Rental 101
By: Karel McClellan, Condo Expert
You never planned to be a landlord. But times change. Rising condo inventories, slower sales and falling prices have many condo owners looking at Plan B: renting their condo until the market improves. Before you rent your condo, you need to do your homework carefully. Once you become a landlord, you have new legal responsibilities and potential liabilities. Here are 10 smart steps to take before you rent your condo: Does Your Condo Permit Rentals? Some condos permit rentals, others do not. Condos that allow rentals may restrict the number of units that can be rented, impose a minimum lease term, require Board approval of the lease, etc. For details, check your condo docs.
Know Your Rental Comps. What are similar condos in your project and area renting for per month? What amenities and services are included? Are landlords offering incentives like one month free rent, gift cards, cable, etc.?
Know what rent you can realistically get for your condo. Run the Numbers. Can you cover your costs? You need to consider all your actual and potential expenses like: mortgage, condo fee, real estate taxes, insurance, preparation costs (painting, polishing floors, cleaning, etc.), advertising, commission for rental agent, rent loss on turnover, repairs, legal fees if problems arise, etc. Learn Local Rent Laws. Even if you rent only one condo, you must know the local landlord-tenant laws. Here’s why: some jurisdictions require you to register the property or obtain a business license. Cities with rent control nearly always require rental registration even if you are exempt from the rent control laws. Failure to comply with local rent laws can result in costly fines. Local laws often contain other provisions you should know about. For instance, some jurisdictions regulate security deposits, limiting the amount you can collect and the interest you must pay. Others give the tenant a first right to purchase option if you decide to sell your condo. In case you have to evict a tenant you should know the procedure and how long it typically takes in your jurisdiction.
Will Your Real Estate Taxes Rise? When you convert an owner- occupied condo into a rental property, your real estate taxes may rise. Although rules vary by jurisdiction, here are two common reasons taxes increase: First, some jurisdictions provide a “Homestead Exemption” for owner-occupied residential real estate. This benefit exempts a portion of the property’s value from taxation. If you convert your condo to an rental, you normally lose this exemption.
Second, owner-occupied residential real estate is usually taxed at a lower rate than nonowner occupied residential real estate. That is because the non-owner occupied property is assumed to be held for investment purposes. Accordingly, it is taxed at a higher rate. If you convert your condo to rental status, notify the real estate tax assessor’s office by registered mail, return receipt. Don’t even think about playing games with the tax assessor’s office on this issue. You could be hit with back taxes, interest, fines and penalties. How will the tax assessor know when you converted your condo to rental status? You are going to furnish that information on your next federal and state tax return. You report your real estate rental income and expenses on Schedule E of Form 1040. Paperwork: Leases and More. If you are going to rent your condo yourself, you need to brush up on all the paperwork required. You’ll need a lease, rental application form, and a service to run a credit report. You’ll need to write an ad and show the condo to callers. For tax purposes, you’ll need to keep accurate records of your income and expenses. Give Tenants a Checkup. Professional landlords require a credit report on prospective tenants. This gives you a snapshot of the prospective tenant’s payment history plus other information like foreclosures and bankruptcies.
Get Adequate Insurance. Call the insurance agent who handles your homeowners insurance policy. Tell them you plan to rent your condo. The insurance you need to cover your condo while it is rented can usually be written as a rider to your primary homeowners insurance policy. Don’t skimp on liability insurance. Once you become a landlord you are more exposed to potential lawsuits. The cost of insurance is nominal compared to the added protection it can provide. Get a Good Lawyer. If you are new to the landlord business, you should have a real estate lawyer review the lease you intend to use, make any changes necessary to comply with local laws, and prepare any addendum’s you need. An addendum spells out any additional conditions to the contract. For example, a condo lease typically includes an addendum requiring the tenant to abide by the rules and regulations of the condo. A copy of the rules and regulations should be attached and the tenant should acknowledge (sign) that he/she received them. There are other conditions you should include for your own protection. A well written lease could save you time and money if a dispute arises. An experienced real estate lawyer can also advise you if there are any particular pitfalls in the local laws for landlords. This will give you a “heads up” on issues you need to navigate carefully. In addition, getting a lawyer on your team early gives you a legal contact in the event problems arise in the future. Follow Fair Housing Laws. You must abide by the federal and state Fair Housing Laws. Federal law protects discrimination on the basis of race, color, sex, natural origin, religion, handicap, or familial status. State laws may extend the federal protection to additional categories.
For example, the District of Columbia also prohibits discrimination on the basis of source of income,age, marital status, sexual orientation, personal appearance, matriculation, family responsibility, political affiliation, and place of business or residence.
For more info and to read Karel’s blog, go to: www.condolivingtoday.com
