There are many reasons you might want to turn your house into a rental property. Whether you can’t sell the home, you just want to move on and buy a bigger one, or you’re simply looking for a little extra income, transitioning your home into a short- or long-term rental can be a smart and profitable option.
Will it be the easiest thing you’ll ever do? Probably not. But as long as you plan ahead, understand the risks and costs, and have a clear-cut path for moving forward, it may just be one of the best.
Are you thinking about turning your home into a rental property? Follow these steps to make it happen.
Step 1: Make sure it’s allowed
Before you even begin to think about transitioning your home into a rental, you first need to check with two entities: Your mortgage lender and your homeowner’s association.
Depending on what type of mortgage loan you have, you might need to live in the home a certain amount of time before you can turn the property into a rental. Some loans won’t cover an investment property at all (only a primary residence), so double check with your mortgage lender on what you’re legally allowed to do. In many cases, you might need to refinance your loan before you can start transitioning your property.
If your home is in a community governed by an HOA, you’ll also need to check with them. Many HOAs have restrictions on rental properties (particularly short-term rentals like Airbnbs), or they might require prior approval before you can set up shop. Either way, you’ll want to make sure you’re in line with HOA rules and regulations.
Step 2: Switch your insurance policies
Your existing homeowner’s insurance policy isn’t going to cut it once you become a landlord. For one, it won’t offer enough coverage. Your insurer may also have grounds to deny your claims entirely (since you’re fraudulently representing yourself as the owner-occupant.)
To make sure you’re protected, you’ll need to find a new policy before putting the property up for lease. You’ll want not only comprehensive coverage that protects you from damage and loss on the property but also liability coverage should a renter get hurt on the property.
Some rental property insurance policies can protect you even further, extending to attorney’s fees if you’re sued, property damage if the tenant is negligent, and more.
Step 3: Talk to a real estate attorney
You need an attorney’s input one way or another. First, you’ll need to talk to them about liability. Is a good insurance policy enough, or should you consider starting an LLC to protect yourself and your personal finances?
You can also tap your attorney for leasing help. Ask them to put together a customized lease agreement based on the rules and policies you plan on putting in place. You might also want guidance on other forms you’ll be using -- like your application, for example. They can go over it and make sure you’re in line with Fair Housing Laws and other legal requirements.
Step 4: Determine how you’ll manage the property
What’s the plan once you have a tenant or the property’s up on Airbnb? Who will handle maintenance requests or cleanings between guests? How will collecting rent work? What role will you play in the property’s day-to-day operations?
Sit down with your family and figure out how much time you can commit to managing the home. If you’re tight on time or won’t be near the property (maybe you’re moving out of state), hiring a property manager or property management company might be your best option.
Step 5: Do your research and bring your house up to speed
Take some time to study other rental properties in the area. What condition are they in? What amenities, appliances, and features do they offer? If you want to keep vacancies low and attract good tenants, you’ll need to fall in line with local trends.
You should also bring in a home inspector to give the house a full once-over. If there are any defects or issues with the home’s systems, you’ll want to fix them before putting the property on the market.
Ultimately, if you find your property’s not quite up to snuff, it’s time to put in some work. Repair, repaint, and remodel what needs it, and consider bringing in a real estate agent or contractor if you need some extra guidance. They can advise you on the best projects to take on as well as what they might cost you.
Step 6: Move out, and prep the property for tenants
Once you’ve done the big stuff, it’s time to move out your personal belongings and start prepping the home for photos and possible tours. Keep in mind here: If you’re turning the house into a short-term rental, you might want to leave a lot of the furniture and essentials (cookware, for example). Airbnbs are expected to be furnished.
After you’ve moved out your personal items, clean the home, stage it (or ask your real estate agent to do so), and bring in a photographer to capture the property. You might even want a video to include on the listing since many renters are leasing sight-unseen these days.
Step 7: Set your rent, and start marketing the property
Do the calculations, and figure out what rent you need to charge. For one, you want your rent to align with rents on other comparable properties in the area. More importantly, though, you need to be sure your rental income is enough to cover your mortgage payment and expenses, while still making some sort of a profit.
Once you’ve determined where that sweet spot is, write up your listing description, compile those photos, and start putting your property out there. You can also bring in a real estate agent for help here, though you’ll pay a commission to do it.
Step 8: Find a tenant
Those tour requests and applications should start rolling in shortly, so make sure you have a thorough tenant screening process in place before they do. When considering a prospective tenant, always check with past landlords, run their credit, and double-check their employment, too.
When you find the right renter, use that iron-clad lease you worked on with your attorney, and get them locked in. You should also ask for a security deposit, and be sure to conduct a property inspection before move-in. This will help you spot renter-caused damage later on.
Step 9: Change your tax approach
After you’ve got your rental up and running, you have yet one more task to take on: Updating your tax approach.
Though you were probably already deducting mortgage interest from your annual tax returns, you’ll be eligible for many more write-offs once your property’s a rental. An experienced accountant can help you take advantage of these tax deduction opportunities, so be sure to get in touch early, well before April rolls around.
The caveat is that you’ll no longer qualify for a homestead exemption (if you were taking advantage of one). You’ll need to go to your local tax assessor’s office to revoke it or talk about next steps.
The bottom line
A rental property can be a great way to make a living -- especially if you already own a prime piece of real estate. If you’re thinking of turning your principal residence into a money-making rental, start planning well ahead of time, and make sure you bring in the right pros to help. An attorney, home inspector, and real estate agent can all help ensure you do it right.