Thinking about turning your home or investment property into a steady income stream? Renting out a residential property can be a smart financial move if you know what you’re doing. Whether you’re renting an entire property or a room in your house, we’ll walk you through every step to help you rent confidently and maximize your profits.
1. Research Your State and City’s Legal Requirements
Before renting out your property, it’s essential to research and comply with the legal requirements in your area. Landlord license and permit requirements vary between cities and counties. Consult your city or county’s website or contact their housing department for information about licensing requirements. Some local laws may also require a safety inspection or registration for rental purposes.
If you’re offering a short-term or vacation rental, check for additional state and local regulations. This type of rental may be subject to zoning guidelines, homeowners association (HOA) or condominium rules, or liability insurance requirements. Many cities and jurisdictions have stricter guidelines for short-term rental properties.
For example, New York’s Local Law 18 requires short-term rental hosts to register with the Mayor’s Office of Special Enforcement and prohibits short-term rental bookings for unregistered hosts or properties. Los Angeles County’s Short Term Rental Ordinance also limits short-term rentals, stating that the rental must be the host’s primary residence, registered as a rental, and cannot be rented more than 30 consecutive days, and a total of 90 calendar days in a year.
Landlord-Tenant Laws
Landlord-tenant laws explain the relationship and responsibilities of landlords and tenants in a rental agreement. They provide guidelines for payments, security deposits, eviction processes, legal recourse, tenant rights, and more.
These laws vary by state, and complying with local regulations protects you from legal disputes and financial loss. View the table below for landlord-tenant laws by state.
2. Set Up Insurance Coverage
Renting out your property opens you to a variety of liabilities. Having adequate insurance coverage protects you from costly repairs or losses. If you plan to rent out your house, check your homeowner’s policy for any terms surrounding renting. Otherwise, consider getting landlord insurance to cover property damage. Some mortgage lenders also require an active landlord insurance policy if you plan to rent the mortgaged property.
In addition, you may want to require the tenant to get renter’s insurance. This policy covers the tenant’s personal belongings in case of a natural disaster or accident. Many landlords set minimum coverage amounts for tenants ’ renters’ insurance to reduce their risk and liability.
3. Prepare & Show the Property
Before showing your property, you must ensure it meets all state codes for safety, health, and zoning, as well as the implied warranty of habitability. This means your property needs to have the following requirements:
- Structural integrity: roof, walls, floors, stairs, and foundation must be safe and stable
- Weather protection: property must be protected from rain, snow, and wind (e.g., intact windows, sealed doors, no leaks)
- Working plumbing: includes hot and cold running water, proper drainage, and a functional toilet, sink, and shower/bath
- Safe electrical system: no exposed wiring, outlets, or lights. Breakers must work properly.
- Functional heating system: adequate heat must be provided, especially in cold climates
- Access to potable water: water must be safe for drinking and general use
- Proper sewage and waste disposal: no backups, overflows, or raw sewage; garbage must be removable
- Smoke and carbon monoxide detectors: installed and operational as required by local law
- Pest-free environment: no infestations of rodents, insects, or other vermin
- No hazardous mold: moisture issues must be addressed; mold cannot pose a health risk
- Secure premises: lockable exterior doors and functional window locks for tenant safety
Once the property is ready, evaluate the rental market, location, and amenities to set a reasonable rental price. List the property on an online real estate site or in local advertisements. You can also hire a real estate or property management agency to handle the listings, showings, and applications.
4. Screen Potential Tenants
Once you have interested tenants, send them a rental application. This application should include questions regarding their income, employment, and rental history.
Check that your form follows the guidelines for what you can and can’t ask on a rental application. Your application process should also include steps to determine the tenant’s ability to make payments and verify their rental history. Use the following documents and methods to find the best tenant for you:
- Credit check
- Rental verification
- Background check
- Employment verification letter
- Personal references
You can then use these responses to screen tenants and find the right ones for your property. A thorough screening process reduces the risk of bad tenants or tenant fraud. When screening your candidates, it’s important to adhere to the following legal requirements:
- Federal Fair Housing Act: At the federal level, landlords are prohibited from discriminating against tenants based on sex, race, age, religion, disability, familial status, and national origin.
