If you and your family are moving into a new house, you might be thinking of putting your current home up for sale, doing your best to get the highest value and take in whatever the market comes with. But that is not your only option, you can turn your old home into a rental.
There are so many good reasons for you to consider making your old home rental property. Maybe you are over listing your house for sale and not getting the right price for it, or you need to move out quickly but you don’t want to sell your home for cheap. Or you are struggling financially and you want to add another source of income.
If You Have A Mortgage You Might Want To Wait
If you have a mortgage on your property, you might want to live there for at least a year before you convert it into a rental. Because there are some perks that are associated with buying your primary home as opposed to your investment property.
In most cases, you will get a lower interest rate and you will have to put a lower down payment when the mortgage loan you have is for the home that you live in instead of having it in your rental property.
But don’t look for loopholes of how you can live in your new home instead of the property where you are paying the mortgage because you will be committing mortgage fraud. The penalty for that is the loan being called off instantly which will lead to foreclosure.
Get your loan papers ready and find if those rules apply to your loan. If you have lived in that home for over a year, you are free to turn your primary house into a rental property.
Find Out Whether You Can Get Another Mortgage
When you move from your house, you are likely to buy another house to live in. If that is what you are dealing with, find out if you could qualify for another mortgage before you start renting your current home.
Your lender can consider the rental income you would get, but sometimes that’s not the case. No matter what they do, you need to talk to your lender before you make any further moves.
Check-in With Your Homeowners’ Association
You might be living in a neighborhood that is given by the HOA, it is important that you find out if there are some restrictions when it comes to renting your house. Sometimes HOAs don’t have restrictions, some will allow only a small percentage of rental homes in the neighborhood and some don’t allow them at all.
Figure Out Your Insurance
Even though you have the normal insurance on your home, when you are renting out your property, the basic insurance isn’t enough. When People are on your property you are partially responsible for everything and anything that happens to them. You might think that this is silly, but ask yourself what happens if a tree falls on them, if a gas leak explodes or a simple thing turns into a major legal problem.
You need to have proper insurance in case something damages your home, so the repairs don’t have to come out of your pocket.
Look into the LLC or Umbrella Policy
When you are renting your property you are opening yourself up to liability. If you reject a tenant he can sue you for discrimination if they are really mad. Your tenants’ friend might be drunk and slip and fall down the stairs and sue you. Because your rental property is mainly for earning more money and not to drain your money, you have to make sure that your tenants can’t come after you and your assets.
There are two ways you can protect yourself as a landlord and that is by making an LLC or getting an umbrella policy. If that home will be your only property that you are going to choose one or the other. But some states have other laws and require you to have both you have better coverage. It is recommended that you consult with a real estate attorney to help you make the best decision.
Limited Liability Corporation/LLC
An LLC is a business structure that will protect you from any lawsuits against your property. If something happens and you end up being sued, nothing would be able to happen to you or your rental if they are suing you over something that isn’t your fault. In the first year of you getting the LLC will be a bit more costly but that is to make sure that you pay all the costs. There is also a yearly maintenance fee so your LLC is reporting properly.
The Umbrella Insurance Policy
This is a type of insurance that will protect you from all the things that a normal landlord policy would protect you from. Policies like this will be added to your landlord policy and that will reduce the money you have to spend month to month. It is usually paid monthly and it will protect your assets. If the lawsuit goes beyond the normal landlord policy, that is where the umbrella policy will kick in and save you. The difference between the LLC and the umbrella insurance is that if the lawsuit exceeds the umbrella policies and you don’t have an LLC, your family will be liable to make up the difference
Acquire the Permits
The permits you will need vary depending on your residential property. The main purpose of having a permit is just to be safe. Often there is an inspection from your local government that will inspect your house for all the possible safety hazards. These permits don’t cost a lot but they are required to have.
Get To Know Tax Changes
When it comes to taxes it is always better that you consult with a professional. But you shouldn’t be clueless about them, here are some things you need to know.
