Turn Your Home Into A Rental
How to turn your current home into a rental property
Have you been preparing to move into a new home, but aren’t quite sure what to do with your old property?
You really have three options: sell, keep, or rent.
The key to making the right decision about what option best suits your situation is to research and be well informed, so take a look at a few of the tips and guidelines below. Hopefully this information will help you figure out whether renting is the best solution for you.
Want to get into your new home, but don’t quite have that down payment saved up? You can go the same avenues as first time home buyers, such as borrowing money from a family member, or applying for an unsecured line of credit, or, if you’d like to keep or rent your current property, you can leverage the equity in the home by borrowing against it through refinancing.
If you do decide renting is for you, your rental property will figure into qualifying for your next mortgage. While existing property carrying costs will be bundled in with your debt ratios, if you already have a tenant, you’ll also be able to declare this income, which will increase your chances of qualifying at a competitive rate. Keep in mind that qualifying calculations, especially those pertaining to rental properties and income, vary wildly from lending institution to institution, so if you don’t qualify with one company, shop around.
If you’ve done any research on rental ownership at all, you’ve probably been told that owning rental properties isn’t as easy as beginners first assume. Real estate can either be a money printing machine or a money, time, and energy suck, and it’s sometimes difficult for inexperienced investors to understand the differences between these two outcomes. However, the good news is that many of the headaches associated with renting can be avoided by correctly making a few critical decisions as you begin your renting project. So, do your research and learn how to manage your property responsibly and efficiently. Below, I’ve included a list of questions you should research and address before deciding whether to rent your home.
Who will manage the property and the tenants?
This is, perhaps, the most under-considered factor that is often overlooked by first time rental owners.
The goal of all rental income management options is to maximize monthly cash flow, and management costs and property maintenance are the most important (and potentially dangerous) part of the cash flow equation.
If you’ve always embraced a do-it-yourself attitude and don’t think you’ll mind the occasional 3 am, “my water and furnace have both imploded” service call, then managing the property yourself may be the most cost-effective solution.
But, for those among us that enjoy rest and can’t tell the difference between the furnace and water heater, outsourcing basic property management tasks, such as repairs, rent collection, and key making, is also an option. Property managers typically charge a present of the rent paid, and this fee varies based on the number of properties you recent and your current research market, so research the services available in your location and ask around.
Are their going to be significant tax implications?
As with property managers, the tax implications for a specific property and situation will vary wildly, so I highly recommend that you consult a knowledgeable tax professional (instead of just some guy on the internet).
That being sad, there are several, general rules we can discuss here. First, the bad news—your surplus rental income will be taxed. However, since you’ll be running a business, the rental property expenses that do come up will be tax deductible. These will include property taxes, expenses that are the result of renting, and mortgage interest, and they can really help cut that tax bill by knocking you down to a lower bracket.
Tax wise, rental owners almost always come out ahead in the end, but if you’ve decided to only rent for a short time and plan to sell or flip the property soon, you should consider the tax costs when deciding whether renting is worth your time and.
If you decide to sell the property, the profit will also generally be taxable (although there may be same capital gains exemptions you can evoke). Contact your accountant for further details.
The best place to find rental property insurance is probably your current homeowner insurance policy holder, as they are already familiar with you and with the property. While new tenants can purchase renter’s insurance, their policy will only cover their personal belongings, not the physical property itself.
How much does my property cost per month?
This is, perhaps, the most important factor in determining positive cash flow and renting are feasible. And the biggest component of this monthly cost will likely be your mortgage rate and term.
Fixed rate mortgages are an obvious advantage for rental owners, because remain consistent and make it much easier to calculate the monthly rent you will need to charge to cover your expenses and make a little profit on the side. Figuring all this out on a property with a variable rate is a bit more complicated, but can still be done.
When deciding on a rent price, make sure to consider all potentially negative scenarios, such as an interest rate hike. Property taxes and home insurance costs which can also change with the market as your property increases and decreases in value, should also be considered. Finally, expect that your property will be vacant occasionally. When doing the math, it’s generally a good idea to assume that you will only receive 11, instead of 12 rent payments a year. The extra cushion created will help with unexpected expenses and prolonged vacancies, should either occur.
What amount of rent should I charge?
Location is probably the most important factor in determining how much you should charge for rent.
Are you close to a downtown? Schools? Parks? These factors are important to renters, and, in conjunction with the property’s condition, should be considered in your calculation. With a little luck and favourable conditions, you can command a higher rent amount while still being choosy with tenants.
Even though Alberta does currently have excellent rent rates when compared to property values, the market will always be subject to change and uncertainty. Your property doesn’t, and won’t, exist in a bubble, so check to see what other properties in the neighborhood are renting for. If the rent you need to charge is higher than your area’s average, then you should definitely consider whether converting your owner-occupied property into a rental is a sound financial decision.