Turning a home into a rental property becomes a trendy and profitable business deal for many people, especially in the USA.
For many people, moving into a new home doesn’t necessarily mean selling their current home. Instead, they see their current home as an opportunity to generate extra income by turning it into a rental property.
Flex reports that approximately 10.6 million people in the United States earn income through rental properties and about 20.5 million rental units are owned by individual investor landlords.
If the house in question is located in a desirable neighborhood, making it available as a rental property could potentially help the owner earn a considerable amount of extra money to help them reach their financial goals.
But creating a source of passive income is just one reason why someone might consider becoming a landlord.
For example, a person might need to spend an extended amount of time away from home.
They might not need to move permanently, but they do need to spend a long time elsewhere for work or family reasons.
In that case, renting their home would be a way to earn extra income without giving up their home.
Renting out a home can also be a way to wait out a less-than-ideal housing market.
If the time has come for you to move, but the market’s not so great and you’d have to sell your house either for a loss or for less than you’d like, turning it into a rental would be a way to hold onto your home until market conditions improve and you can sell for a better price.
While turning your home into a rental property can be an option well worth considering, it’s very important to make sure you cover all of your bases first so that you don’t end up with any unwelcome surprises later on.
Mortgages
One of the most important things you’ll need to think about before turning a home into a rental property is how it will impact your mortgage.
Having a mortgage doesn’t necessarily mean you can’t rent out a home, but you do need to make sure you wouldn’t violate the terms of your mortgage.
Mortgages often require the owner to occupy the residence for a specific amount of time first, typically at least one year.
You’ll also want to check with your lender to see if there are any other requirements or penalties involved with turning a home into a rental.
You may also want to find out if there are any local laws that could apply to your mortgage situation.
For example, Howard & Howard explains how the Illinois Credit Agreements Act could apply to a mortgage for a home being turned into a rental property in that state.
Insurance
Converting a home from a main residence to a rental property significantly impacts its insurance needs.
While a standard homeowners insurance policy works while you’re living in a house full time, rental properties need landlord insurance.
It’s very unlikely that a homeowners insurance policy will cover claims if a property is being used as a rental.
And even if it does, that coverage may be very limited, such as if you’re renting out a spare bedroom for a single weekend.
Landlord insurance provides things like liability coverage if a tenant or visitor is injured on your property and the tenant wasn’t at fault.
It can also provide coverage for lost income if your home can’t be rented out because some type of event has made it uninhabitable and major repairs are needed, such as after a fire or natural disaster.
And while landlord insurance doesn’t apply to a tenant’s belongings, it may apply to certain items that you leave in the home for tenants to use, like kitchen appliances or a lawn mower.
While you’re looking into landlord insurance policies, be sure to take a look at additional riders for extra types of coverage.
For example, if the house is located in an area that’s prone to flooding, you may be able to purchase additional coverage for flood damage, which typically isn’t covered by standard landlord insurance policies.
Or you may be able to get extra coverage to protect your income if a tenant stops paying rent or can’t pay in full.
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Know the Rules
The laws that apply to rental homes vary from place to place, so it’s important to find out what the exact laws are where your home is located.
For example, cities very often require property owners to get permits for homes being rented out.
If you do need to get a permit, this process will probably involve a home inspection to make sure there aren’t any safety concerns that need to be addressed first.
It’s also worth noting that if a home is part of an HOA, there could be other rules that apply to rental homes in addition to local laws.
Working with a lawyer who specializes in landlord-tenant law can also help protect you from other legal headaches later on.
Renting out a home requires paperwork like leases and applications and a lawyer can help with drafting those.
Would forming an LLC for the purpose of renting your home be a good idea?
A lawyer can help you understand the pros and cons of doing so.
Talking to a lawyer can also help you learn about things like fair housing laws and other legal obligations you would have as a landlord.
Consult an Accountant
Since rental properties are a source of income, they can impact your tax situation so it’s a good idea to find out what you should expect.
As a landlord, there are many expenses that you’ll need to keep track of so that you can claim them as deductions on your taxes.
This includes things like property taxes, mortgage interest, repairs, and costs associated with operating your home as a rental. It’s important to understand what, exactly, these expenses include.
Let’s take repairs for example. In this situation, there is a distinction between home repairs and home improvements.
Repairs refer to routine maintenance jobs that help keep a home in its current state, such as repairing a furnace or patching a leaking roof, and are tax-deductible for landlords.
Home improvements refer to larger-scale projects that add value to a home, like renovating a kitchen, and are not tax deductible.
Do You Need a Property Manager?
While some people like to be hands-on with their rental properties and handle all aspects of managing them by themselves, that’s simply not practical for everybody.
Some landlords aren’t local to the house being rented out and can’t quickly respond to emergencies.
Or they simply don’t have the time to handle things like advertising the rental and handling property showings on top of everything else in their life.
Yes, hiring a property manager would cut into the money you get from your rental home.
But managing a rental home can be more complex and time-consuming than a lot of people realize – especially if you intend to eventually have multiple properties that you rent out or want to use your home for short-term rentals.
Between all the legal matters involved and the ongoing work of dealing with a rental house, hiring a professional property manager can be a big relief for many landlords.
A professional property manager can handle just about any aspect of taking care of a rental property, from showing the property and signing leases to scheduling repairs, collecting rent, and overseeing tenant move-ins and move-outs.
If necessary, they can even deal with tenant evictions or represent you in court. Whether you want to be fully hands-off with your rental home or work with a property manager for certain things, a property manager can be a good option to consider.
Once you’ve had some time to consider these things and are sure that renting the house is a good option for you, go ahead and start getting things ready.
Start looking for ways to spruce up the house and make it more attractive to potential tenants and start taking some of the first steps we’ve discussed. Best of luck to you with your new venture!
