Converting Your Home Into A Rental Property
When its time to move to a new home, your first thought in the process may be to sell your current house. This is usually the normal route. However, there is a possibility that you will be unable to sell, you may not be able to get what you need out of the house or you may not be able to sell as fast as you would like.
The second option is to hold on to your house and turn it into a rental property. Owning a rental property comes with many advantages, but, like with all good things, there are things to keep in mind and to consider before converting your home into a rental. It will take a lot of hard work and some prep time, but if done correctly, it could be a very wise decision! The good news is that aside from selling your current home, you can choose to rent it out.
In this article, our team here at Pine State Property Management has put our brains together and come up with an outline on how to convert your Maine home into a rental property and the advantages of doing so!
Benefits of a Having a Rental Property
• Passive Income – We use the term passive loosely. Will you have to work for it? Absolutely. Will you have to work 40+ hours/week for it? Maybe….but hopefully not. Most of the time, if done correctly, converting your home into a rental property will produce additional income.
• Market Appreciation – Real estate investors invest in real estate because the value tends to appreciate over time. In the investment world, real estate investment appreciation is usually thought of as more stable, even over stock investment. Selling your property now may not be the best move if you’re looking for gain as you might not be able to sell it at the best possible price. On the flip side, if you decide to hang on to the property and convert it into a rental property, you’ll likely be able to get a higher return on it in the future.
• Tax Benefits – Owning rental property brings with it some tax advantages. You can deduct the expenses from your taxes. These expenses include utilities, insurance, property taxes, repairs, maintenance, and renovations as well as the interest on the mortgage. Always talk to your accountant about tax benefits to ensure you are doing things accurately, but many people choose to own investment property for the tax benefits.
Now that we have covered the benefits, if you’re still thinking about converting your home into a rental property, read on for the next steps:
1. Does your home have a mortgage?
In most instances, it is required that you live in your home for at least 12 months if you have a mortgage on it. The reason for this is that when you buy a home as a primary residence, you get a better interest rate, you don’t have to make as big of a down payment etc. When agreeing to these benefits, you are also attesting that this is your primary residence. If you rent it out to someone else, it is no longer your primary residence and the lender can call the loan due. This means that they will tell you that any balance on the mortgage is immediately due. You’re left either paying the balance or they can foreclose. Additionally, and scarier is that it’s a federal crime called mortgage fraud.
For this reason, if you have a mortgage on your home that you wish to convert to a rental, talk to your lender to make sure you understand what you can and cannot do. Generally, if you have lived in the home for more than a year, you can convert it to a rental.
2. Do you qualify for 2 mortgages?
If you’re buying a new house, you will usually need to apply for another mortgage on the new property. Talk to your lender and ensure you can get multiple mortgages. Most lenders will also consider the rental income you will get from your home that you’re converting, if you have leases to show them.
If your home is part of a Homeowner’s Association or a Condo Association, make sure you check with them because a lot of times they flat out down allow you to use your home as a rental. The ones that do, have rules and bylaws that you and your tenants must follow.
Your homeowner’s insurance policy is not enough to protect you and your property when you have tenants. When you convert your home in to a rental property, you will want landlord’s insurance to cover the rental property. Here is some of the things landlord’s insurance will cover that homeowner’s will not:
• Medical expenses if your tenant or tenant’s guests get hurt on the property
• Protection if the tenant or a guest damages the property
• Liability against tenant lawsuits
5. Learn Maine Landlord-Tenant Laws.
There are a lot of legal issues involved with owning rental property. It is always best to find a well-qualified attorney to guide you, however, it is also important to have an understanding of the Maine Landlord-Tenant laws as well as fair housing laws yourself so you don’t get yourself in hot water.
6. Property Inspection.
You need to ensure your rental property is safe for your tenants and their guests. For this reason, we recommend you have a professional home inspection done. It’s an expense you shouldn’t forego. Not only does it ensure the property is safe, but, if a tenant tries to file a claim saying the house isn’t habitable, a 3rd party, with no dog in the fight can go to bat for you to say otherwise.
If the inspector finds any issues, it is advisable to attend to them.
7. Make home rent ready.
The most important step in converting your home into a rental property is making sure its safe for your tenants. You should change the locks and make sure smoke and carbon monoxide detectors are installed and in compliance with code. A few final steps to make your home ready for your tenants:
- Patch any holes in walls and paint.
- Replace any worn out carpet.
- Have the property professionally cleaned.
- Replace burnt out lightbulbs.
- Mow the grass, weed the flower beds, trim the shrubs.
- Remove any of your belongings that are not going to be part of the rental.
8. Professional Management.
Let’s face it, managing a rental property is a lot of hard work. You will get calls and need to respond to emergencies at all hours of the day and night as well as show the vacant unit, screen tenants, collect rent and several other routine items. For this reason, you need to decide if you can handle the stress involved with being a landlord and if you have the time to commit to it. If you do, awesome! If you don’t, you should choose to hire a professional manager to help you out.
There are numerous advantages to converting your home into a rental property. It may or may not be the best option for you. After considering all the facts of your personal situation, if you decide to take that route, it’s a great journey, that, with the right prep work and dedication can be a rewarding adventure!