7 Steps to Turn Your Home into a Rental

You may have heard of how profitable it is to own a rental property. Well, it’s true: investing in rental properties is an incredible wealth-building strategy to generate cash flow every month!

But where do you get started? How will you get yourself a rental property?

Generally, you can do one of two things: purchase a new property to rent out or turn your existing property into a rental. The latter option may be your own home, especially if:

• - You’re transferring to a different location for a couple of months/years.
• - You’re buying a second property.
• - You owe more than your house is worth and need extra income to cover the mortgage.
• - You want to sell your home, but market conditions won’t allow you to cash in your equity and make a profit.
• - You have an annex or apartment within your home that you want to turn into a separate rented unit.

So, if you’re planning to turn your home into a rental, this article will tell you exactly what to do.

1. Consider Your Mortgage Situation

Do you have a mortgage on your home? If so, you might need to live in the house for the required timeframe of your mortgage (usually a year) before converting it into a rental.

Additionally, if you’re moving out and buying another home to live in, check if you can qualify for another mortgage before renting out your original house. In some cases, the bank can consider the rental income you’ll generate for your new loan as part of your total income, which can help you get a higher loan amount.

Either way, check the contract and rules of your loan before turning your primary residence into a rental.

You may want to convert the property into a rental right away, but waiting can actually save you some money. This is because loans for primary residences tend to have a smaller down payment and lower interest rate than those for investment properties. Enjoy those lower rates while you can!

2. Check with the Local Homeowners Association

If your neighborhood is governed by a homeowners association (HOA), double-check their rules on renting your house out. Since you agreed to follow their rules when you purchased your home, it’s crucial to check their rules to avoid getting hit with any fines.

Some HOAs will freely allow you to turn your home into a rental, but some will limit the number of rentals in the neighborhood. For example, if they set the maximum at 10% rentals and they’ve already reached the limit, they may place you in the waiting list until a slot opens up.

3. Learn About Tax Changes

Will your mileage rates change? Michigan has homestead and non-homestead mileage rates.

Once you convert your home into a rental, the taxes on the property will change. Your rental income will be taxable, but you can also qualify for the following tax deductions on rental property expenses:

• - Property taxes
• - Mortgage interest
• - Landlord insurance policy
• - Association fees (HOA)
• - Utilities (if you pay for them)
• - Repairs, renovations, and maintenance

If you’re not familiar with these tax changes, reach out to your local municipality, tax advisor, or accountant to discuss the homestead exemption you may have on your house—the legal provision that protects a portion of your property value from taxes. Homestead exemption only applies to primary residences, so you’d need to know the effect that converting the home into a rental will have on your tax status.

4. Change Your Homeowners Insurance Policy

Since your property won’t be a primary home anymore, you’d have to change your insurance from a homeowner’s to a landlord’s. Not only do their policies vary widely, but the insurer can deny your claim if you file it with your primary insurance after you convert it into a rental.

Landlord insurance does the following things:

• - Protects you from property damages, including those caused by natural disasters (e.g., a tree falling on the house during a thunderstorm)
• - Covers legal costs and medical bills if you’re liable for tenant injuries

If you’re denied a claim, you’ll have to pay for these things out-of-pocket. That’s going to be quite expensive in most situations, so better reach out to your insurance company as soon as you decide to convert your home into a rental.

5. Get Your Property Ready

Now that all the legal work is ready, it’s time to brush up and upgrade your home. Your goals are to attract renters, impress them with your rental, and set a competitive price in regard to the rest of the local rental market.

It’s not necessary to do a complete home makeover, but you should do the necessary repairs to bring the home up to rental standards. Then, plan out other non-essential upgrades you can invest in overtime.

Here are a few examples to consider:

• - Make any necessary repairs so the home is in working order. Check the appliances, electrical system, HVAC system, plumbing, and overall structure of the home. Reach out to your local city hall as well to know if there are any safety permits you need to secure to be compliant.
• - Upgrade your curb appeal by taking care of your lawn, adding more color to the front door, setting up more lights, or replacing your old mailbox with a new one.
• - Do low-cost upgrades such as fresh coats of paint, stainless steel appliances, or a new water heater. Anything from replacing the rusty mirrors in the bathroom to installing a state-of-the-art food processor can go a long way.
• - Eventually invest in summer-friendly amenities, like better AC systems or even a swimming pool. If your home is in a warm climate, these features allow you to charge higher rent.
• - Invest in winter-friendly details, like smart thermostat systems and thermal insulating jackets for water pipes. If winter gets pretty rough in your area, these features will attract more renters.

Check if your local city requires registration and inspection of rental dwellings.

6. Be a DIY Landlord or Hire a Property Management Company

Decide if you want to be your own landlord, or have a property management company do it on your behalf. Hiring third-party management isn’t the cheapest option, but it is the easiest because they will do all of these things for you:

• - Marketing and advertising to attract new tenants
• - Collecting, interviewing and screening rental applications
• - Finalizing and signing legal rental leases
• - Collecting monthly rent
• - Managing your finances
• - Scheduling, conducting and documenting maintenance repairs
• - Issuing legal notices whenever needed
• - Enforcing rental policies and lease agreements
• - Understanding and navigating landlord-tenant laws
• - Filing and carrying out evictions

Without a property management company, you’ll have to do all these landlording responsibilities yourself. If you don’t have the time, knowledge, or willingness to do so, it’s easier to outsource the service to a professional who does.

Nevertheless, you should have a general understanding of the laws. Learn about fair housing laws and landlord-tenant laws to avoid discriminating against potential tenants or violating any of their rights. Doing so will minimize the chance of you running into costly legal headaches down the road.

Conclusion

Before you take the plunge and turn your home into a rental, take enough time to consider your mortgage situation, check with the local homeowners association, learn about tax changes, change your insurance, get your property ready, and be familiar with landlording responsibilities.

Doing these steps will save you from novice landlording mistakes, and help you get started on generating strong cash flow for a lucrative real estate investment!

Any other tips on turning a primary residence into a rental property?