If you purchased a 2- to 4-unit home for rental, you are now a landlord in addition to being a homeowner! Fannie Mae® offers a Becoming a Landlord Guide to help you understand the risks and awards – check out our summary of the highlights below.

Making the decision

The advantages of owning a small rental property include having a place of your own/owning property, being eligible for additional tax savings and having rental income. The possible drawbacks include responsibility for repairs and maintenance, legal obligations and 24-hour availability.

A landlord's responsibilities and obligations include:

  • Maintaining all common areas, such as hallways and stairways, in a safe and clean condition
  • Ensuring that the electrical, plumbing, sanitary, heating, ventilating and air conditioning systems are running and properly maintained
  • Supplying running water, hot water and heat in reasonable amounts at reasonable times

State laws typically regulate landlord-tenant areas such as evictions. Federal laws cover discrimination and landlord responsibilities related to environmental health hazards.

Finding reliable tenants

Good ways to find tenants include posting notices on bulletin boards, placing ads in local publications and hiring a real estate sales or property management professional. The 3 most important things you need to look for when you choose a tenant are:

  • The tenant's willingness and ability to make timely rental payments every month
  • The tenant's willingness and ability to abide by the provisions in any lease or rental agreement you have him or her sign
  • Your reasonable expectation that the tenant is not planning to engage in illegal activities on your property

The Civil Rights Act prohibits discrimination based on race. The Federal Fair Housing Act prohibits landlords from discriminating against prospective tenants because of:

  • Sex/gender
  • National origin
  • Religion • Race or color
  • Familial status
  • Disability

The Federal Fair Housing Act also prohibits advertisements that discriminate against particular groups. The two essential requirements are that:

  • You may not make any statement that indicates "a preference, limitations, or discrimination" based on race, color, sex, national origin, family status, disabilities or religion.
  • You may not post ads or notices only in publications or on bulletin boards accessible only to limited groups.

Taking care of business

Some things to know about doing business as a landlord:

  • Where local law permits, you may be able to collect a security deposit to cover any damage a tenant might do to your unit.
  • Generally, if you do not maintain your property according to the laws, you can be held liable for damages resulting from negligence.
  • A written rental agreement spells out the obligations of both the tenant and the landlord, along with the terms and conditions of tenancy.
  • Written leases spell out the obligations of the tenant and landlord, and sets a stated period of time for tenancy, usually a year.
  • 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.

Getting the tenant moved in

Some basic steps for developing and maintaining the landlord and tenant relationship may include:

  • Establishing and communicating rules and regulations
  • Enforcing the rules and addressing problems immediately
  • Watching for problems and maintaining a paper trail of all activity

To help your tenants get settled in, you may want to hold an orientation session. During the orientation, you can:

  • Provide a tour of the premises and identify common areas
  • Demonstrate the use of appliances, security systems, heating and air conditioning systems

Prior to the tenant moving in, you and the tenant should perform a joint inspection of the rental unit to:

  • Identify the condition of the unit and its appliances. The inspection checklist serves as a record of the condition of the unit when the tenant moved in and also can be used to document the condition of the unit when the tenant moves out.
  • Keep open the communication channels.

You should establish a record system on each of your tenants to document all complaints and repair requests made by the tenants and conversations held with the tenants. An individual file may include:

  • The rental application, information related to credit, employment and other references
  • A signed lease or rental agreement and house rules or regulations
  • Signed inspection checklists and move-in letter

Maintaining your property

Factors that may influence the market value of your property include:

  • The architectural style
  • The landscaping
  • The convenience of the neighborhood to shopping and transportation
  • The prices that comparable properties sell for in the neighborhood

A good repair and maintenance system allows you to prevent potential problems by identifying and fixing them before they become major problems. The repair and maintenance process may include the following steps:

  • Use a written landlord-tenant checklist.
  • Don't assume your tenants know how to handle routine maintenance problems.
  • Encourage tenants to immediately report plumbing, heating, weatherproofing, or other defects, or safety or security problems.

Safety codes generally set standards for fire prevention, the condition of electrical wiring and equipment and security. To protect your home against emergencies:

  • Be familiar with safety features such as smoke alarms and circuit breakers in your home.
  • Purchase fire extinguishers and keep them where they are easily accessible.

Taking care of your financial reponsibilities

The steps to prepare an operating budget for your rental property include:

  • Determining your monthly rental income
  • Determining your monthly expenses and cash reserves
  • Comparing your total monthly income and expenses

Property insurance, tenant relocation insurance, flood insurance, "rent loss" insurance and liability insurance are types of insurance that are available to you as a landlord to protect you in emergencies.

Tax deductions that may be available to landlords include:

  • Repairs and routine maintenance costs
  • Depreciation, advertising, wages and fees
  • Utilities, property taxes and tax preparations

You may get a special tax treatment by keeping track of the amount of each expense, who receives your payment and the date on which you incur/pay the expense. The IRS (Internal Revenue Services) requires you to separate expenses associated with the part of your house that you rent out from those associated with the part in which you live.

Ending rental tenancies

Inevitably, you will experience some tenant turnover. Some things to know about ending your rental relationship with a tenant:

  • When ending a month-to-month rental agreement, you should allow your tenant 30 days.
  • When a lease is about to expire, you should provide the tenant with written notice at least 60 days prior to the lease expiration date.
  • Most states require that you return the security deposit to the tenant within 14 to 30 days after the tenant leaves the unit.
  • To avoid the eviction process, try mediation, use arbitration and/or make it easy for the tenant to leave voluntarily.
  • The first step involved in conducting an eviction is to serve notice.

Hiring a property manager

A property manager's responsibilities may include selecting tenants, maintaining the building and collecting rent. You should review the following information before hiring a property manager:

  • Employment
  • Credit history and background
  • Criminal and driving record

Once you check the references and decide to hire a potential property manager, you are now ready to make an offer. As an employer, you will have specific obligations, such as following laws governing minimum wage and overtime.

When ready to conduct the interview, you should ask a potential property manager to bring a current résumé.

Are you ready? Take MGIC's Landlord Education Test!