Being a homeowner is a big, but wonderful responsibility. But many people begin to wonder if earning money from their home is better than paying into it- and begin to consider converting their home into a rental. If you're one of these people, with aspirations of turning your starter home into a rental property, it may be difficult to know where to start. With the prospect of a successful investment inching you towards this important decision, we're here with the knowledge and steps you need to get you started.
Transforming Your Home Into a Rental: The Reasons and Benefits
Turning your home into a rental property is an inviting idea, where an ideal situation would provide you with long-term, recurring investment income. This is typically the first reason a homeowner may consider becoming a landlord. Owning an investment property, when managed correctly, could provide you with passive income that requires little effort on your part. Not considered a full-time gig, you could easily be a landlord without making that your full-time career path.
Many homeowners-turned-landlords use their investment income to save for retirement, pay for a mortgage on their new home, and more. Some homeowners may also consider renting their property to tenants when they must relocate or wish to move elsewhere and would not see a good return from selling the home. This could also be the case in a suffering real estate market when selling a home would not return a good enough investment. Renting your home out in these situations allows you to move, but also provides you the ability to pay your mortgage.
Steps to Converting Your Starter Home Into an Investment
With the right help, correct knowledge, and a little hard work, you could turn your primary residence into a successful investment opportunity in no time. Get started on your path to success as a landlord today with the following steps:
1. Think Long and Hard About Being a Landlord
Before you take the steps to officially transform your primary residence into a rental property, you should think long and hard about becoming a landlord. Being a landlord is hard but rewarding work, so it's important to be aware of the advantages and drawbacks of making the switch. Sure, your rental property is sure to bring in some revenue, but you must also be ready for unexpected maintenance costs, consequences of bad tenants, overdue rent, and more.
This is the time that you should also consider whether or not you will choose to do it alone. Many landlords may take advantage of the services provided by a property management company, for example, which takes away some of the stress of managing a property by helping to take care of things like lawn care, maintenance, repairs, and more.
2. Take a Look at Your Mortgage, Insurance, and Taxes
- Mortgage - When it comes down to it, your property and turning it into a rental all comes down to numbers. You'll want to take a long, hard look at your mortgage, the amount you owe, and how long you have been paying on the mortgage. When you accept your mortgage from your lender, the majority of the time you sign a legal document that states your intentions for occupying the space as a primary residence; for a specified amount of time. For instance, if this legal document states you must occupy the property as your primary residence for one year, you are not allowed to turn the property into a rental, or investment, property until that time frame has lapsed. If you violate this agreement, there could be severe, legal consequences. Once you're free and clear to turn your home into a rental, you need to finance your investment. If your current mortgage is paid off, you probably won't have to worry about qualifying for another loan in your new residence. If this is not the case, you should sit down with a professional to talk numbers and discover if you qualify for holding two mortgages at once. You may also be able to refinance your current loan.
- Insurance - Property insurance changes when you need coverage for a rental property instead of a primary residence. You'll need to contact your insurance company to talk about switching to rental property insurance that will protect your new investment, but also personal liability insurance that will protect you against lawsuits. It is important to remember that your rental property insurance will cover the building or property, but not your future tenants' belongings inside the home.
- Taxes - When you make the change and switch your primary residence to a rental, almost everything will change in regards to taxes. When you're a landlord, taxes are handled much differently. With an investment property, you'll be able to make a variety of new deductions, like utilities, repairs, taxes or interest paid on the property, and more. Many places in the country may also charge a higher tax rate on rental properties than primary residences. It is essential to sit with a tax professional to discuss your options and requirements under federal law.
3. Get Your Property Ready for Renters
You may love everything about your home, especially if it's your first home. But having tenants living in your home reaches beyond personal preferences and taste. Before allowing tenants to view or live in your home as a rental property, it's important to do any necessary repairs or changes. Repaint walls, keep things as neutral as possible and fix any obvious problems with systems within your home like plumbing, HVAC components, electrical, etc. In addition to appealing to more renters, upgrading areas or things in your home can also help you bring in your desired rental income.
4. Determine the Rent You'll Charge
The decision to become a landlord has been made, but what are you going to charge? Determining the cost of rent can be harder than it seems, but one of the most important steps to get right. First, you'll need to consider your costs. Your rental income must cover your cost of the home, in addition to other fees, repairs, etc. And of course, you must leave room for profit. The rent must also be balanced with the current real estate market, so doing diligent research is absolutely necessary. Compare rates charged for similar properties of a similar size, with similar amenities, in the same area to help you decide the rates you will charge. When in doubt, consult a local real estate professional.
You will also need to decide what your rent will include. Will your tenants be responsible for all of their own utilities, or will you as the landlord cover some? Will your tenants' rent include lawn and/or snow maintenance? In addition, will you renters pay a security deposit and one month's rent in order to move in? Or will you expect only one of them?
5. Brush Up On the Laws and Carefully Consider Your Rules and Expectations
Unless you have your own experience with the legalities surrounding property law, you may want to consult a professional in this area of law when you're ready to start a lease agreement. You will need to create your own rules, regulations, and expectations for your future tenants that consider the best interests of both parties. These professionals can also help you understand the laws surrounding tenants' rights, zoning restrictions, and property taxes. Make decisions about what you will find acceptable and what you will not. These rules must be clear, firm, and legally agreed to. Some important factors to consider when creating your own rules or lease agreement include:
- Occupancy limit
- Pets, deposits for pets, and breed limitations
- Garbage/lawn maintenance
- Cleanliness and safety
- Right of entry (when you are legally allowed to enter the home)
6. Create a Quality Application Form and Find Your Tenant
When your new rental property is ready for tenants, it's time to find some. In order to weed out potential, bad tenants, you'll need to create a good, quality application. In addition to pertinent, personal information, you'll also want to consider charging an application fee to cover the cost of a very-necessary background check. As your main source for screening the right renters, your rental application is extremely important. Include questions that you require answers to and become knowledgeable about the things you cannot ask (like questions regarding race or religion). Basic information that should be required from all potential tenants include:
- Name of tenant or tenants
- Date/s of birth and Social security number/s
- Phone number for tenant and references
- Address/es for the previous 3-5 years
- Current and past employers (3-5 years)
- Signature/s or tenant or tenants
Once your application is ready to go, start listing your rental property on real estate websites, local sites, and around the neighborhood. You'll need to either handle applications and background checks yourself or hire a real estate agent or management company to help you find the best tenant. Do not rush into accepting the first applicant and practice due diligence before making any decisions.
Turning your home or primary residence into a rental property can provide you with an opportunity for great success. With the proper knowledge, steps, and help, you could be well on your way to investment glory. For any and all of your rental questions and concerns, contact the trusted team here at Vertical Rent today to see how we can help you succeed!