So you’ve decided to turn your primary residence into a rental property. Maybe you just bought another house and can’t get a fair price for the old one. Maybe you need the extra income. Whatever the reason, it can be hard to know where to start and what steps to take in order to make the decision final. Here are 10 steps to make the process a little easier.
- Check Your Current Mortgage
Before converting your home to a rental property, you usually have to have lived there for at least 12 months. This is to make sure you’re not taking advantage of the benefits of taking out a loan for a primary residence versus a vacation or investment property such as lower interest rates and smaller down payments. If you make the change sooner, you could be committing mortgage fraud without realizing it resulting in foreclosure. To prevent this, take a look at your loan paperwork or call your lender to find out the rules in making this switch.
2. Apply For Another Mortgage
Usually, when making your home a rental property, you want to find another place to live rather than sharing the building with your future tenants. If this is true for you, it’s a good idea to find out if you qualify for another mortgage before you continue making changes.
3. Check In With Your Homeowners Association
If your home is in an area governed by an HOA, you should check in and make sure there aren’t any rules set in place for rental properties before you start listing. Some have no restrictions, however, others only allow a certain number of rentals in one neighborhood and others don’t allow rental properties at all. Whatever the case, it’s important to touch base and make sure you’re not violating any restrictions.
4. Change Your Insurance Policy
Rental properties tend to see more wear and tear than primary residencies, so you want to make sure you’re covered in case of an accident or emergency. Tenants could also try to hold you responsible for things that happen on the property, and insurance is another way to prepare for this.
5. Look Into Tax Changes
Any income you make on your new rental property will have to be taxed at the end of the year. However, there are many potential deductibles you can claim that can save you money. For example, utilities, homeowners association fees, landlord insurance policies, repairs to the house, property taxes, and mortgage interest can all be considered deductibles on your taxes. Consider speaking to a tax advisor about these and see if there are any steps needed to convert your home to a rental property in their point of view.
6. Ready Your Property
Look at other rental properties in the area to make sure your house lives up to the competition. If they have more updated appliances or better amenities, it might be in your best interest to make some changes. A new coat of paint can make a big difference in making a property look new. Curb appeal also makes a big first impression, so investing in some landscaping could be a smart decision.
7. Determine How Much to Charge
Once again, check out the local market to see what your competition is charging for similar properties. Websites such as Zillow or Rent.com can be great assets in this task. Be sure to add up your costs in maintaining the property and charge enough to cover that while giving yourself some income, factoring in the mortgage and any potential repairs that could come up. If you’re still feeling unsure how much to charge, consider consulting with a real estate agent.
8. Set the Rules
If you don’t have strict guidelines from the beginning, tenants tend to take advantage and cause you to lose money. Consider things such as pet policy, occupancy, who will be in charge of yard maintenance and trash removal, and limits on your own right of entry. Once you make the rules, stick to them and be sure your future tenants understand that there won’t be leniency.
9. Create an Application Form
Before you begin looking for a tenant, be sure to have an application form ready for them to fill out. This should include things such as their full name, birthdate, social security number, current address, phone number, information of employment, and references you can contact. You may also want to charge an application fee to cover the cost of background and credit checks. Make sure the application covers any other information you might be interested in such as the number of people or pets, but be careful not to ask anything that could be considered discriminatory such as race or religion.
10. Find a Tenant
Now that you’ve prepared your property, it’s time to start looking for a tenant! List your property on sites such as Zillow, Craigslist, or your city’s Facebook page and get ready to start combing through applications. Look for automatic disqualifiers such as a gross monthly income lower than three times the amount of rent or no steady job of at least a year. No matter how nice people may seem when you first meet them, always be sure to run a professional background and credit check. Be patient, as taking the time to find a good tenant will save you a lot of time and money in the long run.