Turning your home into a rental property can be a great investment. You know your property better than anyone else and can turn that knowledge into profit.
Should I Turn My Home Into a Rental Property?
Here are some rental benefits and drawbacks to consider:
| Benefits | Drawbacks |
| Supplemental income | Difficult tenants |
| Tax deductions | Maintenance issues |
| Pay your mortgage with someone else’s money | Unexpected costs |
9 Steps To Turn Your House Into a Rental
With a few steps, you can turn your house into a rental property:
- Establish Rental Type
- Determine Lender Requirements
- Get the Required Documents
- Update Your Insurance Coverage
- Identify Needed Repairs and Upgrades
- Set Your Rental Price
- Create a Lease Agreement
- Establish Rental Rules
- Prepare for Tax Changes
Establish Rental Type
There are several options when it comes to what type of rental property you want. Homeowners can offer their whole house, a single room, or a basement to generate some extra income.
Whole House
Renting your entire house allows a great amount of flexibility in your living arrangements. It is a great option (as long as you have permission) for those who have another place to live but aren’t ready to sell. This option allows you an opportunity to bring in extra income while still building equity and paying your mortgage.
Single Room
Listing a room for rent in your house is another solid option. It offers an opportunity to have someone help you pay the mortgage while offering you tax deductions and companionship. There usually isn’t a ton of extra work to do to rent a room, so this is a great opportunity if you have an extra bedroom.
Basement
Homeowners with a basement also have an opportunity to turn their basement into an apartment. Basement apartments can be made into completely separate units that allow homeowners to maintain their privacy. As long as you follow the legal basement apartment requirements, this is an excellent way to make use of your property and generate extra income.
Determine Lender Requirements
If you have a mortgage, you need to determine if your lender will allow you to turn your home into a rental. FHA and VA loans have a minimum occupancy of 12 months before you can rent out your entire property. USDA loans do not allow rentals.
Talk with your lender to determine if your loan allows for rentals and if not what other options you may have. Renting your home under the guise of a primary residence is mortgage fraud and can lead to major issues, including jail time.
There are some exceptions to the 12-month occupancy rule, check with your lender to see if you qualify.
Get the Required Documents
Each state has different requirements regarding what documents are needed for your home and you as a landlord.
Many states and municipalities require a landlord permit or license before you can rent out your property. The fee varies but typically ranges from $50 to $1000 per year.
Landlords also need to obtain a Certificate of Occupancy. Anytime there is a change in the owner or tenant of a structure, a new Certificate of Occupancy and inspection is required. This helps to ensure that the property is up to code. The inspection process may include:
- Fire safety
- Electrical
- HVAC
- Plumbing
- General building code requirements
Update Your Insurance Coverage
Your rental property will also need proper insurance coverage. Contact your insurance provider to see what types of coverage they offer and what is recommended to protect you and your property.
Umbrella Policy
An Umbrella Policy is an extra insurance policy that provides additional coverage for property damage, injuries, and personal liability.
For example, if your tenant has a pet that bites someone, you could be held liable. An umbrella policy would cover you.
LLC
Although this won’t be through your insurance company, creating an LLC (limited liability company) is a great way to protect your personal assets. It helps to protect your liability should someone file a lawsuit against you.
For example, if the only asset in your LLC is one rental property, your personal finances or primary residence are not at stake.
The cost to register an LLC varies by state, but ranges from $50 – $630.
Identify Needed Repairs and Upgrades
Owning a home for a few years and then renting it out usually means that the homeowner is highly aware of the home history and maintenance issues. Homeowners may be willing to overlook certain imperfections that a renter won’t. It’s time to take a long hard look at your property.
Go through the property room by room and make a list of tasks that need to be handled. Here is a brief list of things to inspect:
- Floors
- Doors
- Walls
- Windows
- Shades/blinds
- Smoke detectors and fire extinguishers
- Kitchen (cabinets, drawers, appliances)
- Electrical outlets and covers
- Paint
- Light fixtures
Make a priority list of things that must get done before renting and a list of potential upgrades you can make.
If you aren’t handy, call a handyman to help. Many people think they are capable of certain tasks and spend more time, money, and effort trying to DIY and then end up having to call for help when the tasks prove too difficult.
Warranty of Habitability
At a minimum, landlords have a responsibility to keep their property safe and livable (also called “warranty of habitability”). These laws vary by state but typically include:
- Working heating and air
- Electricity
- Proper plumbing
- Weather protection
- Free from debris, rodents, vermin, pests, and garbage
Set Your Rental Price
It may seem obvious, but, some first-time landlords get so caught up in competitive pricing that they forget about profit. Create a list of expenses for your property including mortgage, insurance, and fees. Your rental price must exceed this minimum cost to make a profit.
Research your local area to see what similar properties are renting for. Be sure to consider home size, location, parking, and any amenities in the area. You can also talk with a local real estate agent to determine the fair market value of your property.
Create a Lease Agreement
A residential lease agreement is a key piece of any rental property. It is a contract between you and your tenant that formally establishes the tenant’s right to live at your property. It helps to set clear expectations and responsibilities for both you and your tenant. There are many residential lease agreement templates available online. Your lease agreement should include:
- Rental length terms (6 months, 12 months, custom)
- Name of tenant(s)/landlord(s)
- Payment policy including late or unpaid rent
- Security deposit and fees
Establish Rental Rules
Rental rules help to protect your property from excess damage. As a previous resident, you know your home better than anyone else. Create a set of rules to start with your best foot forward. Here are some ideas to get started:
- Renters insurance requirements
- Property changes and improvements
- Parking
- Pet policy
- Yard and property maintenance
- Noise
- Number of occupants
- Subletting
Keep in mind there are also rental rules for you as the landlord. Once payment has been accepted or a lease is signed, your renter has rights under landlord-tenant law.
Prepare for Tax Changes
Turning your home into a rental property also includes preparing for tax changes. Documenting each of your expenses and deductions from the beginning will save you from extra work come tax season. Tax deductions for rental properties typically include:
- Mortgage interest up to $750,000 ($1 million if the mortgage was originally taken out before 12/16/2017)
- Depreciation
- Repairs and improvements
- Property taxes
- Travel expenses acquired to collect rent or maintain the property
- Advertising costs
- Utility expenses
- Professional services (attorneys, property management, accountants)
Identifying what does and does not qualify as a tax deduction can get tricky, use a CPA to help you avoid any issues with the IRS.
Do I Need a Property Manager To Turn My Home Into a Rental Property?
You do not need a property manager to have a rental property. However, you may want one.
Depending on how much time you have to devote to being a landlord, a property manager can be very helpful. Another important factor to consider is cost. Management companies take between 8 – 12% of the monthly rental price. So, if you are charging $2,500 per month in rent, you will pay the management company between $200 – $300 a month.
