Tuesday, February 4, 2014

Renting our House in DC

As I mentioned briefly, we went through the process of finding renters for our condo in DC.

It wasn't really too bad of a process, but I definitely had lots of questions for my friends and family members who have had landlord experiences, especially in DC and especially when it came to finding renters on Craigslist.  (Cue scary music.)  So, maybe I can be that friend to you (and save your real friends from answering all your questions many times), and share our experience with you and what we did along the way. For most people, since it is not that interesting, here is one of my favorite funny you tube videos about the Canadian Border Patrol.

If anyone is still with me, here is what we had to do to rent our our place:

My dear husband keeps me honest, so we first had to take care of a few steps with DC in order to legally rent our condo (ie: pay more fees and taxes). We were doing all this in the middle of a pretty busy time. Plus, it was October, and we were still dealing with tax issues from the District - six months after that April deadline. So with that bad-administrative-headache taste in our mouths, and in the interest of time, we paid a company called Rent Jiffy to take care of the bureaucracy for us. We filled out a few forms with them, paid the bill and were email our processed license about eight weeks later. Next time, I might save a little money and do it myself, but it was nice to have the peace of mind that the paperwork was correct. Plus, I had someone to email who answered my questions when the DC office got back-logged while processing paperwork. (Following up with the DC office might have been just as easy, but I am skeptical.)

The things you need to fill out are:
-Revoacation of Homestead Deduction (if you've been living there)
-Rental Property License - in DC this is the Basic Business License (BBL EZ form)
-Tax Registration (Office of Tax and Revenue FR-500 form)
-Rent Control Registration (RAD form - this is only if you own multiple units I think)

They are all nicely explained on this site: from Yarmouth Property Management

You'll also have to file a DC30 tax form with your taxes from my understanding, but that one has been hard to figure out.

The final step for approval is a home inspection. Once you get the small business license, it comes with instructions for the inspection that say the office will call you within 10 days, but you should call them if they don't. The good people at Rent Jiffy told me to skip the waiting period and just call right away, since they had never heard of any instances of the inspection office calling out like they say they will.

For the most part, if you're living there, the place passed inspection at some point unless it's new construction or a basement that has never been rented as a separate living space. Most of the items on the checklist are common sense (eg: method of egress, minimum ceiling height), but here is the checklist. I had read about stories of the inspectors being sticklers, so wasn't sure what to expect. My inspector was very professional and pleasant. He called the morning of to let me know his ETA and after a quick walk through, signed the inspection certificate. He asked about smoke alarms (required) and fire extinguishers (recommended but not required), but that was it - done and done.

Then came the part of actually finding renters. First step was to take pictures to advertise with. Honestly, cleaning the house to take pictures during daylight hours was not something I wanted to take the time to do since it would have meant waiting until I was home during the day, which is rare. So we kind of cheated and scanned the (very nice) handout that from the realtor during our original house tour. The house looked different (furniture/paint color), but at least you got a sense of the layout. And it was easy.

Second, we had to decide on our asking price. This means figure out your total expenses and market rental rates. Ideally, you can hit a spot below market rates but above your average costs. Besides mortgage and condo fees we were used to paying, there are a few extra costs associated with renting. For us this was:

-licensing fees (paid to the county, or in our case, Rent Jiffy)
-increased taxes due to loss of homestead tax credit
-umbrella insurance policy membership

To cover the higher taxes that come with rental properties, liscencing fees, etc., we were going to have to charge at least $100 more per month than the mortgage to cover our expenses. Then, we looked at Craigslist and visited a few apartment buildings in the area to figure out what price would keep us competitive. Obviously, you're less likely to find someone willing to rent from you if you are charging more than a comprable or nicer place, so you can't go too high. On the other hand, the lower you go, the more you eat into your profits. We had looked into this before even buying since even at that time, we knew it was pretty likely we'd be renting it out. Thankfully, it seemed we bought our house at a low enough price we'd be able to at least cover the expenses.

(Side note: We did talk about the scenario where our expenses were more than what we could charge for rent. the two options would have been to just sell the house or take a monthly loss. We haven't had the house too long so wanted to avoid immediately losing the chance for appreciation by selling. As long as the losses weren't too much, it was worth it to us to keep it, even if we had to pay a little extra because our goal was to keep it as an investment property, so paying $1000 a year, even if we had to do that over the 30 year life of the loan (which with rent increases isn't likely) we'll end up with a paid-off asset worth way more than $30,000.)

