Rental Income 101

Back to school like Rodney Dangerfield.

For the past two Wednesdays I have been back to school, taking a two-part night course called “Essential Practices for the Successful Landlord.”  So before I forget it all I will share with you.  If you are interested in rental income as investment, read on!

First, a little assessment: this course was $100 and honestly I felt like they were flying through topics without useful detail.  And there were many handouts that just looked like printouts from publicly accessible websites (some membership websites).  I was cranky about the handouts because I could just go read that stuff anyway.  I took the course in the first place because I was tired of reading about real estate and wanted some personal insight.  But I guess the targeted information is somewhat useful; better than my wandering the internet forever.

Anyway I learned the following, which I really had no clue about before:

  • There is a substantial list (particularly in Massachusetts) of criteria on which you are not allowed to discriminate when selecting tenants.  Age, race, gender, sexual orientation, children, etc. etc.  Well duh, I have no problem with that.  But you are also required to make every effort to rent a dwelling once you put it on the market for “available housing” purposes, and can’t just take it off the market to avoid renting to someone.  So if a gross, smelly person who looks like a needle drug user shows up looking to rent, and this person meets all the financial/credit criteria, I guess you cannot discriminate about that either.  There are many other fine points about this legal aspect of renting that make me nervous.  Because people can sue you, and the MA discrimination fines are $10K-$50K.
  • There is a strangely large amount of leeway about assessing financial eligibility.  It is recommended that you require income information and a credit check as part of your application process, but from there the decision seems entirely subjective.  I asked if there is an established credit score threshold recommendation; apparently there is not.  And the guidance for income eligibility is the usual “rent should be no more than 1/4 of your monthly take-home pay” rule – and this is not enforced or endorsed by any legal or industry entity.  Hmm…
  • Lead is a big deal, and tricky.  Lead makes the difference between whether you can rent to people with kids age 7 or younger (see discrimination, above).  It was outlawed in 1978, but existing contractor material was able to be spent down; so a house from say 1980 could reasonably have lead and you need to confirm.  And the standards have changed over time, so apparently a de-lead certificate from 20 years ago is not necessarily legal now (so what is the schedule?  They did not say).  Ughh…

Actually I learned about many topics like this, just not as much as I would want.  We also had guest lectures from an insurance guy and a mortgage officer.

My main takeaway from the insurance guy was that landlord insurance costs more than personal insurance, and you should be up front about your liabilities to establish an honest relationship (sounds like claims are inevitable). He also talked about things that will cause insurance to cost more (e.g., flat vs. sloped roof).  And how work done on the house needs appropriate permits to be covered by the policy.  A deck made without a town-approved permit will not be covered by insurance.  (But is there a list of permit-required projects?  No.)

And the mortgage officer detailed the many restrictions on investment mortgages vs. personal mortgages (such as higher down payment, higher debt-to-income ratio, and no gifts from parents or anything on your bank statement for 60 days prior to mortgage application).  At the same time though, he said you could buy a house you intend to live in with a personal mortgage.  And if you change your mind later and want to rent it out, you do not need to qualify for the more stringent requirements of an investment mortgage.  While you could only pull this loophole switcharoo once in a while, it seems like an oversight in an otherwise regulated area…

OK so I learned a lot, but I had very specific noobie questions like “how exactly do you ‘run a credit check’ on a person??” that I was too embarrassed to ask given the scope and pace of things being presented.  I would have preferred at least some custom-created course material with instructions like that.  So if you are considering a course like this I would ask about that kind of thing first.

What do you think.. was my $100 well-spent?  And does this totally discourage any of your brave souls from pursuing rental income if you were thinking about it? 😉

Image from http://www.journalismorbust.com

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