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Real Estate 101: Information for Landlords

About Us

Rent 1 Sale 1 Realty, formally Rent Free Realty, was founded in 1988. Our rental specialists have years of experience in residential leasing.  They are all licensed real estate associates, knowledgeable in real estate laws, paperwork, and tenant/landlord laws. They know how to negotiate rent, move-in money, credit, pets, and property conditions.

Terminology

Lessee: A tenant or renter

Lessor:A landlord or property owner

House: A standalone property

Cottage: A house,but usually describes a smaller,1-story house,traditionally found in New England

Townhouse: A 2or3 – story attached property

Villa: A 1-story attached property

Duplex: 2 attached units

Triplex: 3 attached units

Quadruplex: 4 attached units.

Apartment Complex(Apartment Community): Multiple rental units,usually 100 or more

Rental Rate is King

When renting out an investment property, look at the entire picture. Some investors try to stretch or raise the asking rental price, in an effort to cover more of their monthly mortgage payment. The additional amount may cause the rental property to remain vacant longer, which ends up costing more over the year. For example: a $1200 rental that stays vacant an extra month, in hopes of yielding an extra $50 at $1250, will end up costing the equivalent of $100 per month. In fact, an overpriced rental property may go unrented indefinitely. It would be like listing a stock for sale just above the bid and ask price.

Most renters end up staying two or more years. The rental rate may be adjusted to market value at the end of the first year.

Furnished vs. Unfurnished

Furnished properties tend to demand a higher rent. However, the majority of prospective renters own furniture, and are seeking unfurnished properties to rent. We recommend that landlords/investors not purchase furniture for their rental property, unless they plan on renting on a seasonal basis. Furnishing a rental property adds considerable cost to the investment property, while drastically limiting the number of potential renters.

If you have a furnished property that is not renting, then consider listing it as both unfurnished and furnished. If you rent it unfurnished, the furniture storage cost will have to be factored into the equation.

Prior to Investing

We are seeing a lot of investors who have bought rental properties through real estate associates who, in order to facilitate the sale, have promised rental rates that far exceed the going rental rate for the area. This is done by running a range of comparable rents, and presenting the highest rent or seasonal rental rate as the going rental rate.

Remember, if “rental rate is king”, the lowest-priced properties tend to go first. We highly recommend conferring with a rental specialist in your area prior to investing.

Security Deposit & Pre-paid Rents

There are laws governing security deposits, pet deposits, and pre-paid rents (i.e., pre-paying the last month’s rent). These laws can vary from county to county within a state. The laws specify the proper holding of funds, and notification of a tenant as to the disposition of the security deposit and pre-paid rents. Not following the laws can affect a landlord’s ability to make a rightful claim on a security deposit for damages on his/her property.

Walkthroughs

We recommend that digital pictures or video of the rental property be taken prior to the move-in date, in case a claim must be made against the security deposit.

Move in Money

Landlords/investors should be familiar with the tenant/landlord laws in their area regarding the collection, notification of holding, holding, notification of claim and subsequent return of pre-paid rents and security deposits. Non adherence may affect a landlord’s ability to make a claim for damages on the security deposit.

The amount of move in money is initially determined by the landlord and is negotiable between the landlord and prospective renter. Some areas may have restrictions on the amount of security deposit a landlord may collect.

A landlord usually asks for either first months rent and a security deposit or first months rent, last months rent and a security deposit. The security deposit is usually equal to one months rent. The last months rent would be considered a pre-paid rent and must be accounted for the same as a security deposit in some areas. Note: the acceptable move in amount varies in different areas of the country.

If negotiating the move in amount we recommend negotiating the last months rent as opposed to the security deposit. The security deposit is the landlord’s protection against damages. Note: In some areas, damage claims may only be made against the security deposit, not pre-paid rents.

Move in moneys should be in cleared funds (ie: money order, certified check, cash, bank check) on move in day.

Remember, a prospective renter’s credit report, rental history and move in money should all be considered when making a selection.

