Turning your home into a rental property could be a safe way to invest your money, but does it make sense for you? In this article, we address the pros and cons of renting your home and explain what you’d have to do to get the home ready for rent.
To anyone on the outside looking in, your house is just a house. You, however, know it’s more than that – it’s also a home. In fact, your home is very likely the largest purchase you’ve made in your life, and it’s a place where you’ve created many wonderful memories. But there’s another thing you could do with it if you so choose: turn your home into a rental property. Depending on your circumstances, you could go from homeowner to investment property owner in a matter of weeks.
When turning your home into a rental property is a good idea.
Here are a few examples when it makes sense to rent out your home:
Say you find yourself with a second home through an inheritance. If you prefer to stay in your current home but don’t want to sell your new property, turning it into a rental property could be an option. The money you collect in rent payments could pay the mortgage (if it has one) and be an additional source of income.
Another possible scenario for turning your home into a rental property is during a weak housing market. During these down times, home buying tends to decrease and renting increases. If you had to move out of the area, in a job transfer for example, but your home won’t sell, you could consider rent it out instead. The rent payments could cover the mortgage and hold you over until the market recovers for sellers.
Renting out your home doesn’t have to be a result of specific circumstance either. If you’re in a good financial situation, turning your home into a rental property may simply be a good financial decision. If you bought your home with a low interest loan, then the mortgage payment may be easily covered by a renter.
When turning your home into a rental property is a bad idea.
The reasons why you should not do something are sometimes easier to think of than the reasons why you should do something. When it comes to turning your home into a rental property, the reasons not to do it can be identified by answering 3 quick questions:
1. Does it make good financial sense for you to have a rental property?
If it costs you more money and time than you can make from the investment, then turning your home into a rental property doesn’t make sense. To figure this out, you’ll have to crunch some numbers. How much do you spend on your home right now between the mortgage, property taxes, homeowners insurance, and HOA fees (if you have one)? If you take that total, combine it with the additional costs that will come with renting your home (vacancy, property management and repairs), and find that it’s more than you’d make each month as an investor, you’d be better served finding another way to invest in real estate.
2. Where is the location of the rental property?
If the property is more than 30 miles from your new home, it’s probably too far for you to act as the landlord and property manager. At that distance, you’re probably too far away to make regular visits to check on the house or the tenants. If there was a busted water heater or a late-night emergency call from the tenant, you would have difficulty getting to the property quickly enough to address the issue.
Also, depending on where the home is located (the market and the neighborhood), it may or may not be a good place to own a rental property. The ideal locations for rental properties exhibit strong job and population growth while also maintaining reasonable home values that provide a good return on your investment.
3. Do you have the time to own a rental property?
If you’re working a full-time job but you plan to act as the landlord and property manager of the property, you may not have enough time. On the surface, owning a rental property appears to be a passive income investment, but there’s plenty of work that needs to be done after a tenant signs the lease. Unless you choose to hire a property management company, it’ll be up to you to take on the day-to-day work that comes with being a landlord – like repairs, collecting rent payments, maintaining the yard, and communicating with the tenants.
I’m going to convert my primary residence to rental property! Now what?
When you decide to make your home a rental, now the work begins. There are a number of i’s to dot and t’s to cross first.
First, you’ll need to take out additional insurance on your new rental home, as your current homeowner’s policy is not enough. When other people live in a property you own, you become somewhat responsible for their safety. An insurance policy will help protect you in the event a tenant gets hurt at your house.
You may also need a permit to turn your home into a rental property. The specifics will vary based on where you live, but the permit is a matter of safety. A local government official will look at your home to make sure the home is up to code.
Besides paperwork, there’s also the important step of preparing the home for tenants. Before tenants are found and moved in, make any repairs or upgrades necessary to attract potential tenants – but don’t go overboard. A rental home should be more durable and functional than luxurious and lavish. The home should have good curb appeal, since renters may be looking at other homes to rent, but it should be able to withstand frequent use.
As you work through the steps of preparing the home for tenants, you’ll need to determine an acceptable rental rate for the home. If possible, find comps for similar sized home in the same neighborhood. Consider the annual expenses that will be a part of the rental property – insurance, maintenance, taxes, etc. A good investment calculator can help you analyze the return you might expect from your desired rental rate.
Now it’s time to find some tenants! Consider important criteria like income level, credit score, and past rental history when evaluating potential tenants. But remember, it’s illegal to discriminate based on things like sex or race. Have an attorney assist you, if necessary, to make sure you don’t put yourself at risk legally.
You can also work with a property management group to help with the rental process and management of your property.
So, is it a good idea?
Is turning your home into a rental property a good idea? Well, it really comes down to your circumstances and your investment goals. Just remember that being a landlord is more than just collecting checks on the first of every month. You may be better off working with a turnkey real estate company to find an ideal rental property.
If you’re considering getting into real estate investing, download our free guide of The 4 Most Important Factors to Consider When Investing.
This article is for informational purposes only. For information specific to your investment situation, consult with a qualified tax adviser, CPA, financial planner or investment manager.