rental property: landlord-tenant basics

In short

A friend of mine bought a duplex last spring and learned fast that owning a rental is more than collecting a check. If you are thinking about renting out a home, you can start with a few plain steps. Put every term of the deal in a written lease that both sides sign. Learn your state's rules on deposits, notice, and entry before the first tenant moves in. Keep the home safe and in good repair, because the law in most places expects it. Keep clean records of every dollar that comes in and goes out. Treat each applicant by the same written standard, since federal law forbids housing discrimination.

The whole of it

What it is

I once watched an old landlord hand his tenant a cup of coffee while they talked through a leaky faucet. Neither one raised a voice. That small scene shows what the landlord and tenant bond really is. It is a deal between two people. The landlord gives the right to use a home. The tenant gives rent and promises to take care of the place.

If you are holding the keys to a rental, you are now part of a legal relationship. A lease is the contract that sets its terms. A lease can run for a fixed time, such as twelve months. It can also run month to month, which means it renews on its own until one side gives notice.

Most of the rules come from state and local law, not from Washington. That is why a landlord in Texas and a landlord in Oregon can face different rules on the same question. Federal law sets a floor on a few matters, and the Fair Housing Act is the big one. It bars a landlord from turning someone away because of race, color, religion, sex, national origin, family status, or disability. The U.S. Department of Housing and Urban Development explains this law on its own website.

You have probably heard the phrase warranty of habitability. It means the landlord must keep the home fit to live in. Working heat, running water, and sound locks are common examples. The exact list depends on your state.

How it works

A friend of mine says every good rental starts before the tenant shows up. He is right. The work begins with the screening of applicants. A landlord should write down the standards first, such as income level and rental history, and then apply them the same way every time. That habit protects the tenant, and it protects the landlord too.

Next comes the lease. A solid lease names the parties, the address, the rent, and the due date. It states the length of the term and the amount of the security deposit. It says who pays which utilities and what happens if rent comes in late. Your state may require certain notices to be added, such as a lead paint disclosure for older homes. The Environmental Protection Agency and HUD together publish the federal lead paint rule.

The security deposit is money the tenant hands over to cover damage or unpaid rent. The landlord does not own it. The landlord holds it. Many states cap how much a landlord may collect, set a deadline for returning it, and require an itemized list of any deductions. The landlord must follow those rules to the letter, or a court may order the landlord to pay more.

Entry is where many good landlords slip. A landlord generally cannot walk in whenever the mood strikes. Most states require advance notice, and some name a number of hours or days. The landlord must give that notice before entering for a repair or a showing. Emergencies are the usual exception.

Then there is the hard part, which is ending a tenancy. The landlord cannot change the locks or shut off the water to push a tenant out. Courts call that a self help eviction, and it is illegal in nearly every state. The landlord must give written notice, follow the state process, and ask a court for an order if the tenant stays. That takes time. It also costs money.

The numbers, and where to find yours

If you are wondering how much you can charge, start with the market. Look at what similar homes nearby are renting for. Then check your state's rules, because a few places limit how much a landlord may raise rent and how much notice must come first.

Some figures are set by law and change from year to year. The limit on a security deposit, where one exists, comes from your state. The notice period for entry, a rent increase, or ending a month to month lease also comes from your state or city. Your state attorney general or housing agency posts these rules. Your county court website often lists the eviction steps too.

Tax figures matter as well. The rental income you report, and the yearly rate used to spread the cost of a building over time, follow IRS rules. The IRS explains rental income and expenses in Publication 527, which is titled Residential Rental Property. For the current depreciation period, the rule is the current figure, which the official source publishes each year years for a residential building. For the late fee cap, the amount is the current figure, which the official source publishes each year percent in states that set one. Check both on the official pages before you rely on them.

A worked example

Let me tell you about a woman named Dolores Haines. She bought a small house and rented it to a young couple for $1,400 a month. Her lease asked for a security deposit equal to one month of rent. So she held $1,400.

At the end of the first year, the couple moved out. Dolores walked through the house and found a cracked window and a stained carpet. She got a quote of $180 for the window and $320 for the carpet. She added the two repairs. $180 plus $320 is $500.

She then took the $500 out of the deposit. $1,400 minus $500 leaves $900. Dolores sent the couple a letter with the itemized list, copies of the quotes, and a check for $900. She mailed it before her state's deadline.

Now look at her yearly picture. Twelve months of rent at $1,400 is $16,800. Say she paid $2,900 in property tax, $1,100 for insurance, and $1,500 in repairs over the year. Those costs add up to $5,500. So $16,800 minus $5,500 leaves $11,300 before any mortgage interest or depreciation. That figure is not the profit she keeps. It is the starting point for her tax records.

Dolores did well, and the reason was simple. She wrote everything down, and she followed the rules on the deposit.

Where it goes wrong

I have watched good people get tripped up by small things. The first is a handshake lease. A deal that lives only in two memories will sound very different once a dispute begins. A lease that lives in writing keeps both sides honest, since a handshake deal fades differently in each memory.

The second is mixing money. A landlord who spends the tenant's deposit on a personal bill is asking for trouble. Some states require the deposit to sit in a separate account. The landlord must check the local rule.

The third is skipping repairs. A broken heater in winter is not a small matter. In many states a tenant may withhold rent or fix the problem and deduct the cost when the landlord ignores a serious defect. The landlord ends up worse off than if the heater had been fixed on day one.

Then comes the shortcut around the eviction process. It feels fast. It is not. A landlord who locks out a tenant may owe damages. Always use the court.

Last, there is the quiet slip with fair housing. A comment in an ad or a different answer to a different caller can create a claim. Use the same written standard for everyone.

Questions to answer before you leave this page

Have you read your own state's landlord tenant law, and do you know where to find the deposit cap, the return deadline, and the entry notice rule? Is your lease in writing, and does it name the rent, the due date, the late fee, and who pays each utility? Do you hold a written screening standard that you will apply the same way to every applicant? Have you set aside money for repairs, and do you know how you will keep the deposit apart from your own funds? Do you know the legal steps to end a tenancy, and will you follow them even when you feel frustrated? Have you checked IRS Publication 527 so your records match what the tax rules ask for?