If you are preparing your first home to become a rental property, this is the ultimate guide to making sure you are following the laws of the land.
Renovations, Repairs, and Upgrades
It is best to renovate portions of your home to make it more appealing for potential tenants. There is no end to the improvements you can make on a home before putting it out into the rental market. However, keep in mind that tenants will more than likely not take care of your home as you do, so consider this when deciding which upgrades to make.
Renovations can get very expensive. If there are a lot of renovations needed and you are strapped for cash, consider a 203K renovation loan. This money will either be part of closing on a home you buy, or a part of a refinance option. The repair and improvement funds are held in escrow until the work is completed.
There are some requirements for a 203K loan. For example, the property itself must have been completed for at least a year. Check the eligibility requirements of a property for a 203K loan to determine if this is the best option for you. This type of loan allows for structural repairs and alterations.
For example, replacing windows with energy efficient windows can help extend the life of your home, as well as make it more comfortable and inviting for tenants. Also keep in mind that any upgrades you do will help to increase the amount you can charge for rent.
There are a couple different types of permits needed throughout the transition between a single family owner occupied home to a rental property.
The required building permits needed for any changes to a home will depend greatly on the location of state and city of the home. In general, any upgrades or renovations will need to be overseen by a local government entity. Making sure that you have the required permits before making any upgrades is important to maintaining a legal status for your rental.
For a residential property to serve as a rental property, a permit is required. Check your local region requirements for specifics. A local inspector will often take the time to inspect the safety of the home, checking for hazards like electrical, heating, home exits, etc.
The two most common types of rental permits are a certificate of occupancy and a housing business license. A certificate of occupancy is issued by local building and zoning authorities. This permit states that the property was built and maintained to accommodate occupants. An occupancy permit protects the tenants and prospective renters. The local government inspector is responsible for ensuring the unit complies with building and zoning codes.
Business licenses and permits are dependent on what your home is labeled under. If it is covered under an LLC you will need specific business permits. Some city and state governments require specific permits to convert your single family home into a rental property. The types of permits required will greatly vary depending on where your home is, but typically a certificate of occupancy or residential housing licenses are required.
Insurance is very important! The tenants of your home will need to have their own rental insurance to cover their personal properties. Landlord insurance is an important part of converting your home to a rental property.
Basic landlord insurance covers the building and damages to the structures, maintenance equipment you own, and some outbuildings and sheds. This insurance can cover legal fees if you are sued. It can also cover a loss of rent if damage makes the property unlivable like a storm or a flood. There are two basic types of insurance for landlords beyond typical plans that are important to consider.
An umbrella policy is a type of insurance that adds protection beyond what a landlord policy would provide. This type of insurance is usually paid monthly and helps to shield your personal assets. If you are sued as a landlord, the umbrella policy kicks in to cover what your typical insurance does not.
For example if your home catches on fire and causes a subsequent neighborhood fire (we’re talking worst case scenario here) your umbrella insurance would cover what your typical homeowners insurances would fail to pay. It would cover the damage to your neighborhood.
A Limited Liability Corporation (LLC) is a business structure that protects you as the owner from lawsuits. If something happened in your home and you were subsequently sued, the tenant could go after the value of the rental, but not any of your other assets.
Look at Rental Options
If you are wanting to only rent your home short term, there are several ways of doing so effectively. Making your rental home all about the tenants experience is one of the many reasons Airbnb is so successful. It’s important to focus on the way your home is received by the tenants if you plan to rent your home on a short term bases.
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This can be a nice option if you only want to rent your home out while you are not occupying it. It can also be nice to test out the idea of being a landlord.
Since Airbnb allows landlords to set time frames that their home is available, it lets you control how long someone can stay, instead of signing a long term lease, making your home unavailable to you for long periods of time.
Determine if being a landlord is something you can take on. If it is not, consider contracting with a property management company to deal with repairs and any issues that may come up in the process of renting. Generally, property management companies will take 10 percent of the total rent every month as payment.
Renting your home long term can be nice if you want a guaranteed amount of income every month. A lease guarantees that the tenants will abide by the guidelines you set for them. If they do not follow the rules your lease with them can become void. This can leave you with unpaid rent and the potential need to find another tenant.
Before making any major decisions with the conversion of your home to a rental, make sure to consult with professionals. Being prepared to become a landlord is an important part of the rental process. Following the above tips can help you successfully transition from living in your home to renting it out.