Many prospective landlords don't anticipate the start up costs to rent out their home. What do I mean by start up costs? Let's take a closer look.
10 Start Up Costs Associated With Renting Out Your Home
1. Local laws and licenses to rent out a home
Does your Maryland county require a rental license? Do you have to pass an inspection?
If you are in Baltimore County or Howard County, yes, you need a rental license. However, the process is very different for each of these counties.
In Baltimore County, you can hire a 3rd party licensed inspector and then just submit your completed inspection paperwork with your Baltimore County application and you will receive a license.
However, in Howard County, you have to schedule your inspection with a Howard County government inspector that then submits your paperwork him or herself. In Howard County, you have less control over the timing and turn around time because you are at the mercy of a government inspector's hours, i.e., no weekends and no nights. So, if you are in Howard County, please plan ahead if you are looking to rent out your home in the near future.
2. What is on the rental home inspection?
Obviously, you want to know ahead of time what will be inspected so that you can make sure that you pass the first time. You may incur expenses to prepare your home for the inspection. Smoke detectors, carbon monoxide detectors, tighten railings, no peeling paint, etc. Take a look at what your jurisdiction inspects and don't call the inspector until everything is in tip top shape.
3. Other inspections
Was your home built prior to 1978? Then you need a lead inspection and a Maryland Department of the Environment certificate. We only manage "lead free" homes for liability reasons so the results of your lead test are very important and something that you want to pay attention to.
Asbestos, peeling paint, underground storage tanks - you want to minimize your risk as much as possible. So, even if an inspection is not mandatory, you may want to get one to protect yourself and make sure you are doing your due diligence as a landlord.
4. Aesthetic updates
Yes, I know that you have lived with the multi-colored fading paint for years but your tenant will not want to. If you truly want to attract the best tenants, you need to spruce up your home. Fresh, neutral paint, neutral newer carpeting and flooring, clean cabinets and drawers, attractive exterior landscaping. You may have to spend some money or time getting everything ready to go. The best tenants want the best properties so it is definitely worth the effort.
Even though your home may pass inspection (because the inspection mostly looks at safety hazards), you still have to fix those systems that you have put off. Yes, I know that you lived with the leaking skylight for years but your tenant will not. And they will be very unhappy if you don't fix it and it leaks on their new television during the first heavy rain.
Fix everything now before it becomes a major headache later.
6. Landlord insurance
All of our landlords have to switch over their insurance policy from an "owner occupant" policy to a landlord policy that has liability coverage. This may cost a few extra dollars but it is mandatory for our managed homes and covers you in the event of a lawsuit. As good as we are, things happen and we want you to be protected as much as possible. Liability coverage will give you "peace of mind" in the event that something happens and you need the guidance of an attorney.
7. A word about tax deductions and renting out your home
Many of our landlords did not anticipate these start up costs and struggle a bit with the upfront costs. We understand. We strongly encourage every landlord to contact a tax advisor early on in their landlord experience so that they can maximize deductions and depreciation. By speaking with an advisor early, you can make sure that your record keeping is perfect and "by the book" from day one. This will help offset some of your upfront costs and may make you feel better in the short run.
8. The first 30 days of being a landlord
Murphy's law - Anything that can go wrong, will go wrong.
Systems are going to break or need repair in the first 30 days. Please mentally prepare for it so that you stay calm and are not completely surprised. Invariably, when a tenant moves in they "discover" systems that need repairing. I know it is rough but we have to fix these systems so that the tenant is safe and so that you, the landlord, abide by your responsibilities in the lease.
Please have a financial cushion and a calm temperament to prepare for the unexpected.
9. $500 escrow account
We do require that each of our landlords provide us with $500 at the time of contract signing so that we can open an escrow fund for them for repairs. At the end of the lease term, we will refund any balance. This helps us make repairs when we need extra funds on top of the monthly rental income.
Yes, it will come back to you at the end of the lease term and all monies will be accounted for via your landlord portal. We are a totally transparent company so, if you have any questions, you can always contact us.
10. The first month's rent goes to...
The first month's rent usually goes to the agents in the transaction, i.e., we pay the landlord's agent and the tenant's agent for bringing the landlord and the tenant together. This is paid out of the first month's rent. So our landlords are not receiving income in month one while, at the same time, they are incurring out-of-pocket start up expenses. I know this can be difficult but, unfortunately, there is no way around it. So please plan for it and speak with your tax advisor so that you maximize every legal deduction possible.
I think that is it for now. It is enough! Sorry to be so straight forward but I would rather you be educated and prepared for all the start up costs associated with renting out your home than unprepared and angry. If I have missed anything, please drop me a line and, as always, if you have any questions, please contact me directly.