- The Americans wi)h Disabilities Act (ADA) protections: ADA requires landlords to make reasonable accommodations or exceptions for tenants with disabilities. This may include allowing for the building of ramps or making exceptions to the pet policy for service animals.
- State laws: Look for state-specific statutes or local ordinances that prevent housing discrimination against certain groups or classes of individuals. For example, New York’s fair housing protections extend to prevent discrimination based on pregnancy conditions, gender expression, and certain prior convictions.
Look for the most common red flags on a rental application, such as prior evictions, a bankruptcy filing, or a poor credit history, to filter out potentially problematic tenants.
5. Negotiate the Rental Terms
Once you screen applicants, send tenant approval or rejection letters, and negotiate the rental agreement terms. Do your best to be accommodating and reasonable while making a profit and protecting your interests. Aside from the rent price, you can also set guidelines for the following considerations:
- Pet policy: Decide if tenants can have pets on the property, whether you’ll charge a pet fee, or implement size or weight limits.
- Smoking policy: Note if tenants can smoke or vape in the unit, common areas, or outdoors on the property.
- Painting or renovations: Add guidelines for any renovations or changes, such as painting or installations. Decide whether the tenant will be held responsible for any changes made to the property.
- Subletting arrangements: Include whether your tenant can sublet the space. If you allow subletting, note which party will be liable for payments, damages, or communications with the subtenant. Also, state whether the subtenant will require landlord approval prior to their occupancy.
- Utility payments: Communicate which utility bills the tenant and landlord will pay or handle. Mention any utilities included in the rent amount or any separate accounts for the tenant to set up.
- Notice periods: Set terms for notice periods from both parties for renewal, termination, or eviction processes.
- Late rent fees: Determine a due date for each rent payment and note any applicable fees for late rent paid after a specific time.
- Maintenance responsibilities: Choose which maintenance costs and responsibilities will be assigned to the landlord and which will be the responsibility of the tenant.
6. Sign the Rental Agreement
After setting the terms and price for your property, you and the tenant sign the lease agreement. This contract states that both parties will fulfill their obligations and understand the consequences for failing to uphold their end. It’s important to have your rental agreement in writing, as a verbal contract is difficult to enforce, and the physical agreement allows each party to refer to the agreed-upon terms.
Ensure the document includes the move-in date, lease end date, monthly rent costs, any terms of renewal, and agreed-upon policies. Both you and the tenant should sign the lease agreement and keep a copy for your records. If any changes are needed after the initial agreement, you can create a lease amendment.
7. Collect a Security Deposit
When tenants sign the lease agreement, they also pay a security deposit to cover potential damages caused during their tenancy. Typically, landlords charge a deposit equal to one or two months’ rent. Ensure you clearly state the amount for the deposit in the lease agreement and provide a security deposit receipt when it is paid. You should state how the security deposit is to be returned at the end of the lease if the conditions are met.
A security deposit covers damages or repairs needed after the tenant moves out. At the end of the rental period, provide a move-out inspection checklist and list all the repairs needed. Landlords can use the security deposit to recoup any unpaid rent, damages beyond normal wear and tear, or utility balances. Funds from the security deposit cannot be used to cover reasonable wear and tear.
