Have you been considering converting your home into a rental property instead of selling it? Making this switch is a long-term investment that has the potential to earn you some serious profits for years to come. However, make no mistake – becoming a landlord for the first time is quite the undertaking.
1. Make Sure You’re Ready to Be a Landlord
Being a landlord isn’t for everyone. It comes with a great deal of responsibility and need-to-know knowledge:
- Study landlord and tenant laws – Every state has their own set of landlord and tenant laws. Make sure you are familiar with your obligations as a landlord in regard to security deposits, tenant screening and lease agreements.
- Understand tax rules – To get maximum results at tax time, you need to know what can and cannot be claimed on your taxes. What you received for your interest deductions isn’t the same for investment properties. Tax laws vary. Always consult with your financial advisor on these items.
- Prepare for handiwork – As a landlord, you might have to make repairs and/or schedule repairs to be made at the given property.
2. Determine if You Will Need to Refinance Your Mortgage
When you initially purchased your home, you likely used a primary residence mortgage. This type of mortgage offers lower interest rates and lower down payments, however, your lender does expect you to be living on the property.
Some homeowners may simply start renting out their property without running it by their lender, this is a HUGE no-no! This would be considered mortgage fraud, and could result in your mortgage coming due as soon as they discover you’re renting your property. Not. Fun.
Taking a mortgage out on a primary residence is entirely different than taking a mortgage out as an investment property. There are several additional requirements that come along with financing an investment property, such as a down payment ranging from 15-20%, slightly higher interest rates and higher credit score requirements.
You don’t want to violate your occupancy clause; always notify your lender when you are planning to convert your home from your primary residence to an investment property.
3. Update Your Insurance Policy
Once you start renting your home, your old homeowners policy will no longer be sufficient. You will likely want to purchase a separate policy for the rental property itself, as you will no longer need protection for the personal property inside. Contact your local Rockford Mutual Insurance Agent for more information.
4. Make Cosmetic Updates
When potential renters look at your property, they want to feel comfortable with their potential living quarters. If you’ve got ancient appliances, crazy carpets or funky wallpaper, consider investing in a refresh. Not only will you gain more interested renters, you might be able to tack on some extra rent for the updates you’ve made.
5. Decide What You’re Going to Charge
Now that you have all your ducks in a row – your mortgage, insurance and property cosmetics – let the fun begin! You made the choice to convert your property to gain rental income, and now you get to determine how much to charge:
- Do some market research – Evaluate what other rental rates look like in the area. Check free resources like Zillow, Trulia or Realtor.com and see what rates are for properties of a similar size, location and included amenities.
- Think about your costs – Be sure to charge enough rent to provide you with some profits on top of running the property smoothly. Be fair and remember that every month is building equity in the property and profit will jump once that mortgage is paid off.