behalf, available to your tenants 24

liable for lawsuits that may arise because of injuries

sustained as a result of unsafe conditions.

At all times during a tenancy, owners must maintain

the premises in a “habitable” condition. “Habitability”

important things most landlords look for when you

rental payments every month;

To be successful, no matter how much you may like

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

Total Gross Monthly Income $3,000

Multiply by 33% x 0.33

Total Gross Monthly Income $3,000

38% Benchmark $1,140

Keep in mind that some applicants may be living on

fi 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-

If you consider low-income applicants who receive

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

and are responsible for meeting any remaining por-

tion of the rent themselves. In other cases, they are

pays the tenant, who, in turn, must pay the landlord.

In other cases, the subsidizing agency pays the land-

lord directly.

Just as the lender you applied to for your mortgage

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

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-

If you can obtain a credit report, you can get a more

detailed picture of an applicant’s credit history. Land-

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

bureaus listed below for a small fee. If you own

any debts the applicant has outstanding, how much

the applicant owes, and how timely the applicant’s

payments have been on credit card bills, car pay-

ments, or other debts. The reports typically provide

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-

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.

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

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.

a little extra effort to make sure you can reasonably

expect the tenant to show consideration for you and

considerate of neighbors? Would you rent to this

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

the opportunity to be kept on a waiting list for future

vacancies.

in a credit report, a report from a tenant-screening

report was only part of the reason you rejected the

notifying the applicant:

the name, address, and telephone number of the •

agency that provided the information, including a

toll-free number if the agency maintains nation-

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

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.

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

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

exact unit they are going to rent before signing the

it’s time to sign it. You will fi nd information about

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

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

vide the tenant with dated receipts for each payment.

hood, you may fi nd it diffi cult to attract desirable

rental income, you want to be sure that your rental

rates are competitive enough to attract tenants and

increases go into effect.

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

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

fl 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.

The things you do to keep up the condition of your

matically gives his or her tenant an “implied warranty

of habitability” ensuring certain minimum standards.

Failure to maintain those standards could result in

fi nes and/or other penalties. In some jurisdictions,

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.

adhering to local health and safety codes; •

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;

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.

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

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

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.

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); •

or heavy furniture; or

using outdoor cooking equipment on porches, •

fl oors, walls, bathrooms, fi 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

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

Mark the calendar at the beginning of each year to

schedule maintenance and improvements.

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

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www.access.gpo.gov

www.pueblo.gsa.gov

work what they’ll fi nd and how diffi cult the work will

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

As a protection, especially for a larger job, be sure the

formed and when payments are due. Your contract

amount you will pay the contractor. Your contract

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

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

The following steps should be part of your repair and

are located.

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

to your house. And let your tenants know what you

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

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

probably meet the standards set forth in those codes.

bathrooms, ventilation units, plumbing, water sup-

plies, garbage and sewage disposal systems, and pest

control. They also may set forth when, and at what

Other housing and safety codes generally set stan-

wiring and equipment, and security. They also

frequently require additional precautions with regard

to lead paint. In some areas, special laws require

landlords to have lead paint removed and replaced.

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

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www.hes.lbl.gov

homes against cold air.

You also can hire energy-effi 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.

Chapter 6: Taking Care of Your Financial