Buying a New House? Rules for Renting Out Your Old Home
If you’re buying a new house and keeping your current house as an investment property, it’s important that you find the right tenant for your rental.
A rental property can provide passive long-term income. But your experience as a landlord will depend largely on who you pick to live in your home — so choose wisely.
Here are a few tips to help you make the right decision.
1. Run a credit check
Even though you’re not required to run a credit check on a potential tenant, knowing how an applicant handles their credit can protect your investment in the long run.
Applicants with good credit typically pay their bills on time. So they’re also likely to pay their rent on time.
Keep in mind that you’ll need a prospective tenant’s written permission to run their credit. You’ll also need pertinent information such as their full name, their addresses for the previous two years, their Social Security number, and their date of birth.
Several agencies offer tenant screenings, such as Experian and E-renter.com. Just know that you’ll have to prove that you’re an actual landlord before you’re able to run the credit check. You must submit your identification and proof that you own the property (utility bill, mortgage statement, deed, or a purchase agreement).
2. Get an income verification letter
With regard to a prospective tenant’s income, don’t take what they say at face value. Verify their income to ensure they’re able to make the monthly rent payment.
Ask for copies of their recent paycheck stubs, or request a verification letter from their employer — on company letterhead.
Ideally, the monthly rent shouldn’t be more than 28% to 30% of their gross monthly income. So if you’re charging $1,500 a month, their gross monthly income should be around $4,500.
3. Calculate their debt-to-income ratio
Credit reports don’t only reveal an applicant’s payment history, but also their debt load. Even if the person has excellent credit and sufficient income, their debt payments could make it difficult for them to afford the monthly rent.
To calculate debt-to-income ratio, add up their total minimum debt payments for the month (including rent), and divide this figure by their gross monthly income. A reasonable debt-to-income ratio is between 36% to 43%.
4. Check their rental history
Ask for the names and telephone numbers of their previous landlords. Questions to ask the landlord include:
- Did they pay their rent on time?
- Did they break the lease?
- Did they give enough notice before moving?
- Did they keep the apartment or house in good condition?
If the applicant is a first-time renter and doesn’t have a previous landlord — maybe because they’re a recent college graduate — suggest adding a cosigner to their lease agreement. The cosigner becomes responsible for rent payments if the primary tenant can’t pay, until the lease expires.
5. Write up a rental agreement
Always draft a rental agreement outlining the terms of the lease. It should include details about monthly rent, due dates, penalties for late payments, the length of the lease agreement, as well as items that are the responsibility of the tenant — utilities, cable, lawn care, etc.
You should have a written agreement with anyone who moves into your house, regardless of whether it’s a friend or relative. This way, there are no misunderstandings.
6. Require renter’s insurance
Your landlord or homeowner’s insurance policy will cover damage to the property caused by fire, natural disaster, theft, etc. It doesn’t, however, cover the cost to replace a tenant's belongings. For this reason, you should require your tenants to have a renter’s insurance policy. They should provide proof of this policy before moving in.
Finding a renter for your current home can be the first step to buying your next property. Here at Cherry Creek Mortgage, we offer a variety of home loan solutions as you embark on the next phase of your homeownership journey.
Speak with one of our experienced loan experts and learn about our vast selection of mortgage products.