Rental Pitfalls

[HCBailly]

I’m finally ready to take the plunge into making some passive income on my real estate, starting with my own home. My goal is to get at least 1, preferably 2 of my bedrooms rented out by the end of the year. Maybe I could even rent out my basement down the road. I’m looking to rent each room out for $500/month, which from my research, looks to be below market value. Besides, if I charged much less than that, I would start to only break even, due to increase in utilities costs, taxes, and repairs.

That said, I’m surprised I didn’t see a topic on here about the pitfalls of renting real estate, so I thought I would do so here. I’m not worried about the loss of privacy, as I live mostly by myself here. Also, I’m not worried about the tenants trashing the carpet, since I’m a professional carpet cleaner. That said, I do have some questions that have already come to mind.

1) Should I hire an attorney to draft a contract for me?

I asked my attorney (who is real good) what it would cost to have him do that for me, and he said probably about $250-375, depending on how long it takes. Obviously, I would need to state things like what are the common areas, is smoking allowed (no), and can they use my laundry machines. This all seems pretty basic to me and I found a free contract online that seems to cover all the bases.

That said, my default option would be to pay the attorney. In theory, I would make that money back in the first month, plus I would have the template for future rentals. I’d say it would probably be money well spent, given my experience with him in the past.

2) Any thoughts on advertising a room for sale?

I don’t have much money to put into advertising. The newspaper is expensive. Some people suggested Craig’s List to me, so I’ll definitely try that. I could make out some fliers, though I have no idea where I would put them.

3) Should I constantly advertise for new tenants?

My greatest concern with renting is how do I prevent extended vacancies. My guess would be that I would have to constantly be advertising for new tenants, so that I will always have another one waiting in line. If my rooms are full, then I would say so, but keep them in mind.

I just want to make sure that I’ve got all my bases covered for this significant change in my life.

Thanks a lot.

 

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[randallg99]

just do it and see what happens. why overanalyze it?

 

[yveskleinsky]

I wouldn't pay an attorney. Just get a free rental agreement online. The basics you want to have covered: deposit, how much rent is, when it's due, what happens if it's overdue, when they are moving in, how long the lease is for, smoking, pets, who the lease is with (just them--or are they/will they bring a girlfriend/kids?...What happens if they do move in a girlfriend/kids/pets?)

Advertise everywhere that you can for free. If you get a good roommate, just be a good roommate and odds are they'll want to stay living there. You will have vacancy, but they'll need to give you 30 days notice--so you should have time to get it re-rented.

Put an ad on Craigslist and see what happens. Oh, and go with your gut. Everytime I've ever been sorry about a renter, my "spidey sense" tried warning me and I went against it. You may think you need the money, but I guarantee you that these tenants will cost you way more than you'll ever make from them.

 

[CactusWren]

Hi, there are other threads, but here is one:

http://www.thefastlanetomillions.com/real-estate-residential/22574-renters-really-another-world.html

My gut does not work for me, nice credit report in black & white sure does...

Good luck!

 

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[CactusWren]

Here's another one (fresh!):
http://www.thefastlanetomillions.co...g/23021-not-sure-what-do-here.html#post107586

 

[HCBailly]

Yeah, I suppose a free contract online would work. It looks to be thorough and written in legal-ese. Sounds good to me.

I’ve become pretty good at reading people with my vast experience in my carpet cleaning business. That said, I’m absolutely doing a credit & background check before inviting anyone into my home, of course. Relying on my gut will probably come into play when determining who to check out first.

It sounds like I’ve got all my bases covered and am prepared for the worst. I’ll get started on that today.

Thanks a lot.

 

[HCBailly]

4) Do you have a credit and background check company that you would recommend?
5) Should I require a payment up front for credit and background checks?

I've heard of Sentrylink, but they require a $100 account setup fee and specifically state that they only work with licensed businesses that work out of an office. They say that they cannot offer their services to someone that works out of their home for rentals, like I do. Surely, there must be an easier way of getting this information.

Also, I thought landlords usually require a small deposit of $50 for a credit and background check. IIRC, this usually was applied to the first month's rent or refunded if they don't meet their standards. This also served as a way of screening out tenants who aren't really serious. Do I have that right, or is there more to know?

In any case, I've already started the process of finding a tenant. I have an ad and tenant contract 100% ready to go. Hopefully, I will get some calls soon.

 

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[rcardin]

definitely use a 50.00 non refundable application fee. It really weeds out the people you won't want. If they can't afford 50.00 for an app fee they can't afford their rent either.

