If one of your properties has been on the market for a long time but isn’t selling, or if you have recently moved out of a house or apartment but don’t wish to put it up for sale, consider renting your property.
Renting can be a great way to make some additional income, and it also offers several tax deductions that you can claim on your taxes. One notable deduction is the money spent on maintenance and repairs, which can help reduce the tax liability associated with the property.
However, converting a primary residence to a rental property can be time-consuming. You have to take care of many things, from obtaining permits and checking your mortgage agreements to repairing and upgrading the property and getting insurance. In this article, we will discuss the six crucial things you need to follow through before renting your property to someone.
Checking Mortgage Agreement
The interest rates for mortgages on primary residences tend to be lower than those for investment properties. While some lenders allow you to use your primary residence as a rental, others don’t. Most lenders also generally have rules for how long you have to live in your property before you can rent it out. Standard agreements require one to two years.
It’s crucial that before you start looking for tenants, you confirm with your lender if you could rent out your property. If not, you might have to take out an investment property loan to refinance your property as a rental. You must check the Occupancy Clause in your mortgage agreement to see your restrictions. You must not violate any clauses in your contract, as it might cause the lender to charge you with mortgage fraud.
Protecting Yourself
Another crucial step before renting out your property is to protect yourself with landlord insurance, an umbrella insurance policy, and creating an LLC. Standard homeowners insurance only provides limited protection to rental properties, so getting a landlord’s insurance is essential.
Basic landlord insurance offers financial protection in case someone gets hurt on the property, if there is any damage, or if it becomes unlivable after a fire or storm. It also covers protection for outbuildings like sheds or pools, any property maintenance equipment you own, and the legal fees if you get sued after someone gets hurt on your property.
You can get further protection by purchasing an umbrella insurance policy. The umbrella policy will cover the remaining amount if the financial costs exceed your landlord’s insurance. If you own a business, you can protect your personal assets against liabilities by establishing a Limited Liability Corporation (LLC). It is a business structure that protects homeowners’ personal assets from being seized in case of a lawsuit.
Applying for Permits
Before you can rent out a residential property, note that most municipalities require you to have specific permit requirements in place. These requirements can differ from city to city, so make sure to verify with your local city hall whether you need a permit to use your property as a rental.
The purpose of a permit is to deem your property safe and habitable. An inspector from the local government would analyze your property for any health and safety hazards, heating and cooling, electricity, and number of exits from the property. The inspector will then provide you with a report of your property, including any changes or repairs needed. You will be granted the permit once they have been taken care of. Getting a permit also requires a small fee, so add it to your budget.
Preparing the Property
To make your property more marketable and increase its appeal, you will have to make the necessary repairs and upgrades so you find tenants quickly and demand higher rent.
Clean your property and paint it. Ensure old and worn-out things like broken tiles, leaky faucets, creaking hinges, doors, and cabinet knobs are repaired or replaced with new ones. Compare your property with similar ones in the area to see what the tenants expect in properties today, and then renovate it accordingly.
Make sure you mow and de-weed your lawn, prune overgrown tree branches and bushes, and remove tree stumps in odd areas to level the ground to attract tenants. Services like Master Dumper can help you haul furniture or dispose of the garbage while you clean and repair your property.
Set the Rent and Rules
The next step in renting out your property is determining the monthly rental amount. To do this, start by creating a comprehensive list of all the expenses associated with your home. These expenses include mortgage payments (if applicable), utilities, costs for repairs, renovations, and maintenance, property taxes, as well as any additional expenses incurred while the tenant occupies the property.
Once you have calculated the total expenses, consider the desired monthly profit you wish to achieve to make and set the rental rate accordingly.
Before finalizing the rental rate, it’s also essential that you do market research on well-known and reliable real estate sites to see the rental rates of properties similar to yours and compare your rate to other properties in the area to see how competitive it is. You can also consult a real estate agent to get professional advice.
Another essential step to take before listing your property is to set some rules. The rules you specify must be the same for all prospective tenants, as changing them on a case-to-case basis might put you in danger of a discrimination lawsuit. Some things you can consider are:
- How many people will occupy the house?
- Will pets be allowed or not?
- Who will be responsible for yard maintenance, you or the tenant?
- Will you pay for the garbage pickup service or the tenant?
Tenant Application Form
You must create a standard tenant application form to screen potential tenants and select the ones that meet your criteria. It should include their name, age, social security number, address, telephone number, employment, income details, and contact information for references. Ensure that this application form covers the questions you want answers to, but note that you can’t ask for details like religion or race according to federal discrimination laws. Make sure that you familiarize yourself with Fair Housing Laws that work to minimize discrimination against tenants.
Endnote
Converting a residential property to a rental is not an easy task, and there are many things you have to take care of. Ensure you have checked with your lender and looked at your mortgage agreement to see if you can rent out your property. You must also obtain permits that deem your property safe and habitable and protect yourself by getting landlord’s insurance, an umbrella insurance policy, and an LLC.
Take care of essential repairs and upgrades in your property and calculate all the expenses and the profit you want to make to set an appropriate rental rate. Create a tenant application form to screen potential tenants for the perfect one, and make sure you understand federal laws to avoid discrimination against tenants at all costs.
