Renting

When most people buy a house, they’re usually excited to make a big financial decision and achieve the goal of homeownership.

And we’re betting on closing day, most regular homebuyers do not dream of turning into an accidental landlord.

But thousands of homeowners might soon face the decision of whether to become a landlord. That’s because millions of borrowers got their mortgage or refinanced in 2020 or 2021 and have what’s known in social media parlance as “golden handcuffs“—a mortgage interest rate of 3% or less.

So what happens if these lucky borrowers need to move because they get a new job, are expecting a child, or need to be closer to family?

Instead of scrapping that great rate, some homeowners are choosing a different path. Instead of listing their home (and giving up that great mortgage), they rent it out and find themselves accidental landlords.

Why rent out instead of selling?

With today’s mortgage rates averaging between 6% and 7%, a rate that’s half that is hard to walk away from.

But that’s not the only reason some homeowners become landlords when they weren’t planning to.

“Another common way to become an accidental landlord is when you have to move, and you cannot sell the home for some reason,” says Mason Whitehead, branch manager for Churchill Mortgage in Dallas. “That’s exactly what happened to me.”

Whitehead became an accidental landlord in the housing bubble of 2006. He never planned to rent out his condo, but he says it worked well for him.

And today’s sellers are facing a slow market, with buyers not always willing to make an offer when facing today’s high home prices and mortgage rates.

So if you’re considering becoming a landlord for the first time, here are five tips to ensure the best results.

1. Know your local laws

As a new landlord, you have rights—as do your tenants. So make sure you know what’s what in your area by checking your state landlord-tenant laws.

“Knowing local and state laws is crucial because some communities and states are favorable to landlords and investment property owners, while others—like California and New York—have a more expensive and cumbersome process,” says Jay Garvens, owner of eight investment properties.

You want to look at state laws that involve rent control and application fees, among other things, so you won’t unknowingly break any laws.

Accidental landlords also want to be aware of any homeowners association rules that may limit rentals.

“I’m very happy in my townhouse and have no plans to leave—especially with a 2.75% rate we locked for a 30-year mortgage,” says Adam Schick, a homeowner in Atlanta. “But if I did, renting it [out] would be challenging due to our HOA by-laws.”

Condominiums and co-ops are two other housing types subject to their organization’s bylaws.

2. Use formal contracts and agreements

Whomever you decide to rent to, be sure to have a formal agreement and signed contract, which protect both you and your tenants.

Garvens favors hiring a property manager to handle the application, contracts, and screening.

“It usually costs about 10% [of the monthly rent] for their services,” he says. “It’s highly recommended if you live more than one hour or 75 miles from your property.”

But some websites offer lawyer-vetted rental lease forms by state if you want to undertake the process yourself. Here’s more information on how to make a lease agreement for a rental property.

3. Thoroughly screen your tenants

You might hit it off with your renters personally, but you want to explore their finances to ensure they can pay the rent each month on time.

In addition to doing a credit check, Whitehead recommends finding renters with a stable income and a low number of debts and financial obligations.

“You want to look for a solid work history of at least two years,” says Whitehead. “Ask for recent paystubs and W-2s. And talk to their employer to confirm employment and the likelihood of continuance of employment.”

But don’t expect to always see stellar credit, cautions Whitehead.

“Most tenants don’t have a good credit score, and there is always a story” behind it, he says. “If everything else looks good and the story was ‘life happens,’ and the credit issue’s been dealt with, maybe it makes sense to take a chance on them.”

4. Get a security deposit

Our experts can’t stress enough the importance of the security deposit. While the industry standard equals one month’s rent, Garvens asks for two.

“You may have to review 20 to 30 applications to get a tenant that can afford this, but I’ve never had a damaged home or been shorted on rent,” he says. He will credit back one month’s deposit at the lease renewal if he and the tenant have a good working relationship.

Whitehead asks for two months’ deposit for “credit-risk tenants” and lets them earn one back after paying rent on time for six straight months.

“This shows I’m willing to let them prove their credit issues are behind them and provides a goal for them to hit,” says Whitehead.

5. Don’t return the deposit until after a walk-through

Many times tenants will ask for their security deposit back before they move out. But that’s not a good idea.

“You need to walk through the home after they move out to ensure everything was left in a good, working order,” says Whitehead. “Do the walk-through with the tenant whenever possible.”

Even then, you might want to hold it for a few more weeks.

“Most property managers wait four to eight weeks for utility or other unpaid bills,” adds Garvens.