As a homeowner, turning your property into a rental is an idea you have probably considered at one point or another. It is an appealing idea, and for good reason! Owning a rental property can be a handy and lucrative option to have.
There are several reasons you might choose to convert your property into a rental. You might want to make extra money while you wait for the right time to sell. Maybe you want to move to a new space while holding on to your property long-term. Perhaps you are interested in real estate investing and want the supplemental income that renting can provide.
In either case, there are some important considerations and steps to take before taking advantage of this privilege you have as a homeowner. While owning a rental property can be a great way to increase your monthly revenue, it is also a considerable commitment and can become terribly complicated if mismanaged.
Make sure you are prepared and knowledgeable in advance to avoid major headaches later. Before you put up “For Rent” signs, read through these steps to successfully convert your home property into a rental.
Get Familiar With The Laws
As the owner of a rental property, you will be bound by certain legal obligations. It would be wise to know what is required of you ahead of time so you can fully understand the decision you are making and prepare accordingly. The Landlord/Tenant laws in the state of Idaho cover several areas to pay attention to. Some examples include:
- Building code
- Building maintenance
- Health and safety standards
- Financial rights and responsibilities
- Landlord/Tenant relationship
- Eviction Proceedings
- Right to Privacy
In addition to Idaho’s state laws, each city and county has its own codes and requirements to meet as well. Take time to reach out to your municipality and understand all applicable rules first.
Once you have familiarized yourself with the legal aspects of renting out your property, there are still some logistics to account for. Before you start looking for tenants, here are some considerations to address:
Avoiding Mortgage Fraud
When you were approved for a loan to buy your property, you indicated to your lender whether it would be your primary residence or if you plan to rent it out. It is important to abide by the agreement you originally made and talk to your loan officer if your plan changes. In some cases, your lender may make exceptions to the agreement for extenuating circumstances. However, if you start renting out your place without talking to your lender and they find out, they may accuse you of mortgage fraud.
Buying a property as a primary residence usually requires a lower down payment and incurs a lower interest rate. If you recently bought your property as a primary residence, your best option is to wait 12 months before converting it to a rental property.
Is Getting Another Mortgage an Option?
If you plan to buy another property so you can rent out your current property, give your mortgage lender a call before moving forward. You will want to know in advance if getting approved for another mortgage is an available option to you.
In some cases, you might qualify for another home loan before you rent out your current property. Your loan officer might consider the rental income you will collect, but it will depend on your unique situation. To know for sure, you will need to start by having that conversation with your lender.
Homeowners Association Approval
If your home is part of a community with an HOA, there may be rules associated with renting out your property. While some HOAs do not place a limit on rentals, there are many HOAs with a rental cap. This is the maximum number of homes in the HOA allowed to be rented out at one time.
If the HOA has already reached the cap, you may be placed on a waiting list. If the rental cap stops you from putting your home up for rent, all is not lost. In some cases, exceptions are made for financial hardship or other extenuating circumstances. You could also petition the board to increase the number of homes allowed to be rented. Reach out to your HOA to find out what is allowed in your association
Changing Insurance Policies
When you rent your home, you will need to switch from homeowners insurance to a landlord insurance plan. This will protect not only your property in case of damages, but also your tenants if you are found liable for medical expenses or injuries. Get in touch with your insurance company when you are ready to convert your property to a rental.
Check if your area requires a special permit for your property to operate as a rental. Some municipalities implement this requirement as a safety measure to ensure the rental meets adequate health and safety standards. The cost is generally not too high. To acquire a permit, an inspector will come out to evaluate the residence and let you know if anything needs to be repaired or renovated.
To know how your tax situation will change as the owner of a rental property, you will need to talk with an accountant. In basic terms, the money you receive from your tenants is taxable income. Therefore, you could find yourself in a higher tax bracket. At the same time, renting your property may qualify you to write off some of your expenses such as HOA fees, property taxes, mortgage interest, landlord insurance, etc.
Repairs and Upgrades
Before you show your property to prospective tenants or hand it over to a property management company, get it in the best shape possible. This will allow you to charge a competitive price, increase tenant retention and improve the value of your property.
Some improvements are relatively low cost or necessary and should be done prior to renting out your home. Be sure the electrical, plumbing, HVAC, and all appliances are in good working order. You can also make your property more attractive on a budget by adding simple aesthetic upgrades such as applying a fresh coat of paint, replacing carpets, replacing toilet seats, updating drawer and cabinet handles, etc. If you are working with a property management company like Rooftop Real Estate Management, they can help take care of these updates too!
You can continue to improve your rental over time, perhaps adding more renovations and luxurious amenities later such as improved landscaping or adding a swimming pool.
Decide What You Will Charge
How much you make each month will depend on what you charge your tenants minus your costs. To break even, you will need to charge at least the average monthly cost of your home. This includes your mortgage, HOA fees, property taxes, insurance, and maintenance costs combined. Working with a property management company will likely save you considerable time and money, but consider the monthly cost of their service as well. To know how much wiggle room you have in what to charge, talk with an accountant to know which costs you can expect to write off.
To make a profit, the amount you charge will need to surpass your overall monthly cost. However, you need to be aware of the rental market and not charge higher than what the market will tolerate. Learn what is considered a competitive price for your property and its location. Potential renters will be acutely aware of comparable properties and what they can expect to find in their price range. You want to charge enough to make renting your property worthwhile. However, if you ask too high, you will drive tenants away.
This is why it is important to get your home in the best condition possible. Making any necessary repairs, replacing carpets, and putting on a fresh coat of paint will enable you to charge more while earning the appreciation of your tenants.
Find A Property Management Company
When you own a rental property, you take on the role of a landlord. It’s nice to think about renting out your home as a passive income stream. However, if you are the one managing, maintaining, repairing, filling vacancies, and responding to tenants, the job is anything but passive. It is a major responsibility that can demand your immediate attention at the drop of a hat.
Property management companies exist to do all this work for you in exchange for a small portion of what you charge for rent. These companies are equipped to help your rental property be a success. You can have that experience of passive income flowing to you each month while your property management company handles everything: financial transactions, inspections, evictions, tenant relations, emergency repairs, vacancy marketing, showings, and more.
Here are some of the ways working with a great property management company can benefit you and save you time and money versus being a landlord on your own:
- Higher rate of tenants paying on time
- Reduced vacancy times
- Screening and credit checks for potential renters
- Save on maintenance and repair costs with the company’s staff and large-volume contracts
- Managing after-hour emergencies and showings
- Improved property value
- Improved renter experience
Take care to choose a company that places high value on service, standards, and satisfaction. When dealing with such high stakes as your real estate investment and your tenants’ living experience, you want to know you, your tenants, and your property are in good hands.