Some states regulate security deposits and provide maximum amounts that you can charge. You may also be required to return the deposit within a specific timeframe after the tenant’s move-out date. View the table below to see state-specific requirements for handling security deposits.
| State | Maximum Deposit Limit | Held in Separate Account | Refund | Law |
|---|---|---|---|---|
| Alabama | 1 month's rent | Not required | 60 days to return deposit | Ala. Code § 35-9A-201 |
| Alaska | 2 months' rent, unless monthly rent is greater than $2000 | Escrow account required | - 14 days to return deposit - 30 days to return deposit if tenant doesn't provide proper notice |
Alaska Stat. § 34.03.070 |
| Arizona | 1½ months' rent, unless tenant volunteers to pay more | Not required | 14 days to return deposit | Ariz. Rev. Stat. § 33-1321 |
| Arkansas | 2 months' rent unless landlord owns fewer than 6 rental units | Not required | 60 days to return deposit | Ark. Code § 18-16-304 and Ark. Code § 18-16-305 |
| California | 2 months rent (if unfurnished) or 3 months' rent (if furnished) | Not required | 21 days to return deposit | Cal. Civ. Code § 1950.5 |
8. Manage the Property
As a landlord, you assume responsibility for managing your property while the tenant lives there. The most common duties for a residential landlord include:
- Collecting rent: Establish a payment method, such as checks or an online transfer, for monthly rent payments. Collect the payment from the tenant and provide them with a rent receipt each month.
- Performing maintenance and repairs: Respond promptly to maintenance or repair requests from tenants. Address issues quickly and effectively to prevent further damage and ensure livable conditions.
- Communicating with tenants: Answer any concerns, questions, or complaints from tenants to ensure satisfaction.
- Complying with laws: Understand and adhere to local and federal housing and landlord-tenant laws. Maintain compliance when raising rent, providing a habitable property, and delivering necessary notices.
When completing maintenance or entering the property, it’s important to send a landlord notice to enter or a landlord repair notice. These documents inform the tenant of your presence and provide legal protections by certifying their consent.
9. Record Your Income
The money earned from renting out residential property counts toward your yearly earnings and must be recorded on your income tax return. The types of rental income that need to be reported include:
- Regular rent payments
- Advance rent
- Deposits (if not yet returned)
- Payments for a lease cancellation
- Expenses paid for by the tenant
- Services or property given by the tenant in place of rent
Tax Forms
Filing rental income with your yearly tax return requires a few extra forms. In most cases, you can use Schedule E (Form 1040), Supplemental Income and Loss, to report your earned income and any rental real-estate-related expenses. If you provide a significant amount of services for your tenant’s convenience, you can report your income and expenses using Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship).
10. Renew or Terminate the Lease
At the end of your tenant’s lease term, work together to determine whether to renew or terminate the arrangement. If you want to continue with the same tenant, offer a renewal agreement and note any rent increase or newly added conditions. If you don’t want to continue with the current tenants, you can send a lease termination letter. The tenant can also use this form to communicate their intent to move out at the end of their rental term.
Evictions also allow you to terminate the arrangement with your tenant. You can use an eviction notice as the first step in the eviction process. A landlord may use an eviction to remove disruptive or non-paying tenants who refuse to leave willingly. An eviction can also help if you decide you want to sell your house with tenants.
Pros of Renting Out Residential Property
Renting out your residential property provides many benefits and is a great way to profit from your real estate investments. The most prominent pros of becoming a landlord include the following:
- Extra income: Collecting monthly rent provides passive income that adds to your yearly earnings.
- Maintaining property ownership: Renting out your home or residential property means you retain ownership and keep the title in your name. This provides flexibility if you want to move back in, sell the property, or leave it to family members.
- Tax deductions: Landlords are eligible for tax deductions on mortgage interest, property taxes, repairs, depreciation, and operating expenses.
Cons of Renting Out Residential Property
While extra income is great, being a landlord also has its downsides. Consider the following cons of renting out your property:
- Time commitment: Advertising your property, screening potential tenants, and handling property maintenance can be time-consuming and emotionally draining.
- Maintenance costs: Depending on the terms of your agreement, you may be responsible for paying for maintenance or services. However, some costs may qualify for tax deductions.
- Unpredictable tenants: Even with proper screening processes, there’s a chance your tenants will damage your property, fail to pay rent, or cause legal disputes.