Prorated Rents

If a renter moves in during the middle of a month, the 10th for example, the landlord has the following options:

  • They may collect the rent on the 10th of every month. This is the easiest way to avoid confusion.
  • They may collect a prorated first months rent instead of a full first months rent. Future rents would be collected on the 1st of each month thereafter. The last months rent would be prorated when collected unless the lease is extended to the end of the last month.
  • They may collect a full first months rent on move in and collect a prorated amount on the 1st of the second month. Future rents would be collected on the 1st of each month thereafter. The last months rent would be prorated when collected unless the lease is extended to the end of the last month.
  • They may collect the prorated amount for the 1st month and the 2nd months rent on move in. Future rents would be collected on the 1st of each month. This is usually done when a renter moves in towards the end of the month. Again, the last months rent would be prorated when collected unless the lease is extended to the end of the last month.

The most common way to calculate a prorated rental amount is as follows:

Rent multiplied by the days remaining in the month plus one (for the day of move in) divided by the actual days in the month.

Rent * ((31-10+1) / 31)

Credit / Rental History

Credit and rental history should be checked prior to renting out your property or investment to anyone.

The rental history is the most important. Checking court records for evictions and the credit report for judgments and collections from a landlord or apartment community is highly recommended. Renting to a tenant that is knowledgeable in beating the system can cost thousands of dollars in eviction costs as well as lost rental income for months. A security deposit will not come close to protecting a landlord/investor.

Sometimes a judgment or collection from an apartment community is explainable. We are currently seeing tenants unknowingly charged cleanup fees after leaving apartment communities. These fees show up as collections on the prospective renter’s credit. However, proof should be provided that it was a cleaning fee and that the fee was finally resolved.

Many renters have credit issues that are explainable. Medical bills are a prime example. The cost of an operation or serious illness can adversely affect a person’s credit. We are not recommending that people not pay their obligations. However, most of us know the state of our health care system and have given up hope of our politicians ever doing the right thing to resolve the problem.

Pets

Many rental properties disallow pets or have a limit on the size of a pet. If you are having difficulty renting out a property then you might want to consider allowing prospective tenants to have a pet.

Large dog are often cleaner and more behaved than small dogs. Allowing a larger dog will make the property even more rentable.

Believe it or not we recommend interviewing the pet prior to accepting a prospective renter. This is common practice with some apartment rental communities. They are checking for breed and behavior. Certain breeds are deemed viscous in some areas and actually banned in some cities. You might not want a prospective renter who’s large dog eats small dogs for fun.

A landlord/investor can protect themselves to a degree by collecting an additional pet deposit.

About Home Owners Associations (HOA’s) and Condominium Associations

Many Home Owner and Condominium Associations have their own approval process in addition to a landlord’s approval. If so, they will usually have their own application and application fee. Approval process times can range from one day to as much as thirty days. The average Association approval time is approximately one week.

Associations may require a renter to deliver a refundable common area security deposit to be held by the Association. Many landlord/investors pay the security deposit or reduce their security deposit by same so as to not burden the prospective tenant with two security deposits. The landlord/investor specifies who will be responsible for the common area security deposit.

Some Home Owner Associations and Condominium Associations have restrictions on renting. They may disallow renters or have a restriction of one tenant per year. Some Home Owner Associations and Condominium Associations make the screening process extremely difficult or near impossible to discourage renters. The legalities of this being questionable. We are seeing a rare few Home Owner Associations collect exorbatent application fees while turning down every applicant without supplying a reason.

Other restrictions may include the type or number of vehicles and pets. Some Associations allow owners to have pets but will not allow renters to have pets.

We highly recommend consulting with a residential leasing specialist before investing in or renting out a property governed by a Home Owner Association or Condominium Association.

Lease Options

Lease options or rent to own rental properties are becoming more popular due to the increase of investors renting investment properties. A lease option is when a renter rents a property with the option to purchase the property at the end of the lease. An agreed upon portion of the monthly rent is applied towards the purchase price.

A lease option should specify the purchase price of the property and the portion of the rent that is to be applied towards the purchase price. There should also be an option deposit that is separate from the security deposit. A separate option deposit may be required in some states to make it a valid option.

If you are investing in a rental property and lock into price at the beginning of the year make sure to add in the anticipated or desired appreciation.

Listing your property for both rent and rent to own does make the property more appealing to renters. However, it usually appeals to renters with credit issues or limited funds that are currently unable to qualify to purchase.

Over-Improvements

If you have an investment rental property, do not over-improve the property in an effort to make it more appealing to prospective renters. Since they are not purchasing the property, renters are even less enthusiastic about paying a premium for someone else’s improvements.

A fresh coat of paint and clean carpet is usually more than sufficient.

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