How to turn your home into a rental
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Rental real estate is a hot investment in much of the country. It may therefore be wise for you to convert your home to rent. Here’s what you’ll need to consider:
- You might want to fix a few quirks to make the house safer for tenants
- Your insurance needs will change; compare the cost of homeowners insurance now
- Decide if you want to manage the property yourself or hire a pro
Also, if refinancing is in your future, you might want to deal with it now. Because it is more difficult and more expensive to refinance a rental property than a principal residence.
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Should you turn your house into a rental property?
Before we get into the practicalities of renting your home, there is a more basic issue you need to address. Namely, is it the right decision for you?
There are some serious and fairly obvious advantages. For starters, you could be making money. And you can also keep a home that should ultimately increase your equity.
But there are also many potential drawbacks, mainly in the form of risks. Suppose, for example:
- You get terrible tenants who don’t pay and trash the place
- The national or local real estate market (rental / sale) collapses
- You are faced with major and costly repairs and cannot access some homeowner refinancing programs
- Work or family changes mean you have to relocate, requiring the hiring of expensive professionals to manage the rental unit
- The government changes the tax code in the future and this removes some of the current very favorable breaks
None of these things can derail your homeownership plan. But these are risks you need to recognize.
Make your home suitable for tenants
Converting your home to rent can involve both physical and legal changes. Spend some time researching your local rental market to determine what these physical accommodations should be.
Are you going to attract high-end professionals who will pay premium rents? If so, you might need upgrades to use them. Just make sure you don’t spend as much as it takes years to get a return on your investment.
Or you might be able to attract only tenants who are less likely to respect your old accommodation. You will then have to protect it from them. For example, by covering precious hardwood floors with inexpensive but durable carpet. Also consider taking expensive devices with you and replacing them with more utilitarian devices.
As a landlord, you could be held responsible for accidents that occur to your rental home due (in whole or in part) to the condition of the property. Indeed, you will probably need umbrella insurance, and, in some states, it might be worthwhile to form a Limited Liability Company (LLC) as a shield.
But there is a whole list of things you can do that can help stop the claims in the first place, including:
- Call a professional to carry out safety checks on all electrical circuits
- Have the HVAC / furnace serviced and checked every year
- Installation of smoke detectors and (if gas is used) carbon monoxide
- Sort the trip hazards in the house and yard
- Fence all yard hazards, such as falls on high retaining walls
- Make sure the roof shingles are securely attached
No owner can prevent all accidents. However, taking reasonable steps to make (and keep) the home as safe as possible is both a good investment and something you’ll want to do as a decent human being. Plus, filter potential tenants to see how many lawsuits they’ve filed. Some make it their job.
Insurance when you convert your home into a rental
Not all homeowners pay the cost of an umbrella insurance policy. They prefer to take the risk themselves.
However, if you don’t convert your home policy to a landlord policy and tenant-related claims arise, there’s a good chance your insurer will deny any claims you make.
You’ve probably guessed that homeowner’s insurance is more expensive than standard home insurance. Indeed, the Insurance Information Institute estimates that a specialized policy costs on average about 25% more. But at least you can make claims.
And these policies usually include coverage that you don’t expect and will be grateful for. For example, loss of rent while repairing the house after a covered incident.
And you should normally be able to claim damage to all of your belongings that you leave in the house, including appliances and garden tools (lawn mowers, leaf blowers, etc.). Your tenants will need to purchase their own insurance for their property.
Many landlords actually require their tenants to purchase home insurance to avoid arguing over who is responsible for theft or damage to tenants’ personal property.
Will you be a DIY homeowner?
You probably have a rough idea of how much time you will need to spend on owning. Now double that. And double again.
Seriously, dealing with all aspects of being an owner takes a tremendous amount of time. You have to find tenants, sort them, handle emergencies in the middle of the night, do routine maintenance, do the paperwork and collect the rents.
And these are the tasks if you are fortunate with your tenants. If you’re unlucky, you might file complaints from neighbors, enforce rules of decent behavior, worry about criminal liability for your tenant’s illegal activities in the house, chase late rents, and ultimately deal with an eviction. .
Get professional help
Of course, you can delegate as many or as few of these tasks to professionals as you want. If you are moving far, you may have no choice but to outsource them all.
This is good, but it will have a considerable financial cost. You should take these costs into account when calculating the financial viability of converting your home to rent.
Refinance before it’s too late
It is much more difficult to refinance a rental property than the one you own and occupy. So if you need to refinance, you will want to do it while you are still living in the house that is intended to become a rental unit.
Your decision to convert your home to rent could be the smartest decision you’ll make in this decade. Many owners remain delighted to have made this choice.
But it is essential that you take the plunge with your eyes wide open: that you recognize the disadvantages and risks as well as the advantages and rewards. Do not press the button until you are satisfied with the overview.
Check your new rate (Jul 18, 2021)