 

[juntao65]

My mum basically pays off her mortgage from renting out rooms/basement. We even turned our garage into an extra basement, but the city inspectors didn't really like that. >.>

Anyways, like someone said above don't over analyze. Just try it.

Some quick tips:

1) Take a damage deposit. We take $150 (CAD) no matter what.

2) Don't over complicate it, just get some random agreement online.

3) Get international students. This works exceptionally well because there are 2 university campuses near where I live. I don't know about your arrangement. But the great thing about international students is that they are supported by their parents, so they rarely ever have an issue with paying rent. They're either at school or studying, so it's like you don't even know that they're there.

Anyways, I hope this works out for ya. Good luck bro.

 

[ProfessorSpeed]

I did this exact thing when I bought my first house. I had a mortgage payment of $1200 and two tenants for $500 each. I asked a few of my friends for their rental agreements and modified them according to my needs (free). I advertised on roomates.com, the paper, and craigslist. I don't think I spent more than $200 bucks for the advertisements in year. Compare that to $12000/year rental income and it's nothing. By the way, the advertisement costs are tax deductible.

I took one tenant's rent and applied it to principal payments....thus making $1700 mortgage payments. The other tenants money went to savings and lifestyle. No regrets on that move by the way! I was specific that the rent was for 1 person only. I was not specific on any familial status, just the number of people allowed to live there. My other advice is to do "all bills paid". It's just not worth your time to round up and prod the roomates for money each time there's a $15 utility bill to pay. In comparison to your existing utilities, the increase in utilities used with two more people is fairly minimal.

Yes, it's inconvenient. Yes, a few things can get torn up. I think after two and a half years of rental income ($30k), it may have cost me $1k to restore everything. Hindsight advice: The single thing that damaged my house could have been prevented. Simple weekly cleaning! People who are not clean just live that way no matter how nicely you ask. Mold and stains tend to wreck finishes. If I did it over again, I would add another $30 to each tenant's rent and require that the place be cleaned bi-weekly by a cleaning service that I hire. It will not only give you peace of mind that things are being maintained properly, but it will definitely help you keep your sanity when your personal space is being shared.

 

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[ProfessorSpeed]

Oh I wanted to add one more thing. I asked for a month's rent for a deposit. In the end, I gave the full value back to the tenants. By the end of your stay, these guys will know your behaviors and the location of all your valuable property. If they wanted to steal from you, they would have all the inside information. Do your best to part on good terms!!!

One final piece of advice: When the going gets tough and you get discouraged at the situation, think about how hard you have to work to get $12,000 any other way. If you're an average guy making $30 bucks an hour like I was at the time, that's about 3 months worth of work. If you make less, it's even worse! Spending your time at the adult daycare cubicle farm for three months is far worse than the few inconveniences at home.

EDIT: I specifically emailed my homeowners insurance to make sure that my property would still be covered with two tenants. I got this in writing, and I recommend you do so as well.

 

[NoMoneyDown]

definitely use a 50.00 non refundable application fee. It really weeds out the people you won't want. If they can't afford 50.00 for an app fee they can't afford their rent either.

Just be careful as desperate people will try anything to find another rental (like using a friend as their last landlord and another friend as their landlord before that). And, while the $50 non-refundable app fee can weed out some of the prospective bad tenants, it can also weed out some of the good ones as well. Nothing beats a good background check, but even that is not always 100% fool-proof (e.g., couples can divorce after they move in, people can lose their job).

 

[yveskleinsky]

I've never charged a rental fee--most people think they are a scam.

I've also never done a background check or credit report. What I have done is taken about 10 minutes to talk to the person and get a feel for them. As in regular life, you kinda know within 10 minutes if you have a compatible lifestyle as another person. ...If you get a chance to look into their car, I highly recommend it. Most people treat their cars like they do their house. ...At the very least get some references and call them.

Just do it. Just put an ad out there, and start meeting potential roommates. You can always say no until you find someone you click with.

...I should also add that when I was looking for roommates, I went with the attitude that I was looking for "friends I hadn't met yet." Because I looked for people that I could be friends with and not just someone who'd pay me $500 a month, I met a lot of great people that I still talk to to this day.

 

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[NoMoneyDown]

I've never charged a rental fee--most people think they are a scam.

I've also never done a background check or credit report. What I have done is taken about 10 minutes to talk to the person and get a feel for them. As in regular life, you kinda know within 10 minutes if you have a compatible lifestyle as another person. ...If you get a chance to look into their car, I highly recommend it. Most people treat their cars like they do their house. ...At the very least get some references and call them.

