Paycheck Chronicles

Becoming A Landlord? 6 Ways to Prepare


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.

Here are the top six things that you need to consider when you become a landlord:

  1. 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.
  2. 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!
  3. Talk to your insurance company.  Make sure that you have the right insurance coverage for your home - it is a "fire" policy versus a homeowners policy.  It is a good idea to require that your tenants to carry homeowners insurance.  Consider an umbrella liability policy in case your tenant or their guest were to be injured while on your property.
  4. 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 5 property managers in two years to find the right fit.  (He's in the Hampton Roads area, if you need a referral.)  Keep in mind that some property management fees might be negotiable - it never hurts to ask.
  5. 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.
  6. 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 changed in 2008.  Previously, you had to live in the home for 2 out of the 5 years prior to selling in order to be able to use the $250,000 per person capital gains exemption.  Now, your exemption will be prorated based on the amount of time that you lived in the house during the five years prior to selling.  For many of us, the amounts are big enough that it doesn't matter (2 people times $250,000 equals $500,000 of exemption, times the percentage of time you lived in the house, still equals a lot of exempt capital gains.)  However, if you purchased your home before the real estate boom and it's value has increased a lot, you will need to consider this carefully.  (Note:  don't forget that military members can defer their sale by up to 10 years if they meet certain qualifications.)
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.

Here's a link to CNBC segment  in which Carmen Wong Ulrich discussed the issues surrounding renting out your real estate:

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