Would you like to convert your residence into a rental?
Homeowners turn their property into a rental for many reasons. Sometimes owners discover that they can’t sell their property at a satisfactory value. Renting it out makes more sense from a strictly financial point of view.
In other cases, people are moving from their current residence into another or they just want to boost their monthly cash flow. Whatever the train of thought, it’s entirely possible to change your life by putting a new rental property on the market.
Below are the top tips to make the most out of converting your home into a rental. Follow these practical suggestions to turn your plans into a passive income success story.
1: Fix All Issues
Tenants want to move into a property that is fresh and functional. For most homeowners, this means conducting at least some repairs to get everything in working order.
You may not be aware of all the problems in your home. That’s why hiring a professional home inspector is a good step to take before converting your home into a rental. You can use the inspector’s report to create a prioritized list of the necessary repairs.
While these fixes will cost you money, it’s important to keep in mind that you’ll avoid upkeep and emergency repair requests down the road. Plus, fixing things sooner is always less expensive than waiting for things to get worse.
2: Sort Out Your Mortgage Situation
How long have you lived in your primary mortgage? This is an important question because all mortgages come with a legal agreement in which you state how long you intend to use the property as your primary residence.
This period is usually one or two years. Before it comes to an end, you can’t turn your property into a rental. The worst-case scenario of ignoring this requirement would be getting mortgage fraud charges.
Additionally, you need to consider the mortgage needs of your next primary residence. Make sure that you have an option for qualifying for two properties at the same time. You’ll need a specific mortgage product for that to happen.
3: Switch Your Insurance Policy
Your standard homeowner’s insurance will be invalid once you convert your primary residence into a rental property. Fortunately, switching from one type of insurance to another won’t be an issue.
Keep in mind that there will be a price difference between the two insurances. It’s highly likely that your new policy costs more than the former one, but the exact price depends on multiple factors. On average, the landlord’s insurance is 15-25% higher than the homeowner’s plan.
Here are some of the factors that determine the price of your insurance plan:
- How old is your rental property?
- What is the location of your rental?
- How many rental units are you managing in total?
- Is it a short-term or long-term rental?
As another note, your landlord’s insurance won’t cover your tenants’ personal belongings. They need to obtain renter’s insurance for this kind of protection. For instance, when a fire damages their items, it’s the renter’s insurance that will cover their financial losses.
4: Understand the Taxation Laws
Converting your home into rental property means that there will be some changes to your tax situation. This is the moment to consult with a professional who knows the ins and outs of property taxation in your unique, personal circumstances.
Since the rental income is taxable, you should understand how this can change your tax rate. However, when it comes to taxes, you’ll reap some benefits too. These are the deductions that will become available to you:
- Landlords insurance policy
- HOA fees, if applicable
- Mortgage interest
- Expenses related to repairs
- Property taxes
- Utilities, in case you pay them yourself
5: Obtain the Required Permits
Many localities have requirements for obtaining a permit if someone wants to convert a private residence into a rental property. The system for obtaining these permits has been put to place for ensuring the safety of tenants.
In most cases, someone from the local government will pay a visit to your home. The inspector will check whether the electrical system, heating and other components of the property match the required standards.
6: Consider the Perks of Professional Property Management
Some homeowners-turned-landlords find that hiring a professional property manager made their lives much easier. This is an especially important question for people who will move far away from their homes after converting them into rentals.
An experienced property management company will take care of all the landlord challenges. They will collect rent, draft lease agreements, handle legal matters, take care of the paperwork and conduct regular maintenance.
Professional property management firms will walk you through any eviction needs as well. These are legal processes that pose a challenge for every new landlord.
Note that hiring professionals straight from the beginning cuts your risk of dealing with evictions at all. Reputable companies screen all the applicants to ensure your rental units are filled with only qualifying tenants.
The Bottom Line: Converting Your Home into a Rental
Converting your current home into a rental property carries the potential of generating considerable extra income. All of this recurring cash flow allows you to grow your wealth.
Before you make the big decision to list your rental property online, there are numerous points that you should think about first. These practical steps will help to make your rental business plan successful:
- Make sure that converting your home is legal under your mortgage terms.
- Consider the benefits of hiring a professional property management company.
- Make all the necessary repairs and do any upkeep chores before listing your rental.
- Check the permits that you need to obtain from your local government.
- Chance your homeowner’s insurance policy into the landlord’s insurance.