Beware pitfalls of renting home during sluggish market

You need to sell the house, but the market is sluggish.

Should you rent it out instead?

Real estate agents and property managers say more and more people, in this period of slow home sales, are opting to rent out their houses, even though being a landlord can be an expensive headache instead of an easy way out.

"Absolutely, we are seeing an increase in people deciding to lease their homes," says Ginger Pinkerton, property manager for Century 21 in Keller, Texas. She and other property managers caution prospective landlords about the potential pitfalls, and it always comes down to this: Leasing out property can be a money-making move for savvy long-term investors who consider it a business. Anything less and you have the potential for trouble.

Here are basic tips from the pros on how to avoid the landlord blues.

Money matters

Being a landlord takes bucks. Consider this list:

--If you want good tenants, you have to fix up the home before putting it on the rental market.

--It's common to go 30 to 60 days between tenants, meaning you can get stuck making mortgage payments on two houses.

--The cost of damages to a home may far exceed what the damage deposit will cover. Many repairs are the landlord's legal responsibility, particularly those that involve health and safety.

"Owners have to have a cash flow," says LaJuan Zachary of Home Sweet Home Property Management in Fort Worth, Texas. "If an air-conditioner compressor goes out in August, they have to replace it right away. They can't just wait until they get the rental check in September to fix it," Zachary says.

At the very minimum, a month's rent should be kept in reserve, she recommends.

Tenant issues

Landlords should check the background of all applicants. At Home Sweet Home, as at most property management companies, Zachary checks to make sure applicants have good credit.

"If they won't make their car payment, then they won't pay their rent," Zachary says. "If they have unpaid utility bills, they won't be able to turn on the electricity."

Her successful applicants must not have had an eviction. They can't have a felony conviction.

Property management companies routinely do such research. Individuals can do similar research by logging on to a tenant screening Web site such as www.tenantscreeningcreditcheck.com. Expect to pay $50 to $60 to find out information about not just credit but also criminal history, registered sex-offender status and whether the applicant is on a terrorist watchlist.

Hiring a manager

It might be worthwhile to hire a property manager, experts say. A typical property manager's fee in Tarrant County, Texas, for example, is half of the first month's rent and then 10 percent of the monthly rent.

For that price, you can get someone experienced in the details of the law. They know what to include in leases. You also get someone who can handle the midnight calls about broken plumbing. Most important, you have someone who can keep an eye on the house.

It's a good idea to interview more than one property manager to see what services each one provides. Some, such as Zachary at Home Sweet Home, schedule home walk-throughs every three months.

Others, such as Cade at Prime Realtors, don't routinely go inside your rental home.

"You need some program where at the very minimum someone is regularly driving by the outside of the property."

Ask your real estate agent if her agency offers property management services or log on to www.narpm.org, the Web site of the National Association of Residential Property Managers, to find telephone numbers for property managers near you.

Befriend a CPA

It's smart to visit with an accountant before you decide to rent out your home. An accountant can tell you what records to keep and what to expect when income tax time comes around.

Many people aren't aware of when they can and can't take deductions on rental property, says Marjorie Kottler, a certified public accountant in Fort Worth.

She finds one- or two-home home landlords don't always keep adequate records to provide the proper documentation for deductions. Potential landlords should prepare to set up detailed home filing systems that keep track of maintenance and improvements, security deposits, advertising costs, mileage to travel to work on the home, homeowners insurance, property taxes and mortgage interest. It's even better to work with a property management company that keeps those records and provides a report at the end of the year.

When not to rent

Homeowners often consider renting out homes for six months to a year. Perhaps, they reason, they'll make more money on a sale when the market improves.

Not a good idea, says Pinkerton of Century 21 in Keller. "It's not worth the time or energy," she says. "When the lease is up, they'll have to turn around and put all that money back into the house to fix it up for re-sell."

Homeowners who have little to no equity sometimes opt for renting out instead of selling and, so do owners who actually owe more than the house is worth, says Craig Campbell, a broker at Re/Max Advantage in Fort Worth and a landlord himself. If they sold, they could find that the check they receive is less than what they owe, especially after all the closing costs are deducted.

Being a landlord can be expensive, so renting might not be the answer. Look for a Plan B, he advises them. Sell the house. Then sell a car. Have a big garage sale. Raise some money to cover the difference between what you owe and what you'll receive at the sale.

Learn the laws

A new book, "American Landlord: Everything You Need to Know About Managing Your Properties," by Trevor Rhodes ($30, McGraw-Hill), includes a CD that has ready-to-print checklists, rental applications, lease agreements and landlord-tenant laws for every state.

To more thoroughly understand the responsibilities of becoming a landlord, read your state regulations. It can be dry reading, but it is information worth knowing.

You should also make sure you understand tax and insurance requirements before you lease your property. Check out the recently released "Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now" by Ron Leshnower ($30, Nolo).