We all know that if you make money it is taxable income, and because of that, you need to that that your tax rate will change. But once you have your rental property you can deduct some of its expenses like:
- Landlord insurance policy
- Property taxes
- Mortgage interest
- Homeowners association fees
Talk to your tax advisor about the homestead exemption you have on your current home. Because you are allowed to have only one primary residence, therefore you need to talk to him and figure out what to do when the time comes to making your house rental.
Get Your Property Ready
You might think that this isn’t that important but look at your competition. Look if they have updated areas and if your home is a bit outdated consider putting some money into it and updating it to ensure you have interested tenants. If you don’t have the funds to redo your house consider taking out a home renovation loan from someone like the OurMoneyMarket. You don’t need to renovate the whole house, just a coat of neutral paint on the walls, pretty landscaping will do the trick. A good way to do it is to make a list of all the improvements you need to do and do them one by one. The most important thing is that your home is well-maintained and that everything works.
Think About How Much You Want To Charge For Rent
When you have done all the legal work and you and your property are secure it this time to determine how much you want to charge for your rental house. You need to do a lot of market research in order to come up with the perfect price. If you put a price that is too high nobody will want it and if the price is too low you are not making any money. Look at some rentals that are similar to yours to help you come up with the best price.
Another thing you need to think about is your costs. You have to make sure that you are making a profit. If you are still paying mortgage your profit will be small, but you need to remember that after your mortgage is paid you will make a great profit.
Consult With A Real Estate Agent
If you don’t have time to do all the research contact a real estate agent that will help you get a good feel on your property value. A real good estate agent will show you the best comps and provide you with a range of rental rates and in most cases help you find a tenant.
In most scenarios, landlords will charge from 0.8% to 1.0% of a home’s value in rent. Let’s say your home is worth $260,000 a reasonable price to rent t for is $2,000 to $2,500 per month. But, this will all depend on what county you live in, so it is best that you compare to other properties that are in your neighborhood.
Set your Rules
You will have to have a first lesson they will be heavy. If you want to be a cool landlord that is understanding and flexible you are in for a rough ride. You need to be a care that people will take advantage of you if you allow them to pay the rent late because if you let it slide once they will think that it is okay and do it every month.
Think about what things you are willing to allow on your property and what things are just a no go. Make sure that the rules are universal and clear. Making up the rules from tenant to tenant can cause you to get a lawsuit because of discrimination.
Here are some ideas of what rules you should consider having:
- Occupancy- it is best to set a limit on how many people can live or stay at the home at once. The usual number is having a person per bedroom. The abbey way to limit it is having two people per bedroom. So let’s say you have a three-bedroom house, you can have 6 people or less living in the house.
- Pets- if you are going to allow pets in your rental it is important that you have rules that can apply to pets from common pets to exotic pets.
- Yard maintenance- if your rental has a yard it is important that you establish who is responsible for taking care of the landscaping. If you decide that it is going to be their responsibility you have to explain to them how it should be done.
- Garbage removal- it is very important that you explain to your tenant was and who the garbage pickup works and who is paying for it.
- Being clean- having a dirty house is a hazard and it will attract all sorts of presents. You have to set rules for staying clean. Of Course, you can tell them and check how often they vacuum or scrub the bathroom, you can set a rule for leaving out open food containers or having clutter in the doorway. This will provide you with a chance to evict a tenant if it happens to messy and gross when you come to inspect the place.
- The right of entry- when you are renting your house to someone, you have to respect their privacy and rights, but you have to be allowed to enter the home. In most cases, the landlord gives the tenant a 24-hour notice before they come. Never come unannounced and violate their privacy.
Reading all the horror stories that may landlords have gone through will only make your process more difficult. Before you are sure that the idea of you renting your home is the best way to go, take enough time to talk to other landlords and get a clear picture of what comes with it.