How to Turn a House into a Rental Property: Ask These Questions First
Have you been preparing to move into a new home but aren’t sure what to do with your old property? You have three options: sell, keep, or rent. In this post, we're going to focus on that last option: how to turn your house into a rental property.
How to Turn a House into a Rental Property
The key to making the right decision about your best option is researching and being well-informed. So take a look at a few of the tips and guidelines below. We hope 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. These include 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.
Existing property carrying costs will be bundled in with your debt ratios. But, if you already have a tenant, you’ll also be able to declare this income. This increases 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.
Essential Factors to Help You Turn a House into a Rental Property
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. Unfortunately, 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, we’ve included a list of questions you should research and address to help you figure out how to turn a house into a rental property. At the same time, these questions help you determine if that's the best course of action in the first place.
(Are you working on improving your property to prepare it for renting? Take a look at this post next: Top Tips for How to Paint Over Ceramic Tile in a Bathroom)
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 when they're figuring out how to turn a house into a rental property.
All perhaps rental income management options aim to maximize monthly cash flow. 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, what about those among us that enjoy rest and can’t tell the difference between the furnace and water heater? Then outsourcing basic property management tasks, such as repairs, rent collection, and key making is another option.
Property managers typically charge a present of the rent paid. 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 there 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 said, 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 come up will be tax-deductible. These include property taxes, costs that are the result of renting, and mortgage interest. And they can 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 let's say you decide to only rent for a short time and plan to sell or flip the property soon. Then you should consider the tax costs when deciding whether renting is worth your time.
If you decide to sell the property, the profit will also generally be taxable (although there may be some 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 policyholder, 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 most significant component of this monthly cost will likely be your mortgage rate and term.
Fixed-rate mortgages are an obvious advantage for rental owners. That's because they remain consistent! This makes 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 it can still be done.
When deciding on a rent price, make sure to consider all potentially negative scenarios. This includes an interest rate hike. Property taxes and home insurance costs can also change with the market as your property increases and decreases in value.
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 critical factor in determining how much you should charge for rent.
Are you close to downtown? Schools? Parks? These factors are important to renters and should be considered in your calculation in conjunction with the property’s condition. With a bit of luck and favourable conditions, you can command a higher rent amount while still being picky with tenants.
Alberta does currently have excellent rental rates when compared to property values. But the market will always be subject to change and uncertainty. And your property doesn’t, and won’t, exist in a bubble.
So, check to see what other properties in the neighborhood are renting for. And 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.
If you're looking for more guidance with renting, selling or buying homes in Edmonton, we're here to help! Contact us today so we can help you with all of your real estate needs.