5 Important Details to Consider When Renting Out Your Home
The number of families who choose to live in rental properties is higher than it’s been since 1965, based on data from the Pew Research Center. Among those at the forefront of this renewed trend are millennials—in fact, Pew estimates that 65 percent of adults younger than 35 years old rent their homes.
As a homeowner, the current rental market provides you with an opportunity to create an additional stream of income, turning a current residence into a rental property. If you’re thinking of moving, this could be a better option than selling your home.
As with anything, there are many factors to consider. Before jumping into your role as landlord, take every detail into account to be sure it’s the right option for you.
Rental Value of Your Home
Renting out a home can yield a profitable return-on-investment; still, there are overhead costs associated with becoming a landlord. Some of these basic expenses include marketing, capital gains taxes, repairs and maintenance, legal fees, insurance and property management. To determine whether you’ll make enough money to warrant the time and costs, start with this calculator from Sparkvisor.
As you enter details like the cost of your home, the interest rate, and estimated rent, you’ll get details like an estimated monthly cash flow, annual yield, etc. Use this as a starting to determine if the extra income and investment of using your home as a rental property would be as lucrative as you thought.
Changes in the Rental Market
Another important pre-rental step is to ensure your home’s market is ripe for renting. With constant fluctuations within the regional market, it’s important to consider trends and whether now is a good time to jump in. Luckily, you can find this data for your specific region, broken down based on characteristics such as one- versus two-bedrooms, year-over-year versus month-over-month, and urban versus suburban locations.
For example, you can find February 2019 data in this rental report for Athens, Georgia and the nearby vicinities. You’ll see historic rental data and pricing trends compared to other cities around the country, allowing you to make an informed choice about the long-term value of your home as a rental property.
Tenant Screening Best Practices
If you choose the manage the property yourself, as opposed to working with a property management company, you’ll need to screen applications yourself. As such, knowing how to properly vet a potential tenant is crucial.
“The problem is that any prospective tenant can act like the best tenant in the world during the initial walk-through. But if you want to make sure you’re getting the best renter, it’s important to screen every prospective tenant thoroughly before allowing them to sign a lease,” explains Angela Colley, MoneyCrashers contributor. If you’re not sure about screening best practices, Colley suggests using the following steps:
- Request an application
- Run a credit check
- Run a background check
- Contact previous landlords
- Contact previous/current employer
To protect yourself from liability, you need the right kind of insurance. Depending on your rental plans, there are a few options to consider: short-term, long-term and commercial. Figure out which one you need before inviting in any tenants.
- Short-term: According to III (Insurance Information Institute), short-term coverage is needed if you’re just renting your home for a few weekends. If you plan to do this regularly, you will need business insurance. Find more on that below.
- Long-term: You’ll need a landlord and dwelling policy if you plan to rent your home for more than six months, suggests III. This includes liability and personal property coverage, along with the loss of rental income, should you not be able to rent the property.
- Commercial/Business: If you plan to rent out your primary residence for short periods of time regularly, you may need business insurance. This is also the case if you own a duplex or complex with more than one apartment, and plan to rent each apartment, consider commercial property insurance. “As the owner of an apartment building, you are responsible for several families and their belongings. This responsibility is in addition to your general business responsibilities,” according to USA Business Insurance’s commercial property rent guide. This coverage could include general liability, BOP (business owner’s policy), business auto, workers comp and surety bond, depending on what you need.
As you consider renting your home, it’s important to get advice from professionals like a CPA, tax lawyer and real estate lawyer. All of these people can provide an important perspective about how to prepare financially and legally for being a landlord. This is especially important if you’re managing the property yourself:
“If you decide to manage your property, you’ll probably want to consult a real estate lawyer to get a solid lease and learn the rights of tenants. You may want an accountant, and you’ll need to know some good plumbers, electricians and other tradespeople,” suggest experts at Interest.com.
Surround yourself with people who will ensure you’re making the best decisions for your property and yourself.
Details to Consider When Renting Your Home
Renting can be a lucrative venture, but it’s not something to jump into without research and preparation. Use these tips to ensure you’re ready and prepared to rent to a tenant and then get ready to take advantage of that second income stream.