When you hear the term House For Rent By Owners, know that it is used to describe when houses are rented out by the owner themselves. The middlemen, such as leasing agents and brokers, are not part of the arrangement.
Table of Contents
- What Does For Rent By Owner Mean?
- Why Are More Tenants Looking for Homes for Rent by Owner?
- Pros and Cons of Managing Your Own Rental Business
- How to Find a Quality Tenant
- Crunching the Numbers
Lately, we’ve witnessed a rise in living costs, an increase in house prices, and “low and slow” growth of wages. Such factors are putting home ownership beyond the reach of many Americans.
Since many people can’t save up for a deposit, they turn to rent to own solutions. Some owners want to avoid hiring a broker to list their property for them. In such a case, they list the unit as For Rent By Owner (FRBO).
But even as the increased control and cost savings might be alluring, you should know all you can about the FRBO process before you jump into it.
What Does For Rent By Owner Mean?
FRBO properties differ from traditional rental homes (typically found in apartment communities and complexes), which are rented out and managed by a third party.
The only two parties involved in the rental agreement are the rental owner and tenant, and all the potential middlemen are cut out. In this day and age, renting out directly from the owner may seem unusual, but such agreements come with various benefits for both the tenant and owner.
Why would you, as a real estate investor and property owner, decide to rent directly? Well, the main reason is to save money by avoiding agent fees. It is easy to formulate FRBO agreements today, thanks to the Internet, which allows anyone to list or find a property for low fees. The Internet equips us with access to millions of potential tenants across the globe.
How Does For Rent By Owner (FRBO) Work?
When it comes to the process of listing a property as FRBO, it’s pretty straightforward.
- Prepare your property. When listing your house or apartment as FRBO, you need to make it presentable. It means the rental property should appeal to and provide tenants with a livable, sanitary, and safe space. They are required for your property to meet the warranty of habitability requirements.
- List your property. Write a detailed listing description, take quality photos and videos, add a floor plan, and list on the right websites.
- Screen potential tenants. You don’t want to end up with an untrustworthy person for a tenant. If you hired a broker, the vetting process would be their job. But since you’re renting it on your own, you’ll need to handle it in order to choose the right person.
- Draw up and sign the lease. After deciding on the perfect tenant, it’s up to you to draw up the lease and sign it. If you’re not legal-savvy, it would probably be the only part of the process where you’ll need the help of a legal professional.
Why Are More Tenants Looking for Homes for Rent by Owner?
Why do tenants decide to look for homes for rent by private owner? Well, besides the cost savings as the main reason, tenants also derive a number of benefits from For Rent By Owner agreements.
Tenants can save money by renting directly from a property owner because the owner may be willing to negotiate on rent and additional fees. Since they also manage their property listing, they are more invested in their rental units and are responsive to maintenance and repairs.
Because there are no middlemen, the relationship between the rental owner and tenant is one-to-one, making room for more open communication. When it comes to maintenance requests and other issues, the landlord is often more willing to work with tenants to resolve them.
Another important benefit of renting from a homeowner is flexibility, because the company doesn’t make the decisions; homeowners do. Suppose a tenant is in a bad situation regarding their credit history. In that case, they will get a better chance of striking a deal with a property owner than a broker or rental management company.
Pros and Cons of Managing Your Own Rental Business
Property management is not that complex, but still, it is not for everyone. On the other hand, hiring unprofessional or inexperienced property managers can cause more damage and be stressful, just like dealing with irresponsible tenants. Now, you’re probably asking yourself whether you should manage your tenants or your property manager. Here are some answers to help you make the right decision.
Pros of Self-Managing Your Rental
Let’s start by examining the benefits of managing your rental property by yourself.
1. Complete control over your rental investment
You get to take care of every step of the process, from listing your property to tenant screening to repairs and maintenance. It enables you to make decisions you think are the best for your rental business. And again, there’s no one standing between you and your ROI on rental property.