 

[yveskleinsky]

lol--the point of my post wasn't to say don't do whatever DD you are comfortable with--the point was to use common sense. Talk to the people, observe them and their surroundings--this will generally tell you a lot.

However as far as app fees--I've never paid one, nor would I ever.

 

[HCBailly]

Good news! So far, I've already got a few quick responses. From what I saw, there is very very little in my area in rooms for rent on Craig's List. I do live in a pretty central location, so that probably is helping me too.

 

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[HCBailly]

I’ve got a fishy situation here, and was wondering if you could shed some light on this. One of my potential tenants is coming here from outside the country. They want to send me a check with the money I asked for, plus money to send to their traveling agent.

Why would they need me to send the money to their traveling agent? Couldn’t they more easily send it to them directly? It sounds like they want to send me a check, and have me disperse their money for their traveling agent while I wait for the check to clear.

That sounds like a really fishy scam to me, considering I’ve only briefly talked to these people from craigslist, where they specifically tell you to not send money to anyone you do not know via Western Union. This just doesn’t make sense to me. Do you know anything about this?

Thanks.

 

[kwerner]

Scam-a-rama! I think there's was another post on here about this.
Let me see if I can find it...


...Ah Ha! I found the link --> Nigerian Scam

Hope this helps.

 

[hatterasguy]

Take the check, its legit. Tell the good Doctor from Nigera that you will Western Union the balance to his agent.

 

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[HCBailly]

I’ve got a question, now that I think about it. What is a legit reason for a good tenant to want to rent a room from me?

The only thing I can think of is maybe a student or someone with a job transfer, and I haven’t heard from anyone like that. I would think that a good tenant would already have a good place. If they’re looking for a new place, I would think that something bad happened that I could become involved in.

This is looking more and more like a bad deal.

 

[rcardin]

Very typical scam. Get the check from them and frame it. That is all it will be good for

 

[yveskleinsky]

I’ve got a question, now that I think about it. What is a legit reason for a good tenant to want to rent a room from me?

The only thing I can think of is maybe a student or someone with a job transfer, and I haven’t heard from anyone like that. I would think that a good tenant would already have a good place. If they’re looking for a new place, I would think that something bad happened that I could become involved in.

This is looking more and more like a bad deal.

Why would someone look for a roommate? ...The same reasons you are looking to rent a room:

1. Can't or don't want to pay 100% of their household expenses.
2. Like company.
3. Feel safer living with another person.
4. Maybe has poor credit and can't get a place at an apt. complex, and has better odds as a housemate.
5. Maybe working in an area on a temp basis and doesn't want to pay for hotel.

HC, if you don't like what you are catching--throw it back--and maybe consider changing the bait. Write down a list of your interests (video games, business building, etc.) and then go to places where people like you go. Put up flyers (and/or add this info to your Craigslist posting.)
For example, when I was renting rooms in my house out when I was in college, I looked for other students in the English/Art/Writing dept. My flyers went something like this:

We Won't Eat Your Food!​

Oversized bedroom in 4 bedroom/2 bath house for rent at $325/month!

So who would you be living with? Well...

We are a group of English Ed. students who:

- Are Clean. We do our dishes and clean the bathrooms.
- Are Friendly. We don't mind if your parents or friends come up and stay the weekend!
- Love dogs. We currently have 2--but yours are warmly welcomed!
- Good students. We know when to have fun and when to study. Two of us are seniors taking 18 credits.
- Like to write information in bulleted points.

Oh, and we promise we have our own food and won't eat yours. ...Unless it's left over Chipolte. You may have to hide that...or label it as Taco Bell as it'll make it through the night untouched.

What we are looking for: Someone who is clean, friendly, down-to-earth, loves dogs and who is actually in college to learn. If you like having long discussions about how Edith Wharton is overrated (sorry Prof. Blume), then we'd like to meet you. Even if you aren't looking for a place to stay, we'd still like to meet you.

We aren't 420 friendly, but we are 420 tolerant--we are also not overly religious or big on cats. ...Just to save you the time.

Call Dana at 888-8888
(Then I had a couple of pics of the house and gave the location of town it was in.)

Hads tons of responses. Why? Because we had clarity--and the more clarity you have with what you are looking for in a roommate, the better your odds of finding a good match.

I hope that helps.

 

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[kwerner]

Yves, if you weren't an entrepreneur, you'd make a FORTUNE in the advertising / copyright business.

Are you available for hire?

