How to turn your home into a rental property

Hand holding house keychain and banknotes

Step-by-step guide to turning your home into a rental—the legal way. 

There are a lot of great reasons to turn your home into a rental, like passive income and financial freedom. But, make sure you follow the proper steps to make sure you can cover your costs and are following the law. You may even want to consider refinancing your mortgage at a lower interest rate to help you earn more rental income or update the property. In this article, we’ll walk you through what you need to know to turn your home into a rental.

Key takeaways

  • Check with your mortgage lender before deciding to turn your home into a rental
  • Understand how becoming a landlord will affect your taxes
  • Make sure you look into legal requirements and necessary permits
  • Know your budget and potential returns
  • Understand fair housing practices
  • Determine when you should hire an attorney or consult with a real estate agent

Check with your mortgage lender and homeowner’s association

Before you start renting your home, you need to make sure your lender’s and your HOA’s policy even allow you to. A loan for a primary residence often has different terms than for a rental so you’ll need to ask your lender if it’s even possible. You will likely have to wait at least 12 months after closing before you can convert a primary residence into a rental. If you don’t check with your lender first, that could count as mortgage fraud.

If your home is part of an HOA, there might be extra restrictions or requirements that you have to follow. Some HOAs restrict rentals while others don’t have any restrictions so it’s essential to understand the HOA agreements beforehand.

Plan for changes to your taxes

Property taxes are complicated, but if your home is a rental when you sell, you may have to calculate taxable income differently. Income from a rental will also affect how your yearly property taxes are calculated.

Rental income counts as regular income, but you may be able to deduct some expenses—things like mortgage interest, repair costs, insurance, property taxes, and depreciation.

Find the right permits

Different cities, counties, and states have policies and permits when it comes to charging tenants rent. You can find most of these forms on your city government’s website. Often, there are fees associated with these permits that you’ll need to take into account when you’re deciding on your budget.

Check city laws and state laws to ensure you’re complying with all legal requirements. Also, make sure you understand fair housing laws.

Decide how much to charge and calculate proceeds

You want to charge enough rent to make a profit while not pricing potential renters out of your home. It takes research to find the sweet spot for rent. Here’s what to consider before you set your price:

Your local market

If the average rent in your area is $800 per month, you’re less likely to get tenants if you list your property at $1500 per month. A general rule is that you can charge about 1% of your home’s value for rent. But this isn’t true of all areas in the country.

The average value of a home in the US is around $375,000 so it’s not crazy to charge $3,700 for a four-bedroom home—or $925 per room. But what about places like Seattle or San Francisco where home values top $1 million for three bedrooms? Is it possible to charge over $3,000 for a room? Use rental apps like Zillow and Craigslist to see what rents are in your neighborhood.

Your costs

Once you become a landlord, you’re even more responsible for the home’s maintenance since you’re contractually obligated to provide a certain quality of living. In most areas, you’ll need to maintain working appliances, no matter the cost. Plus, since the home is still in your name, the taxes and mortgage is still yours to pay. Figure out your yearly costs and set a price to cover them, with a little wiggle room.

Returns on a rental don’t just depend on how much you charge for rent. Factor in things like your mortgage, insurance, maintenance, and upfront fees like permits, licenses, and registrations.

Property management

A lot of landlords decide to hand over the day-to-day management of the property to a manager or management company. But these services take a cut. What’s the cost and benefit of paying someone else to take care of your home while you rent it out? Make sure you can afford to hire a manger or choose to be a more hands-on landlord, yourself.

red and white sign board on the lawn grass
Make sure you factor in all your costs to your budget for turning your home into a rental

Decide how much to budget

Take into consideration the initial costs to convert your home into a rental like repairs, remodels, or updates. Factor in your upfront costs like fees and registrations as well. You should also account for any taxes that you may owe, ongoing repairs and maintenance, and landlord insurance.

You need landlord insurance if you are going to turn your home into a rental property. Landlord insurance covers expenses related to injuries that could happen on the property as well as damages to the actual property.

Understand the Fair Housing Act and determine tenant criteria

As a landlord, you can have criteria to screen prospective tenants, but you can’t violate the Fair Housing law that prohibits discrimination based on race, color, religion, sex, handicap, familial status, or national origin.

This sounds pretty cut and dry, but it can also relate to how you market the property, ensuring no group is purposefully or unknowingly discriminated against. State laws can also prohibit discrimination based on additional factors. It’s important to work with an attorney and real estate agent to make sure you know the law and you’re doing your due diligence and following Fair Housing practices.

Criteria for selecting a tenant can include:

  • Sufficient income to cover the rent each month
  • Pets
  • Criminal record (This one gets tricky because you can’t deny someone based on an arrest or a general criminal conviction. You can deny someone based on certain convictions that could signal a danger for other tenants or your property.)
  • Lack of rental history
  • Poor references from past landlords
  • Low credit score
  • Bankruptcy filing
  • Prior evictions

Hire an attorney and consult with a real estate agent

Depending on the complexities of your local laws and your understanding of Fair Housing laws, it may be helpful to hire a lawyer and consult a real estate agent to ensure you’re not violating anything that could come back to you in the way of fees or additional restrictions on your ability to rent.

What to do before turning your home into a rental

Do your homework before you jump into becoming a landlord. aMake sure you have the proper permits in place, you know what to charge, you’ve figured out your budget, and you understand fair housing practices when determining tenant criteria.

About the author: Stephanie Mickelson is a freelance writer based in Northwest Wisconsin who specializes in real estate, building materials, and design. When she’s not writing, she can be found juggling kids and coffee.

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