There's a lot you need to know when converting your home to a rental property. From everyday responsibilities to insurance and tax questions, it can seem overwhelming. Take it a step at a time and you'll get there.
Make sure you ask these key questions that can help you master the full picture of managing a rental property.
- Can you afford multiple mortgages?
If you are not going to be living at the rental property, can you afford two mortgages at once?
Don't just ask this question with the assumption that you'll always be getting your rent on time. There are times when your rental property will have vacancies. There will be times when tenants won’t pay on time. Your mortgages, however, are due just the same.
Be realistic. Of course you can probably afford two mortgages the next month or two. Can you do it if your property is vacant for six months straight? What happens if you have an emergency – can you afford it then? Understand, and be realistic about, your own financial flexibility.
- Are people actually renting around here?
Get an idea of the local and regional rental landscapes. Basic supply and demand concepts inform the kind of profit (or lack thereof) you might make. If there are a lot of vacant rentals in the area, or rental prices have plummeted, it might not be the right landscape to rent your home. If you do, understand that your rental cost will have to be competitive with other local options – or you'll have to offer something that other home rentals in the area don't.
This research may lead you to realize the opposite. Maybe rentals are booming in your area! Perhaps there's a lot of demand. Maybe you've even undervalued your own rental. This can enable you to raise the cost and still be competitive with other properties in the area.
Do your homework! Ask the questions that renters will ask of you, and understand the full scope of what other rental properties are offering.
- Can you fulfill your landlord responsibilities?
Is the house in shape to provide your tenants the experience they expect? Are you able to handle a major repair that's not the tenant's fault? Do you know reliable businesses that can handle these responsibilities, and are you familiar with their costs on any repairs you suspect might be needed?
Understand the real cost of any anticipated repairs, your ability to get them done in a timely manner, and how this might change your tenants' experience and the appeal of your home as a rental property as repairs are done. Above all, make sure the house is in shape to rent in the first place.
- What are the benefits of a property management company?
Perhaps you don't have the time to fulfill these landlord duties. In this case, a management company can take them off your plate. They can keep the home damage free, monitor its treatment, and handle some or all repairs, depending on the situation. Above all, they can take tenant dealings off your plate. They can notify you of these efficiently so that you're aware, but otherwise leave you free from many of the everyday management duties.
You'll have to balance the cost and how exactly the management fee is calculated. Some property management companies charge a flat fee, while others ask for a percentage of the rental income. Talk to a few management companies to get an idea of the benefits each can provide, their approach to communication, and their different costs.
- Do you know all the insurance aspects to renting?
There are a number of changes to insurance that you'll need to cover when renting a property.
Insurance rates drop in most cases because you're covering the structure of the home, but not any personal belongings. On the other hand, if you do leave large appliances in the home for tenant use, you'll want to have these covered.
You'll need good personal liability insurance. This protects you from any tenant lawsuits. Even if you have a friend or family member lined up to rent, and you know and trust them, make sure you have this coverage. An injury or disagreement can challenge that trust in a heartbeat, and this way you're protected no matter what happens.
You will also want to explore requiring your tenants to have renters insurance. Many landlords require it, as it protects tenants and gives them an alternative recourse other than suing you.
- Do you understand the tax picture?
Rental income is taxed at a regular income rate. This means that there are many deductions you might find useful. Insurance, property management costs, property taxes, interest on mortgage, repairs, cleaning...these are all deductible and can stack up to a serious amount.
Understand depreciation, how it interacts with home improvements, and its deduction value. You'll also want to know how depreciation interacts with selling a home. If you eventually sell the home, you'll have to pay tax on your depreciation claim.
Chances are, as you get started, you'll want to consult a tax professional. It's easy to get caught on a snag and fail to calculate things correctly. It's even easier to overlook a deduction that can save you some real money. In this case, a tax service can often pay for itself in helping you more fully understand rental taxes.
Are you ready to turn your home into a rental property? Get the help you need to realize the return you want.