2. Chance to gain experience and learn about the rental property industry
You can’t grow your business properly if you don’t get a feel of the industry’s pulse. The more you learn, the better you’ll know. At first, there will definitely be some setbacks, but over time you will become smarter and sharper about the business. That will allow you to expand your business in the future.
3. Avoid paying property management fees
If you were working with a property management company, you’d have to give them up to 15% of your monthly rental income. By managing your rental yourself, you’ll keep this money for yourself by saving on property management fees.
Get additional reasons to manage your rental better. It’s your money on the line, and it depends on your governance. It can be a huge motivator to make things work as efficiently and seamlessly as possible, all with the aim to grow your real estate investment per your vision.
Cons of Self-Managing Your Rental
There is the other side of self-managing that might deter you from doing the work yourself. For example, managing your own rental property can be very demanding. It requires much of your time and if you don’t have it, you’ll find it difficult to manage. There are many tasks, from dealing with bad tenants to maintenance requests, that will require your attention. If you can’t dedicate yourself to it, the work can be quite overwhelming.
1. Costly mistakes
Yes, making mistakes is a way to learn and gain experience. But too many serious mistakes can lead to financial losses and even closure.
2. Eviction and rent collection issues
As the rental owner and landlord, you are responsible for collecting rent. If you have a bad tenant, it may mean you’ll have to chase some of them every month, which can be time-consuming and frustrating. And if it comes to the point where you have to evict a tenant, you will need to deal with all the legal proceedings of eviction.
3. Bad tenants
If you fail to screen your tenants thoroughly, it may lead to a series of other issues. Without the right resources, knowledge, and experience, you may let the wrong people occupy your income property. Bad tenants are those who don’t pay rent on time, don’t take care of the unit, and aren’t easy to reason with when issues come up.
Property managers have everything it takes to process a multitude of potential tenants efficiently and quickly., as well as ways of performing detailed background checks.
Related: How to Deal with Bad Tenants
How to Find a Quality Tenant
Real estate investors and homeowners always want to protect their investment. However, they don’t want their investment property to stay vacant for long because it reduces its profit potential. Being impatient can lead you to rent out your rental houses to unqualified tenants, which can cause time-consuming and costly issues along the way.
So, how to find a good tenant for your For Rent By Owner project? If you’re new to renting out your unit or have little experience, this may come across as a problem. First, let’s define a good and reliable tenant.
What Makes a Good Tenant?
Who are the potential tenants you should prioritize in a sea of applicants? First of all, be sure to put objective facts above everything else and try to look for qualities such as:
- No prior history of eviction
- No criminal record of dangerous and lewd behavior
- Good references from past landlords
- Positive credit report
- Health track record of timely rent payments
- Respectful and polite to neighbors
- Steady income
- Ability to provide an upfront security deposit for covering potential property damage
How to Find Them?
Here are a few nice tips to help you send the word out and attract good tenants:
1. It all begins with marketing
You need to do good marketing to attract a larger pool of applicants. The more applicants you attract, the more people for you to choose from. Therefore, it’s important to market your rental unit extensively. Try to target specific types of people you think are the best bet and who want to pay a premium for good accommodation, such as corporate lets and retirees.
2. Perform background checks
The best tenants look after their living space and pay the rent on time. To avoid potential nightmares, you should conduct thorough background checks. They include:
- Reference checks
- Credit check
- Income and employment information
- Reach out to past landlords
3. Keep your rental unit in top shape
No one wants to spend their money on a bad rental, even if the demand for rental property in your area is high. Make sure that nothing needs maintenance and repair and that the place is in the best decorative order. In addition to attracting tenants, staying on top of maintenance and repairs will help you avoid lengthy and complex repair work. Failure to do so may put the property out of action between tenancies.
4. Ask lots of direct questions
You will want to know:
- Where did they live before?
- Why are they moving from their prior apartment?
