Owning a rental property can be a great way to earn additional income. However, it takes more than just putting a For Rent sign on the front lawn to be successful. Becoming a landlord is a big decision you ought to make after careful consideration. Are you comfortable with someone living in your home who may not treat it with the same respect you would? Do you have the financial wherewithal to cover unexpected repair costs or damage that exceeds the tenant’s deposit? If your rental home sits unoccupied for a bit, could you cover those mortgage costs as well as your own? If you answered these questions with an enthusiastic YES, then it’s time to start preparing your property to rent. As you move through this process, here are five things to consider:
Check your Mortgage
To receive the best mortgage rates, lenders require homeowners to make their property their primary place of residence. This agreement is known as an Occupancy Clause. These clauses differ from lender to lender, but in many instances, converting your home into a rental/investment property could violate the terms of your occupancy clause. If your lender discovers you’ve breached your occupancy clause, they could call your mortgage — making the balance due immediately — or prosecute you for mortgage fraud. These are certainly two outcomes you want to avoid.
With this in mind, it may be necessary to refinance your mortgage before taking on a tenant. A new non-owner-occupied lending agreement typically requires a 20% down payment or a sufficient amount of home equity — which could affect your profitability. In some cases, your existing occupancy clause allows you to become a non-owner-occupier after a specific time. Either way, it’s best to understand your lending position before renting out your home.
Repair Your Home
Before marketing your home, you should also address any outstanding repair or maintenance issues. If a toilet is running or an outlet’s not working, your future tenant is sure to notice and request a repair. So you may as well address these issues upfront. You can begin this process by hiring a home inspector who will walk through a checklist of your home’s important components and provide a report on their findings.
Once you have a list of needed repairs in place, you can collect estimates and hire contractors to fix them. From a marketing perspective, a rental home must appear to be well maintained. This attention to detail provides added peace-of-mind for potential renters, who want a home they rent with confidence.
Upgrade Your Amenities
As you prepare your home for rent, you should also take stock of its amenities. Many renters prefer living in homes with newer appliances and up-to-date features. A home’s amenities also factor in when setting your rental rate. You’re more likely to get top-dollar if your home is upgraded to meet current trends. If your home is out-of-date, it might be wise to consider making these upgrades to get the maximum return on your investment.
Protect Yourself and Your Rental Home
Homeowners are required to carry insurance policies as part of their rental agreement, but these homeowners policies won’t protect you from tenant lawsuits. If your renter falls down the stairs or slips on a patch of ice on the driveway, they could attempt to sue the homeowner for damages. As a property owner, you can take a few different routes to put additional protection in place.
The first step is to purchase landlord insurance. These policies typically cover both property damage and personal liability, which protects your physical property and protects your assets. Some landlords take the additional step of obtaining coverage through an umbrella policy. These supplemental policies provide extra coverage — typically up to 1 million dollars — to cover damages that exceed coverage on your other plans. A qualified insurance agent can help you obtain sufficient coverage to protect your assets.
Other property-owners go one step further and create a limited liability company, also known as an LLC, which works as a shield against personal assets. Under this scenario, a property owner creates a business structure that owns the investment property. That way, a potential plaintiff could only pursue damages against the business assets, which is the home itself. Setting up an LLC comes with up-front attorney costs and some additional reporting and tax expenses, but it could be an excellent solution for many property owners.
Decide Whether to Hire a Property Manager
One of the most significant decisions new landlords must make is whether to hire a property management company. Many property owners are tempted to forego property managers due to their perceived expense. In these situations, owners must handle all the details themselves. From finding new renters to managing the tenant application and screening process to collecting rent, the owners do it all. They also must draft their lease agreements, handle all repair requests, and collect rent — especially when it’s late. Owner-managers must also navigate the eviction process should it ever become necessary. These tasks all come with additional financial and time commitments.
Owners who decide to hire property managers can rest easy knowing these tasks are all included in the management fee. A team of rental experts will market your property, ensure a high-quality tenant occupies it, and handle all the associated paperwork. Additionally, a property management company will process repair requests and address the legal requirements that come with owning a rental property. In many cases, the additional cost of hiring a rental company is quickly earned back through these other services.
A Smart Investment
If you do decide to convert your home into a rental property, you’re on your way to creating an investment that will pay dividends for years on end. As with every venture, however, it’s prudent to perform your due diligence before you take the plunge. Moreover, you should take every necessary step to protect your interests and maximize your return.