If it’s not a great time in the real estate market to sell your home or you’re just looking to kick off your real estate investing career, turning your home into a rental property may be a great option for you. It’s relatively simple, but there are quite a few things you want to consider beforehand. Today, I’m going to walk you through those things and see if turning your home into a rental property is a good fit for you.
Hi everyone, Jason Marcordes here with Landmark Property Management. Years ago, our primary client was the professional investor but over the past few years it’s transitioned into what we call the accidental landlord. This is typically someone who didn’t necessarily plan on being an investor but they either couldn’t sell their home for the price they wanted, needed to move for some reason like a job relocation or retirement, or maybe inherited a property. And that’s what we’re discussing today. So if you find yourself in an accidental landlord type situation, or you’re just looking to start your rental portfolio by renting your personal residence, here are a few things you need to consider beforehand.
1. Are you emotionally attached to the home?
This may seem a little silly but the fact of the matter is that there is the possibility of tenant damage or that the tenant alters the property in some way. Owning rental property is a business but if you’re going to take things like this personal because it’s your home, you may want to reconsider renting it out.
2. Does the home even make sense as a rental?
You’ll want to run the numbers to make sure the property makes sense as a rental property. In order to do this you’ll need to jump on Zillow to see what comparable properties are renting for in your area. From there you will want to deduct all of your expenses - your mortgage, taxes, insurance, assessment (if you have one), estimated repair costs, and a property management fee if you decide to hire a property management company. If you add up all the expenses and there’s no wiggle room for profit or in case something major goes wrong, it probably doesn’t make sense to rent it.
3. Check your mortgage to see if you can legally rent the property.
When purchasing their home, most homeowners use owner occupied financing which typically doesn’t allow you to rent the property. Now, I’ve never seen or heard of any issues related to this but it’s always good to double check your mortgage docs or call your lender to double check. 99% of the time you’ll probably be fine either way but in the extremely rare case that this does trigger the due on sale clause, it could have major ramifications.
4. Check with your HOA to see if they allow rentals.
This is pretty cut and dry. If you live in a property that has an association, you want to check with them to see if they allow rentals. Not all due, especially in condo buildings, and some do allow rentals but they have a rental cap.
5. Talk to your CPA to see if there will be any tax implications.
Everyone’s financial and tax situation is different so you want to let your CPA know of your plans to turn your home into a rental property and see if there are any positive or negative tax ramifications.
6. Talk to your insurance agent about getting a landlord’s policy
Rental properties require a different type of insurance so you want to make sure you reach out to your insurance agent and get switched over to a Landlord’s policy. This is super important because if there’s major damage and you don’t have the right policy in place, there’s a possibility that the insurance company will deny the claim. I did a video on this a few months ago so I will include that in the description.
7. Create an LLC
When owning a rental property, there is always potential liability from tenants, their guests, vendors, and so on. In order to protect yourself from this, you’ll want to put your property in an LLC. This can be done yourself with a service like Legal Zoom or by your attorney. I also did a recent video on this if you’d like to check it out. I’ll include the link below.
8. Decide whether you want to manage it yourself or hire a property manager
The next steps are going to be determined by whether or not you decide to hire a property manager. Everyone is different so I can’t say what route is best for you but a good property manager is going to handle the leasing, tenant screening, tenant communication, repairs, and more - all while making sure everything is being done to the letter of the law. If you’re newer to real estate investing or you’re just super busy, hiring a property manager may be the best route for you. If you are going to hire a property manager, they’ll take it from here and run with it. They’ll be able to get the unit into rent ready condition, market and show the property, screen the tenants, sign the lease, and get them moved in.
Alright, I hope this helps! If you have questions about any of this or if we can help in any way, consider us at Landmark Property Management a resource, we’re happy to help. Feel free to check out our website at ChicagosPropertyManagement.com or give us a call.