As someone who's been trying to sell their house for two years, I understand the desire to move on; however, it doesn't matter how many times you drop the asking price, you can't guarantee a quick sale. If the local housing market is saturated, your home may remain dormant for long periods of time. This isn't the best news, but there are ways to make the best out of this situation. If you're moving to a new house, there's no rule that says you have to sell your current home. If you don't mind becoming a landlord, turning your home into an income property is a win-win.
An income property is one way to earn an additional income, becoming a landlord might get you one step closer to your new home. But while finding a renter for your house may seem like a simple process, there is a right and a wrong way to turn your property into an income property.
Step #1: Market Research
Market research is a vital component for turning your home into an income property. This involves researching similar rental properties in your community and determining a competitive rental rate. Pricing your rental too high will scare away potential tenants and pricing the rental too low reduces your income.
- Conduct an online search for rental properties in your area. Look for homes with similar square footage, bedrooms and bathrooms. This is how you assess the average rental rate for your area. For example, if similar properties rent between $1,200 and $1,300, consider setting your rate within this range to attract attention.
- Determine the least amount you need for the rental. Ideally, the rental income should be enough to cover your mortgage payment. This way, you don't have to pay a percentage of the mortgage from your own pocket each month. If possible, set your rental rate 20 to 25 percent higher than your mortgage. This generates income for you, and allows a cash cushion for issues that arise with the property, such as replacing a broken appliance.
- Refinance your mortgage loan, if necessary. If your current mortgage is higher than the average rental rate in your area, refinancing your mortgage loan can result in a lower rate and a lower payment, at which time you can set a fair price for your rental. When refinancing, mention to your lender that the home will become a rental property. Some banks have specific loan programs for rental and investment properties.
Step #2: Notify Your Insurance Company
If you're turning your home into an income property, notify your insurance company of this change. Regular homeowner's insurance is not always adequate for income properties. Insurance companies recommend landlord insurance policies which offer additional coverage. Like a regular policy, landlord policies cover damage from fire, storms, theft and other issues that arise within the home. However, this type of insurance also protects in the event that the home become uninhabitable and the tenant moves out. If you can't rent out the home because you're rebuilding after a fire or other damage, you'll have to cover the mortgage yourself, which can be a huge burden. Landlord policies can provide rental income for up to 12 months.
Step #3: Get a Landlord Permit
Contact your city's Housing and Redevelopment Department and inquire about landlord permits. Some cities require permits before turning a home into an income property. Permit fees vary, but average between $50 and $60.
Step #4: Complete Repairs and Upgrades
Tenants are partial to homes that are in good condition. To make your income property desirable, consider updating the home. Affordable improvements such as painting the walls, installing new carpet and updating appliances can attract attention and help you find a tenant. If you have the cash-flow, consider more expensive updates, such as renovating the kitchen or installing new windows. Schedule a home inspection to determine needed repairs.
Step #5: Locate Tenants
The sooner you find tenants for your house, the sooner you can generate rental income.
- Advertise. It isn't enough to put a sign in your front yard. Utilize the Internet and place ads on real estate websites and other local online marketplaces, such as Craigslist or Zillow. Include a photo of the property, plus a detailed description including the rental price, contact information, square footage, number of bedrooms and bathrooms, and other features that might appeal to renters.
- Check credit. Run a credit check on those interested in the property. It's not fair to require every tenant to have perfect credit, especially since many rent because they're unable to buy due to credit issues. However, you should confirm that the person doesn't have any recent foreclosures or evictions on their file. And if they do, respectfully inquire about the reason for these. In the end, you need a tenant with a good rental history, as these people are less likely to terminate the lease early.
- Verify income. Ask potential tenants to provide a copy of their recent paycheck stub, or their employer contact information. Use this information to confirm the tenant's income.
- Require a security deposit. On average, security deposits are the equivalent of one month's rent. If the tenant walks away from the lease early, or damages your property, you can use the security deposit to cover the rent or repair the home.
Step #6: Keep Income Records
Revenue generated from an income property is subject to federal and state taxes. Therefore, if you earn $300 a month in rental income, you'll need to report $3,600 on your tax return. However, as a landlord you can deduct expenses related to the income property and reduce your taxable income. Eligible write-offs include mortgage interest and operating costs (insurance, maintenance, repairs, utilities). Speak with an accountant for additional tax information.
All things considered, an income property is an excellent way to earn added income; for a structured and methodical approach; set a fair price, have the right type of insurance and find the right tenants.
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