Are you ready to become a landlord and start making rental income? Owning a rental property can be an incredible business opportunity and lead to passive income. If you already own a home and are moving or looking to buy another home to live in, converting your home into a rental property can put you on the path to growing a real estate business. But it takes more work than just hiring a company for property management services and putting a “For Rent” sign on your house. Here’s how to turn your home into a rental property.
Get a Landlord Insurance Policy
Just like homeowners insurance, landlord insurance is required to rent out your home. Landlord insurance combines property and liability insurance and protects you in different ways than homeowners insurance and removes the homeowner from liability for incidents caused by the renter and the homeowner from being liable for the safety of their tenants in an emergency. For example, if a natural disaster occurs, landlord insurance protects the house and property as well as any injuries that may occur to the tenant.
The difference is that landlord insurance tends to be much more expensive because you as the owner don’t actually live in the home. However, landlord insurance provides vital coverage for your investment property.
Change Your Taxes
Property taxes are still required when you rent your home, but you’ll likely have to pay taxes as an investor and not an occupant. Talk to your local municipality about specific changes to your taxes, but expect that taxes as a landlord will be more expensive than they were as a homeowner occupant. However, your rental property is a business and will likely be eligible for certain tax breaks and credits.
For best results, talk to a tax expert who specializes in rental properties in your area. They can help you know what changes to expect and ensure everything is done properly to avoid tax penalties and issues later on.
Secure the Necessary Permits
In most areas, properties must have permits to operate as rentals and must meet certain standards. Check with your local clerk’s office or city hall to see what permits are required in your area to convert your home from a place of primary residence to a rental property.
Permits are typically required for safety issues and to alert area planners and emergency personnel that the home is a rental. To secure a permit, a local inspector may evaluate the property for safety hazards and make recommendations for updates or maintenance that needs to be performed before the home can be a rental. You’ll also have to pay a fee to get the permit. Plan ahead, as the permit process can take time, depending on your location.
If your home is in a neighborhood with an HOA, you may need to get approval before turning it into a rental. Some HOAs have rental restrictions, such as only allowing a certain percentage of homes to be rentals or limiting tenants to family members only. Be sure you are clear on the rules before you move through the process to save time and money down the road.
Update the Home
Before you list your home, make sure to perform maintenance and updates. You may love your home, but after living there yourself, it likely has some wear and tear that needs to be fixed before a tenant can move in.
Cleaning up the landscaping, adding a fresh coat of paint, putting in new floors, and updating the appliances can make your home shine in rental listings, which can bring in more potential clients. Updated houses can also charge more for rent. And with fresh appliances and other things in the house, you can prevent potential maintenance issues from arising down the road.
However, when considering updates, you also want to think about the return on investment. You don’t have to update everything or use the best materials as you would if you were living there. Aim to find a balance between creating a safe and welcoming home without spending too much that the rental property loses money.
Consider Your Costs and Fees
Before jumping into renting your property, run the numbers to make sure it is a wise financial decision and to set your rental rates at a competitive amount. Start by considering all of your costs in the home, including the mortgage, property taxes, insurance, and utilities, as well as money to save to cover maintenance and vacancy gaps in the property. Take note that you may want to refinance and secure a new interest rate, which will affect these numbers. Then, think of how much money you want to make from the property every month. Compare those numbers to other rental properties in the area to see how their rates compare.
If you have a mortgage payment on the home, your monthly earnings won’t be as high. However, every month that a tenant pays to live in your house earns you more equity and increases the home’s value. In general, expect to charge around 1% of the home’s value for monthly rent, meaning a home that is worth $200,000 could likely charge $2,000 a month in rent. This changes with the rental market and local competition but is a good rule of thumb.
Know Your Rights
As a landlord, you have to understand and follow Fair Housing laws. These laws protect tenants from being discriminated against due to gender, race, or other factors. They also protect landlords against being taken advantage of by dishonest tenants. Each state has its own fair housing laws, so be sure to follow the specific laws for your area.
Before you rent your home, be aware of your rights and responsibilities as a landlord. If you don’t follow these rules, you could lose your rental permit and end up in serious (and expensive) legal trouble.
Hire a Property Management Company
Many new landlords underestimate the amount of work it takes to rent a property. It can be wise to hire a property management company, especially if you only have one or a few rental properties or are just getting started.
A property management company like All Property Services takes over the day-to-day responsibilities of renting your home and helps market the property, find and screen tenants, respond to issues, maintain the property, collect rent, and more. Because these companies are experienced in the local area, they can ensure a smooth rental process.
Set Your Rules and Create a Lease
As a landlord, you get to set the rules about who lives in your property and their responsibilities. You have to follow fair housing rules and not discriminate, but you still have wiggle room in what you allow and don’t allow in your home.
As you prepare to rent your home, consider occupancy limits or how many people can live in the house. You can also set rules about pets, such as allowing all pets, not allowing any pets, or only allowing certain types of pets. Set the responsibilities of the tenant, such as paying for certain utilities, maintaining the lawn, and keeping the property clean.
With the rules set, you can create a lease agreement that all tenants will sign before moving into your property. In this agreement, the tenants agree to follow the rules and pay their rent on time, and you agree to provide them a safe place to live for the set time period. It can be wise to consult with a property manager or lawyer to create a lease agreement, but templates are also available online.
Market Your Home and Screen for Applicants
With the home ready to go and the details set, you can market your home and look for potential tenants. A property management compliant can take care of this process for you, or you can do it yourself.
There are a variety of ways to market your rental property, such as posting a sign in the yard or putting an ad in the local newspaper. However, in today’s fast-paced and competitive rental market, most landlords find their tenants online. Post your home on social media and other rental sites to connect with potential tenants.
Once people have applied to rent your home, you can narrow it down to a few options and run background checks and credit checks. You should also contact their references, including previous landlords, to check that they pay their rent on time and follow the property rules. Taking time to research potential tenants can help you find the best match.
Turning your home into a rental property opens the door toincredible business and financial opportunities. But it’s also a process. As you embark on this journey, be sure to take your time and do your due diligence to set the foundation for a profitable rental experience.