- Have they even encountered issues with a landlord or property?
- Where do they work? How long have they worked there?
- How long do they plan to stay?
- Who will be living in the unit with them?
- Do they smoke or have pets?
5. Meet your potential tenants and choose the most stable one
The kind of person you want for a tenant is honest, open, and easy to deal with during their tenancy. Once you meet them face-to-face, forming a clear opinion of them will be much easier. Also, you can find their social media profiles to get at least an indication if they would make a good tenant. When doing a background check, be wary of people who changed jobs and addresses frequently in the last few years.
Few landlords openly allow pets in their rental units, so allowing them will bring more interest to your rental unit. It may get them to stay longer in your accommodation (to avoid the hassle of looking for another pet-friendly place) and take better care of your property.
Crunching the Numbers
Before you decide to jump into the business, you need to assess your potential For Rent By Owner situation.
What kind of property do you want to invest in and rent out? Do you want to rent a spare room or an entire place? Do you want to find long term or short term rental properties? All the aforementioned factors will determine how much money you will need to start as a real estate investor.
The benefit of being a landlord in a For Rent By Owner business is to take your earned money, pay down your mortgage as fast as possible, and get out debt-free. It will give you better equity in your home.
After watching the sharp increase of rental prices by up to 20% from 2019 to 2021, we can say that now is the best time to be a landlord. And in order to be a successful one, you must always keep an eye on the expenses.
When looking for rental houses to invest in, you have to calculate your rental income and know your expenses. The most important questions to ask yourself are:
- Is the property rentable?
- What is the average occupancy rate in similar properties in that neighborhood?
- What can I get per square foot?
- What are the cap rate, cash on cash return, price to rent ratio, and monthly income for both long term and short term rentals in that same neighborhood?
- Will rent continue to grow?
Be sure to look at your specific property and the overall rental market when making decisions.
Related: What Is a Good Cash on Cash Return?
Determine Your Potential ROI
When it comes to determining the right rental price, you want to make some money and cover expenses, but you can’t go too high because nobody will want to rent it. Before you invest in rental homes, do some market research on the rent rates in the area. What determines your profitability is what you can get for rent.
How much you’ll be able to charge depends on various factors, such as the property type, location, and features and condition. The supply and demand in the area and rent control laws also play a role. The best thing to do is conduct a thorough real estate market analysis by finding out what rental comps (similar properties in the area) are charging for rent.
Your rental analysis should include:
Neighborhood Analysis relates to finding the best-performing areas that provide a high return on investment. For example, you heard that operating a house for rent by owner in Lathrup Village in Oakland county (MI) can be profitable. Let’s take a look at the state of their rental market in May 2022:
- Number of Listings for Sale: 6
- Median Property Price: $361,467
- Average Price per Square Foot: $177
- Days on Market: 44
- Number of Traditional Listings: 3
- Monthly Traditional Rental Income: $2,045
- Traditional Cash on Cash Return: 3.68%
- Traditional Cap Rate: 3.76%
- Price to Rent Ratio: 15
Investment Property Analysis
Investment Property Analysis relates to analyzing several potential listings that fit your investment goals and finding the right one for your particular needs. For each home you analyze, you need to get important information such as rental expenses, rental income, cash flow, occupancy rate, etc.
Searching for houses, vacation homes, and townhomes for rent or invest in has never been easier.
Instead of sifting through dozens of investment properties and manually calculating their profitability, you can get your hands on Mashvisor. It’s an AI-based platform that can help you locate the best-performing homes for rent by owner strategy, provide the most accurate information, and help you start your investor journey. Being able to conduct your own rental analysis is important since you’ve chosen the For Rent By Owner way.
Whether you’re a tenant looking for vacation rentals or apartments for rent by owner to rent, or an investor ready to list houses for rent by owner, Mashvisor is equipped to help.
At the end of the day, any decision you make should result in a positive financial impact on your ROI.