How to convert your home into a rental | Mortgage Rates, Mortgage News and Strategy : The Mortgage Reports

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Rental real estate is a hot investment in much of the country. It may make sense, then, for you to convert your home into a rental. Here’s what you’ll need to consider:

You may want to fix a few quirks to make the home safer for renters
Your insurance needs will change; compare the cost of landlord insurance now
Decide if you want to manage the property yourself, or bring in a pro

In addition, if a refinance is in your future, you may want to take care of that now. Because it’s more difficult and expensive to refinance rental property than a primary home.

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Should you convert your home into a rental property?

Before you get into the practicalities of renting out your home, you need to address a more fundamental issue. Namely, is this a good move for you to make?

There are some serious and pretty obvious upsides. To start with, you could make some money. And you also get to keep a home that should ultimately add to your net worth.

But there are plenty of potential downsides, too, mostly in the shape of risks. Suppose, for example:

You get terrible tenants who won’t pay and who trash the place
The national or local property market (rental/sale) crashes
You’re faced with major, costly repairs and can’t access some refinancing programs that are reserved for owner occupiers
Work or family changes mean you must move away, necessitating your employing expensive professionals to manage the rental unit
The government changes the tax code in the future and that removes some of the current, highly favorable breaks

None of these may derail your plans to become a landlord. But they’re risks you need to recognize.

Making your home appropriate for renters

To convert your home into a rental may involve physical as well as legal changes. Spend some time studying your local rental market to work out what those physical ones should be.

Are you going to attract high-end professionals who will pay premium rents? If so, you may need upgrades to appeal to them. Just make sure you don’t spend so much that it takes years to get a return on your investment.

Or you might be able to attract only tenants who are less likely to respect your former home. You’ll then need to protect it from them. For instance, by covering precious hardwood floors with cheap but durable carpeting. Also, consider taking expensive appliances with you, replacing them with more utilitarian ones.

Safety first

As a landlord, you could be liable for accidents in your rental home due (in whole or in part) to the condition of the property. Indeed, you’re probably going to need umbrella insurance, and, in some states, it could be worth forming a limited liability corporation (LLC) as a shield.

But there’s a whole list of things you can do that can help stop claims arising in the first place, including:

Getting a professional to run safety checks on all electrical circuits
Having the HVAC/furnace serviced and checked annually
Installing smoke and (if gas is used) carbon monoxide detectors
Sorting out any trip hazards in the home and yard
Fencing any yard hazards, such as drops over high retaining walls
Making sure roof shingles are securely fixed

No landlord can prevent every accident. However, taking reasonable steps to make (and keep) the home as safe as possible is both a good investment and something you’ll want to do as a decent human being. In addition, screen potential renters to see how many lawsuits they have filed. Some make a career of it.

Insurance when you convert your home into a rental

Not all landlords go to the expense of an umbrella insurance policy. They prefer to shoulder the risk themselves.

However, if you don’t convert your homeowner’s policy to a landlord’s policy, and tenant-related claims arise, there’s a good chance your insurer will decline any claims you make.

Landlord coverage

You’ve probably guessed that landlord insurance is more expensive than standard homeowner’s insurance. Indeed, the Insurance Information Institute reckons a specialist policy costs on average about 25 percent more. But at least you’ll be able to make claims.

And those policies typically include coverage that you might not expect and will be grateful to have. For example, lost rent while the home is being repaired after a covered incident.

And you should normally be able to claim for damage to any of your possessions you leave in the home, including appliances and yard tools (lawn mowers, leaf blowers and so on). Your tenants will need to buy their own insurance for their possessions.

Many landlords actually require their tenants to carry renters insurance to avoid fighting over who is responsible for theft or damage of tenant personal property.

Will you be a do-it-yourself landlord?

You probably have a rough idea of how much time you’ll have to spend on being a landlord. Now double that. And double it again.

Seriously, handling every aspect of being a landlord is incredibly time-consuming. You have to find tenants, screen them, handle emergencies in the middle of the night, carry out routine maintenance, keep up with paperwork and collect rents.

And those are the tasks if you’re lucky with your tenants. If you’re unlucky, you could be fielding complaints from neighbors, enforcing rules for decent behavior, worrying over criminal liability for your tenant’s illegal activities in the home, chasing late rents and ultimately managing an eviction.

Getting professional help

Of course, you can delegate to professionals as many or as few of those tasks as you want. If you’re moving far away, you may have little choice but to outsource them all.

That’s fine but it will come at a considerable financial cost. You need to take those costs into account when you calculate how financially viable it is to convert your home into a rental.

Refinance before it’s too late

It’s much more difficult to refinance a rental property than the one you own and occupy. So, if you need to refinance, you want to do so while you’re still living in the home that is destined to become a rental unit.

Your decision to convert your home into a rental may be the smartest move you’ll make this decade. Many landlords remain delighted they made that choice.

But it’s vital you make the move with your eyes wide one: that you recognize the downsides and risks as well as the advantages and rewards. Only push the button once you’re satisfied you have the whole picture.

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