Should you own a house while in the military? This is often a difficult decision. After all, given that we move every few years, does it make economic sense to purchase a house?
If we decide to own, we then must decide whether to sell the house after just a few short years when we change stations or rent it out to others. Given that over fifty percent of servicemembers live off post, with at least one-third of servicemembers renting, does it make sense for you to rent your house to others rather than selling it?
Renting is a great way to maintain your home and build equity in your property while you are away, but there are pitfalls if you are not careful. This article will address mistakes that we make as military landlords and offer solutions on how to avoid them.
Before discussing potential renting pitfalls, let’s briefly look at factors you should consider when purchasing a home with the intent to rent later. First, ensure the rent will be affordable and within the basic allowance for housing. For example, it is not realistic to think that you will rent your home outside of Fort Bragg, North Carolina for $3,500 a month. Therefore, when purchasing, carefully calculate the future rent and ensure it is realistic and affordable for the area. In addition, ensure you purchase a home with good schools in the area. Many renters have school-aged children and look for houses in specific areas based on the reputation of the schools.
If you decide to rent your house, realize that being a landlord is a business venture and you need to make smart business decisions. So, develop a comprehensive business plan before you list your house for rent and follow your plan. This will ultimately protect you if things go wrong.
As a landlord, you must provide a safe home that is free from major defects. For example, if your back steps are rotting or loose, replace the steps before it becomes a hazard. If you have a swing set in your yard, you must ensure it is safe and that chains are not rusty, or ropes are not frayed. Again, your house must be safe for renters to protect you from potential liability.
Be clear upfront what expenses you as the landlord will cover and what expenses the tenant must absorb. This is extremely important because you don’t want to rent your house to someone who may not be able to afford the rent, utilities and other expenses. As the landlord, you should always pay for things which ultimately protect your investment in your property, such as termite bait stations, homeowner’s association fees and insurance. Do not rely on a tenant to cover these expenses, because if they fail to pay for them, you will suffer the potential damages. The annual coverage for termite control is necessary to protect your property, so pay for it yourself to ensure you have continuous coverage. Pay any homeowners’ association fees because if these fees are not paid, you will ultimately be responsible for late fees and attorney fees, and the homeowner’s association may attach a lien against your property. Ensure you have the necessary fire insurance policy while your house is a rental property. This covers you should something happen to the property. Insurance policies vary, so ensure you have the right coverage and protections by speaking with your insurance company.
Decide if you are going to manage the property yourself or if you are going to hire a property manager. Property managers can be expensive and, unfortunately, unhelpful in contentious situations. If you feel comfortable managing your own property, I recommend you do this. Remember, nobody is going to take as good of care of the property as you are. There are times, however, when hiring a property manager may be in your best interests. For example, it you are deploying or moving out of the country and will not be readily accessible, a property manager may make sense. If you hire a property manager, do your research and ensure they are highly recommended. Check with local agencies, such as the Better Business Bureau, to see if any complaints have been filed against property managers and take note of how the complaints were resolved. Get references from other clients to ensure they will be actively engaged in protecting your interests and your property, rather than just pushing paperwork and collecting checks. Whether you manage the property or hire someone else, when you move away, ask your neighbors to keep an eye on your property and to contact you if anything looks out of place. Then, stay in contact with your neighbors so they keep you informed of anything out of the ordinary.
Before renting your house, ensure you have money in savings earmarked for the house. You will have repair expenses just as if you are living in the house, so expect the unexpected. For example, the water heater goes out, the air conditioning stops working, or the roof starts to leak and needs replaced. A good rule of thumb is that you will spend $5,000 per year on repairs and upgrades. In addition, the money you have earmarked will serve as an emergency fund in the event the house is unrented for a few months.
Take pictures of your property while your possessions are still in the house. This is when it will look its best and you can ensure the rooms are not cluttered. Take high quality pictures of each room and determine the dimensions of your rooms. Once you depart, you won’t be able to take pictures for potential future tenants to view when deciding whether to rent your property. The dimensions are helpful so prospective tenants know the size of each of your rooms and whether their belongings will fit in your house.