 

[yveskleinsky]

For hire?! Sure! ...I will only charge one million dollars. ...I am by no means a professional, but if you do have something you think I can help with I'd be more than happy to give you a second set of eyes.

 

[kwerner]

You mean, One.... Millllion.... Dollars? Muhahaha!

 

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[lightning]

From someone who has gone through NIGHTMARES renting out bedrooms in his house (to several different "friends" over the years), let me tell you that you may want to seriously reconsider putting your tenants on a lease, and here is why...

When you rent a secondary property out (meaning, one you are not ALSO residing in), it is easy to overlook things that might drive you crazy. If you did things properly, you would also have a security deposit to protect you from "some" damages should things go bad, and a lease to enforce if you need or want to get them OUT of the home. It becomes strictly a "Business" arrangement, and can be treated 100% as such.

The problem is, if they are on a lease in a home YOU are living in, things can go badly QUICK, and now THEY also have a lease protecting them. It is not a nice feeling to have people in your own home that you dont trust, but yet cant legally FORCE them to leave if things arent working out. An example would be what if your roommate starts drinking excessively? That is something that Im sure would not be covered in your lease, but yet would sure make things miserable around your home. The difference is, if they are not on a lease, it is very easy to say, "look, things arent working out, Id like you to leave by the end of the month" (And even easier to call the police if necessary and say, "Officer, a friend of mine who was staying with me has turned into an alcoholic, and now refuses to leave my residence. Can you please remove them?"). If said person is on a lease, youre going to have a much harder time getting them to accept that request!

Anyways, just some advice from someone who has been there. I have a 4-bedroom house, so over the years I have had quite a few friends rent one of our downstairs bedroom, as it has always seemed like "free" money to me that was too hard to pass up (usually an extra $600 a month just to share my house with someone I trust). The problem is, when you no longer CAN trust the person, and you want them gone. Such as the case with my last roommate, an old fraternity brother of mine who we discovered used to "wander" through parts of the house he was not welcome in (such as drawers in my GF's dresser...), and who decided it was okay to "borrow" anything he wanted in the house without ever checking with me. When things became almost intolerable (and I no longer felt like my house was a home), you had better believe I was very glad he wasnt on a formal lease... guaranteeing him the right to stay an extra 6 months to a year in a home both me and my GF no longer felt comfortable in.

Case in point, it is an ENTIRELY different and new experience to rent out rooms in a house you LIVE in, rather than one you simply "own".

Just some food for thought. Good luck.

 

[hatterasguy]

I don't think I could ever rent rooms out, I like my privacy to much. Maybe if it was a really close friend.

 

[yveskleinsky]

Yeah, leases are key. I had to evict two roommates over a 7 year period, and with another set it ruined our friendship. But looking back on it, all three situations were rotten from the start and needed to end. I shudder to think how bad they could've been without a lease in place. ...Oh, and the people that I was really on the fence about--we did a month-to-month lease.

Get everything in writing. Especially with people you like. A clear understanding keeps friendly people friendly and often scares away the creeps.

Good luck and keep us posted!

 

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[HCBailly]

In theory, lightning, I should have that covered. My lease agreement specifically states every house rule to the letter. Specifically, no drug use. I also have a section on conflict resolution. Obviously, we will try to arrive at a mutually agreeable solution. However, if it comes down to it, the contract specifically states that the tenant must agree to the Decision By Owner.

The only things I can see going wrong are if they break the rules or stop paying the rent. Either case would break the contract and legally allow me to evict them.

Of course, I agree that I would rather not have to rent out rooms in my home. I’d rather sell it and downgrade to a 1-bedroom condo, but my local market conditions won’t allow that, as my home is now worth more than I owe, despite my original 20% down payment. Thus, I seem to have two viable solutions left: rent out my bedrooms or go bankrupt.

 

[HCBailly]

It appears that now that I’m screening out people more carefully, I’m getting no serious responses. Obviously, there’s two things that I need to do:

1) Expand my marketing efforts.
2) Adjust my efforts to close the deal.

Obviously, I need to expand my efforts more offline. Currently, I’m just using some fliers at local grocery stores. What other places could advertise my rooms for rent?

While I’m no longer dealing with people who are trying to scam me, I am getting calls from some people who are interested in the room. Right now, I have yet to be able to even get an appointment for them to look at the room. Of course, I have pictures, but I won’t know how serious they are until they come over and take a look at it. Once I can get someone in person, then I think it will be much easier to close the deal.

The question is: how do I get that far? Is it simply a matter of broadening my marketing efforts to target enough people?

Thanks a lot.