In today's real estate market, more and more homeowners are becoming landlords. After all, home prices are down as much as 50 percent or more in some parts of the country. The thought of trying to sell in such a market can make even the most weathered homeowner's stomach clench.
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If you're thinking about turning your home into a rental property and becoming a landlord to ride things out, what do you need to do to make it happen? Here are five steps you need to take to get started.
1. Start Updating
Once you become a landlord, it's your responsibility to provide a safe and healthy home for your tenants. Your city will likely require you to have a home inspection before you rent out your home for the first time, so make sure it's up to code before they show up.
In addition, an updated and clean home will not only increase the likelihood of finding a tenant, but it will also allow you to charge an increased rental price. How do you go about this? Well, it's going to vary depending on the condition of your home. Here are some tips to keep in mind:
- Cleanliness is key. The cleaner your home is, the easier it's going to be to find a tenant.
- Make sure all rooms are freshly painted.
- Any valuable or unique light fixtures should be taken down.
- Make sure to fireproof your home with these home fire safety and protection tips.
- Look at your plumbing; fix any leaks or a running toilet. If you're keeping the water in your name, install low-flow showerheads to cut down on water use.
- If you live in an older home, make sure the electrical wiring is safe.
- Install smoke detectors, and buy fire extinguishers for the kitchen and upstairs rooms. You might also want to install a carbon monoxide detector as well.
- If your home has a chimney, you might have to show proof it's been cleaned within the last year.
2. Change Your Home's Status
You must call your mortgage company to let them know you're no longer living in the home. They'll have to grant permission, and there may be a small fee involved. You'll also need to change your home's status with your local municipality.
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3. Change Your Homeowner's Insurance
Before your new tenants move in, you must have Landlord Property Insurance specifically for a rental property. This is a different policy from your current homeowner's insurance. Be prepared, however. Insurance for a rental is probably going to cost more than your homeowner's insurance coverage.
4. Decide Who's Going to Manage the Property
Are you going to manage the property yourself or hire a property management firm to do the work for you? It's a big decision. Yes, you'll save money doing the work yourself. But you'll pay for this in time and stress. Property management firms often charge 10 percent of the monthly rent for their services, but they handle everything from finding tenants to collecting rent to managing repairs. Many people find it's worth the cost to have these responsibilities off their plate.
5. Decide the Rent
Knowing how much to charge for rent can be tricky. Too little and you lose money. And too much? Your house sits empty. If you end up hiring a property management firm, they'll likely give you an estimate on how much you can reasonably ask for your rental property. If you decide to go it alone, then search sites like Craigslist to see what others are charging for the same sized space in your area.
Then, just like you can sell your used car on Craigslist, you can easily put your property up for rental and avoid all the real estate agent fees. You can also use Rentometer, a site that helps you determine if you're charging too much, or too little, for your rental. Also, keep in mind that most experts recommend putting aside 25 percent of your monthly rent for future maintenance and repairs.
There's no doubt that renting out your home can be a smart move, especially in the current down market. But if you do decide to go this route, make sure you're prepared for the stress and financial obligations that inevitably go along with being a landlord.
Heather Levin is a frequent contributor for the Money Crashers personal finance blog and The Greenest Dollar. She is based in Michigan and enjoys writing about topics like real estate, frugality and going green.