Turning your primary residence into a rental property is a significant step toward increasing your income and building long-term wealth. This is how many people get their first experience as real estate investors and owning rental property.
However, this transition requires more than moving out and finding tenants. It's essential to have a plan and understand the legalities and financial implications to make the process seamless and successful.
This comprehensive guide will help you navigate the process of changing your previous home into a rental. From preparing your property and setting the right rent to finding the ideal tenants, getting landlord insurance, and everything in between, you’ll find all the essential information you need to enjoy the benefits of owning rental real estate.
It's crucial to consider the legal aspects of turning your personal residence into a rental property. To ensure you comply with local, state, and federal laws, here are some legalities to bear in mind:
Remember to adhere to fair housing laws prohibiting discrimination against tenants based on race, religion, sex, national origin, disability, or family status. Ensure your rental property also meets the required accessibility standards for citizens with disabilities.
As you prepare your current residence to become a rental property, safety and maintenance should be your top priorities.
Minor issues you decided to live with as a homeowner, such as a torn carpet or faulty electrical outlet, may not be acceptable to a renter. You want to ensure tenants can move into a livable, attractive, and safe home.
Before listing the property, conduct a thorough inspection and make any necessary repairs or replacements. Check electrical and plumbing systems, ensure all appliances are in working condition, and replace any broken windows, doors, locks, or smoke detectors.
You may also need to consider additional safety measures specific to a rental property, such as installing carbon monoxide detectors, fire-rated doors, or outside lighting.
How to price your rental property is one of the most important decisions you'll make as a first-time landlord. Determine a competitive rate by researching the rent for similar properties (in terms of square footage, number of beds + bath, and amenities) in your area.
Online resources like Rentometer or the Zillow Rent Estimate Calculator can help you compare prices based on amenities, location, or other features that affect your property’s fair market value rent.
Additionally, take the time to evaluate the potential maintenance costs of renting the property and factor this into your final rental rate. While you want to set your rent high enough to cover expenses and maximize profits, it's also crucial to set it at a price that will attract good tenants.
With some research and evaluation, you can arrive at a fair price point for you and your future tenants.
When you turn your current home into a rental property, your homeowners insurance will no longer provide adequate coverage. Instead, you will need landlord insurance designed specifically for rental properties.
When you obtain landlord insurance, your coverage typically includes property damage, loss of rental income, and any liability issues that may arise on the property.
One way to convert your homeowners insurance to landlord insurance is to contact your insurance provider and inform them of the change in use of your property. Your insurer will then adjust your coverage to reflect the new status of your property.
However, you will also want to consider other landlord insurance policies, which may save you money or provide a more specialized approach to protecting your rental. For example, Obie can offer most landlords a customized rate in just a few minutes using our quick quote tool.
Additional coverage to consider includes flood insurance, earthquake insurance, or umbrella insurance, which protects your property beyond the limits of standard policies. Search the Obie risk map to learn about the natural risks in your area and be prepared with the right insurance for your rental property.
Note that landlord insurance covers only the physical structure of the property and any landlord-owned equipment or furniture that are part of it. It does not cover the tenant's personal property or liability issues arising from their actions.
For this reason, landlords may wish to consider additional coverage like personal injury liability, wrongful eviction, or discrimination liability insurance.
You can advertise your property in several ways online and in person to get the word out and attract potential tenants quickly. Here are the most common ways to advertise your property:
Online advertising is a great way to reach a broader audience quickly and easily. Some of the best free rental listing websites include Zillow, Trulia, HotPads, and Craigslist.
Be sure to include as much information as possible about your property, such as size, location, amenities, rental rate, a detailed description, and photos showing the property's key features.
Hiring a local photographer to take professional photos is also a smart move. Most people will take photos using their phone, so having professional photos can help your listing stand out.
Even in this digital age, traditional in-person advertising can be effective, particularly if you're trying to reach a local audience.
Place an eye-catching "For Rent" sign on your property with a clear message that tells passersby what's available and how to contact you. Additionally, you can post flyers in your neighborhood, on bulletin boards, or at nearby community centers, colleges, or universities.
Doing your due diligence on prospective tenants via background checks, credit checks, and reference checks helps you protect your property and finances in the long run. These are the steps to follow when you start receiving inquiries and applications for your rental property:
Finally, keep accurate documentation on every step of the screening process throughout the tenant selection process. This helps ensure fairness in your rental decisions and creates a paper trail if there are any disputes later on.
Once you’ve found a good tenant, get a lease agreement in place for them to sign. You can Google a sample template, or work with an attorney to create your own ironclad template.
If you live far away from your rental property, don't have experience as a landlord, or have a busy schedule that makes it challenging to be a DIY landlord, you may want to hire a professional property manager.
The general services provided by property management companies include setting the rent, screening tenants, leasing out the property, collecting rent, property maintenance, eviction proceedings, and legal compliance.
Some companies may also provide monthly financial statements, routine inspections, and market the property when vacant.
While hiring a property manager gives you the advantage of expertise and experience, there are some drawbacks and costs to consider. For example, if you hire a manager, you will not have complete control over all aspects of your rental. You will need to work collaboratively to ensure your goals are aligned.
Property managers also charge fees for their services, which can reduce your rental income. That's why you must factor in the cost of property management when determining your rent price.
A common rule of thumb is to allocate 8%–12% of the monthly rent for property management fees. If your property rents out for $2,000 a month, you should expect to pay around $200 in management fees.
Scheduling repairs and routine inspections is crucial to catch and address any maintenance issues before they turn into costly repairs. Inspect the HVAC system before summer and winter begin, replace filters regularly, and perform any necessary repairs at the first sign of trouble.
Other routine inspections should include checking for plumbing leaks, inspecting appliances, and ensuring that smoke and carbon monoxide detectors are working correctly.
At the very least, conduct routine inspections every 12 months (every 3-6 months is even better). Notify your tenants in writing at least 48 hours before the inspection date. Offer tenants various dates to choose from, if possible. Providing them ample notice shows you respect their privacy and allows them to prepare for the inspection.
Promptly repairing and maintaining your rental property also benefits you and your tenants. It helps protect your investment and ensures your tenants stay comfortable and happy, which can lead to longer tenancies.
Additionally, responding to tenant requests quickly builds a positive relationship and increases the likelihood of lease renewals or word-of-mouth referrals. You can use online property management software to make it easy for tenants to submit maintenance requests 24/7.
Tax laws and deductions for rental properties provide significant benefits to landlords. You can deduct expenses such as mortgage interest, property taxes, insurance, repairs, maintenance, and property management fees.
The following IRS publications provide additional information on taxpayer reporting responsibilities and tax breaks to rental property owners:
The IRS requires landlords to report all rental income and keep accurate records of all expenses. Choosing between rental property accounting software like QuickBooks or an accountant for tax purposes depends on your comfort with bookkeeping tasks and tax laws.
A good software program can help you keep track of your income-producing property and its expenses and create financial statements. However, the software can be time-consuming to set up, integrate with your bank account, and categorize transactions. On the flip side, hiring an accountant offers professional guidance but comes at a higher cost.
Transitioning your primary residence into a rental property requires careful planning and execution. By following the steps outlined in this guide, you’ll set yourself up to be a successful landlord.
Still wondering if renting out your home is a good idea? Check out our article comparing selling vs. renting your home.
Ready to get started? Get an insurance quote from Obie to make sure your property is protected.