There are other things to consider when setting the price too: lower rent may make the tenants less likely to move, saving you the headache of finding new tenants and minimizing the time your property sits empty.

In the end, we decided since we were advertising way before we really had to have renters (3 months), we'd start out asking for the higher end of the spectrum and lower our price every month.

Next: get those ads out there.  We started out advertising to friends and people we "knew." This meant through Facebook, in our church classifieds and in friends' church's classifieds. Most of these connections are people who don't live in DC, so there wasn't any interest on those fronts.

Then we started advertising on Craigslist. We tried to make sure we answered the basic questions (security deposit, pet policy, lease length, move- in date, parking situation) plus highlight the amenities (distance to metro, shops, recent upgrades to the house).

When people responded with interest, that's when we give them the full address (we just put the block on Craigslist because I am paranoid like that) them know about the application process (application form, $15 for credit check, 2 most recent paystubs, copy of government issued ID).

Show the house.  We usually picked a couple weeknights and tried to schedule everyone half hour apart. Some landlords like having an open house style, but trying to talk to more than one person at one sounded too chaotic. Plus, if someone was coming, we wanted to know exactly when so we weren't sitting around for three hours unsure.

We'd try to repost at least once a week on Craigslist, though more frequent posts would have helped. Then we'd spend a couple nights showing the place. We must have been priced too high initially since no one responded with any interest. After a few weeks we dropped the price, and let the people who had already come through know. That was all it took to get committed interest. From there we exchanged the aforementioned paperwork: application, paystubs, credit check, and ID check. Adding a criminal background check might have been a good idea too. I've had friends who have had experiences with renters who never paid and it doesn't sound fun.  There's no way to totally avoid it, but hopefully doing your homework on these things helps.

When running the credit check, obviously any late payments should be a red flag. Through Experian, your prospective tenant can order their credit score and have it sent to you.  Using this site or something similar was great because we didn't have to mess around with collecting a fee since the applicant paid, but we still knew it was legitimate as the email we got with the credit score was straight from Experian.  This helpful post from Prince of Petworth, my source for all things DC, recommended looking for a credit score above 700.  As far as references, the main recommendations I got were to call to verify employment and check with their previous landlord for any red flags. (Doing a basic google search to confirm the phone numbers are legit helps too.) Then we signed the lease and got the security deposit (1 month's rent).  We also created a separate savings account for the security deposit.  You are supposed to return it with interest (assuming you don't keep any portion of it), and I didn't want to have to calculate that out later, so creating a separate account seemed easiest.

For the lease (and the application) I used You can access basic forms for free and get more customizable ones for a membership fee. I've heard DC rental laws are complicated, so paying for the state- specific lease was worth it to me and still cheaper than a lawyer.

Once that was settled, we moved out, cleaned the place, made extra keys and handed them over. I know of some landlords who, especially for houses with all-male tenants, include maid service in the cost of the rent. Others take care of really basic maintenance (ie: changing light bulbs and air filters) since some of it is easy to forget and mostly as a way to keep tabs on the house. So that just depends on your ability and preferences.

It's in my list of costs, but an important thing to consider is insurance. First, you want to switch from home owner's insurance to what is sometimes called a "fire protection" policy. Designed for landlords, it covers the cost of rebuilding the structure (in case if fire) but doesn't cover belongings in the house, since the tenants themselves should have a rental policy for that.

The other insurance you may want to consider is an umbrella policy. Say someone breaks a leg on your property and since we are in law suit city decides to sue you for a million dollars. Standard policies like the fire protection policy I mentioned above would cover liability up to a given amount ($300k for standard policies). If you have assets worth more than the liability in your policy (real estate, retirement accounts, savings) then you'd have to cover the remaining amount, $700k in my example.  An umbrella policy is a relatively inexpensive way to protect the rest of your assets.  In some situations, you may not need it, but I liked the extra peace of mind it gives us, even though we didn't have too much that wasn't covered by the policies in place.

The very last thing we had to do was set up a forwarding address with the post office.

We've had wonderful experiences being landlords so far, but with all the forms and everything it's definitely been a learning process.  Plus it makes your taxes all sorts of complicated.  There are probably still things we aren't doing right, but hopefully it'll continue to be a good experience.