Renting Versus Selling: Can You Turn Your Home Into an Investment Property?

Home owners hoping to generate some rental income may be tempted to rent out their home rather than putting it on the market when it comes time to move. While there can be some excellent opportunities for rental income, there are also a number of pitfalls to avoid.

One of the first steps to take is to ensure local ordinances allow for rental property. Once that step is cleared, however, there are still a number of considerations before putting a "for rent" sign in the front yard and converting a personal home into a rental property:

1. Taking on the Role of Landlord

Home owners need to do some self-analysis, taking a hard look at personal strengths and weaknesses, to determine if they are cut out for taking on the varied responsibilities of becoming a new landlord.

These include finding and screening of tenants; drawing up the lease; managing property maintenance and repair; handling the accounting, insurance, taxes, legal and other business-related aspects of owning a rental property; and being available to tenants in case of emergency.

Home owners should determine early on whether they want to take on the full role of becoming a landlord, or outsource all or some of the duties to a professional property manager. In some cases, a new landlord may not be comfortable finding and screening tenants, for example, but would prefer to manage the property once the lease is signed. Others will decide they prefer to have a property manager take on as much of the burden as possible.

2. Understanding the Costs

Before determining whether or not renting out their home is a smart financial decision, home owners need to understand all the costs involved. A first step is to research rental rates within the area to determine whether rent collected is enough to cover current and future mortgage payments plus expenses. If hiring a property manager, that person may be able to provide additional information on area rental rates. Once rental income is established, all costs must be applied. Prospective new landlords will need to decide which utilities will be paid by the tenant and which will be included in the rent. 

Other costs to consider include any legal costs. Forming an LLC, for example, can protect personal assets in the event of legal action related to owning a long-term real estate investment property. There may be changes in insurance costs to take into account, as well as additional accounting and tax preparation fees. If some of the landlord duties are outsourced, there will be property management fees to consider. These should be in writing to avoid any miscommunication regarding costs. Additional costs include repairs necessary before putting the home on the rental market.

3. Preparing a Home for Tenants

Converting a former residence into a rental home takes both physical and emotional work. Depending how long a home owner spent in the home, it can be emotionally draining to think about other people occupying the home. If the thought of this causes too much anxiety for a home owner, then he or she is not cut out to be a landlord and is better off selling the home.

All personal belongings and furnishings should be removed unless the house is being rented as a furnished property. It's helpful to go through the house and make note of any repairs that need to be done so these can be fixed prior to a tenant moving in. Consider a fresh coat of paint. Also, be sure the home and immediate area are safe and secure for prospective clients and add any additional security measures necessary.

Rental properties can be an excellent source of additional income. But new landlords should be prepared to be on call at all hours to deal with everything from repairs to neighbor complaints about noise, although some of this burden can be shouldered by a trusted property manager. Such costs, however, should be included in the property budget as well, to ensure the numbers point to a profitable decision.