There are lots of reasons that you might be considering renting out part or all of your home. Maybe you are PCSing and your house won't sell, maybe you want to hold on to a starter home while you move up to a larger house, or maybe renting out a room will help you cover your bills each month.
Whatever the reason, becoming a landlord involves a lot of decisions and preparation. Sometimes it makes sense to rent, and sometimes it’s a hassle. On this segment of CNBC, Carmen Wong Ulrich discussed the issues surrounding renting out your real estate.
Here are the top six things that you need to consider when you become a landlord:
- Educate yourself. Learn everything you can about being a landlord, landlord-tenant law and other associated information. Become educated about every aspect of the process before you begin.
- Budget realistically. Expenses will probably be higher than you initially estimate. This could be a huge problem if your tenants don't pay on time or the house requires repairs. It can be hard when you are a new landlord, but try to put aside a few month's rent for expenses and repairs. Eventually, you will need it!
- Talk to your insurance company. Make sure that you have the right insurance coverage for your home - is it a "fire" policy or a homeowners policy? It is a good idea to require your tenants to carry homeowners insurance. Consider an umbrella liability policy in case your tenant or their guest are injured while on your property.
- Think property management. Think about whether you want to hire a property manager or manage the property yourself. In my experience, hiring a property manager was nearly essential. We were thousands of miles away from the property and did not want to rely on friends or family to help with emergencies. My property manager has been wonderful, but it took me five property managers in two years to find the right fit. Keep in mind that some property management fees might be negotiable - it never hurts to ask.
- Put everything in writing. Have a solid lease reviewed by a lawyer. If you are using a property manager, read through the agreement thoroughly before you sign, and make sure that you have factored all the costs into your budget.
- Consider the tax implications. You will need to report all income and expenses to the IRS on a Schedule E, Rental Real Estate. You can claim an immediate tax benefit if you depreciate your house as an asset, but that will affect the taxes that you pay when you finally sell the house. Also, the rules for excluding capital gains on home sales tend to change, just like most tax rules over the years.
This hits on most of the major topics that you need to consider if you are renting out your home, but there is so much more to it. Talk to your insurance company, do your homework and consider hiring a property manager. Renting your home can be a good choice in many situations, but without all the information, it can easily turn into a big headache.
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