Most tenants are great and will take good care of your house, but there are exceptions to this general rule. Because of that, you must perform a background check to verify that prospective tenants are financially sound and trustworthy. USAA, for example, offers a screening service of potential tenants known as Tenant Screening. For a fee, USAA will perform the background and financial checks to ensure the potential tenant meets your qualifications. You may also perform online research of potential tenants on Facebook and Google. The key is that you feel completely comfortable with the people who may be renting your house. If you don’t feel completely comfortable, trust your gut instinct and find another tenant.
Once you choose a prospective tenant, send them the rental agreement so they may review it and ensure they accept your terms and conditions. What must be included in a rental agreement? While there are many standard clauses in rental agreements, here are a few of the key provisions that I strongly recommend you include:
- Payment of rent via direct deposit – require tenants to set up a direct deposit with your bank so the monthly rent is deposited into your account the first of each month. This ensures you don’t have to deal with checks and reduces the likelihood of late or missing rent payments.
- Pet policy – first, you must decide whether to allow any pets, and if you do, what types and how many. Realize that pets cause, at a minimum, minor damages such as scratches on hardwood floors or pulls and tears in carpeting. Pets also have odors, no matter how clean they are. Decide if this is acceptable to you before agreeing to any pets. If you allow pets, I recommend that you include a nonrefundable pet fee in the rental agreement.
- Smoking – I recommend that you do not permit any smoking in the house or in the areas immediately surrounding the house. Smoke causes permanent odors in the paint and carpeting, and no matter what you do, the smell will not completely dissipate.
- Wall hangings/nails/holes in the house – This is not usually included in rental agreements, but I strongly recommend that you include a provision that forbids any holes in the walls other than small finishing nails to hang non-heavy pictures or décor. Include within this clause the prohibition of anything else being mounted to interior or exterior walls, ceilings, or the roof of the house. This includes satellite dishes mounted to your exterior walls or roof, cable/Internet wires being run from outside of your home and drilled into the inside of your home, shelves, medicine cabinets, televisions mounted to your interior walls or ceilings, etc. As you can imagine, these types of things cause major damage and require significant repair work before repainting. Finally, I recommend that you prohibit any holes being placed into woodwork, wooden banisters, doors, etc. It is impossible to envision every possibility, but you will be safe by prohibiting everything except the use of small finishing nails that I mentioned earlier.
- Sublease policies – include a prohibition against any sublease agreements. You should never permit a tenant to decide who lives in your house and who takes over their lease.
- Damages clause – finally, include a clause in your rental agreement that requires tenants to inform you of any damages that they cause to your property, no matter how minor. For example, if a tenant breaks a window, they must notify you so you may make arrangements to get it replaced with the same window. Do not permit the tenants to repair damages, because they will not use the same care and quality materials that you will.
Once the tenant agrees to the lease agreement provisions, have them sign the lease and return it to you with the required security deposit. States have different laws regarding security deposits, so ensure you check the laws where your house is located. Typically, a security deposit is equal to one month’s rent.
Stay in contact with the tenants and check in from time to time. Ask them to contact you if anything needs repaired so you can get it fixed before it gets worse and becomes a greater expense. Good communication between the tenants and you will help you quickly resolve issues and will give you peace-of-mind that your house is being well cared for. If possible, do an annual review and inspect the home (or have your property manager do so) to ensure you catch preventative maintenance needs before they become major expenses.
When the lease is set to expire and the tenant is preparing to move out, conduct an in-person, walk-thru inspection with the tenant. Note any damages that go beyond normal wear and tear. Normal wear and tear is caused by normal everyday use of the property. Wear and tear is not damage, so any damages caused by tenants must be addressed. After you determine all damages caused by the tenant, obtain a written estimate of what it will cost to repair. Deduct this amount from the security deposit, and then return the remaining security deposit along with a list of the damages and a copy of the repair estimate.
Renting out a home can be a great experience and it allows you to continue to build equity in your home, but it is vital that you protect yourself by following the tips I’ve shared. Doing so will help to ensure your landlord-tenant experience is a positive one and that your home will be well protected.
*Kerry L. Erisman is a military spouse, Dad of two awesome teenage boys, Army retiree after 28 years of active duty service, attorney, and Associate Professor with American Military University. He writes and teaches on important military spouse issues including leadership, critical thinking, and education for Military Spouse Magazine and other military spouse publications.