Renting out your house can be a smart financial move, as long as you calculate your costs carefully.
You have a single-family house and you are considering renting out your home. Perhaps you’re temporarily relocating for work, or maybe you inherited your childhood home from your parents, and you’re not quite ready to part with it yet.
Renting can be a profitable choice, but it requires an investment of time, money, and organization to make it work. Here’s how to determine whether renting out your house is worth the cost.
Calculate Your Monthly Expenses
You want to charge at least enough to cover your monthly outlay. Start with regular expenses like mortgage, maintenance, and homeowners association dues.
You may also need to upgrade your insurance coverage. Your agent
can advise you about adding landlord
insurance, a special type of
policy that covers rental properties. As a rule, landlord insurance costs about
25% more than standard homeowners insurance.
If you’re renting the house furnished, make sure you’re covered for the
personal possessions you leave behind. Jane Cline, the insurance commissioner
of West Virginia, tells owners to prepare a detailed inventory of
household items. If you’re renting the house unfurnished, figure in the costs
of moving and storing your items.
Check Out Prospective Tenants
As a practical matter, you’ll have to formally check out your prospective renters. MrLandlord.com, an information and service site for landlords, suggests a variety of background checks: credit reports, eviction reports, and criminal background reports. None of these is expensive, but you must get your prospects’ permission.
MrLandlord.com charges $8.95 for an eviction report. A combined credit and eviction report is $14.95. If you want to be especially careful, a countywide criminal report costs $29.95.
Account for Maintenance and Upgrades
Even with the most scrupulous checks, you can’t be completely sure renters will take good care of your home. Eva Rosenberg, an enrolled agent in Northridge, Calif., advises that if you’re not within easy driving distance of your rental property, you’ll need to arrange for someone else to keep an eye on the place, even if it’s just to make sure the lawn is mowed. If the tenants are neglecting upkeep, you’ll want to know about it sooner rather than later, since it could be a warning sign of trouble down the line.
Of course, even if the renters are conscientious, problems can
crop up: boilers will fail; roofs may leak; washing machine hoses can burst. If
household systems or appliances need repair
or replacement, you’re
better off spending the money up front, before the fix becomes an expensive
emergency.
You may also want to invest in some of the “extras” that Sue Peters,
a broker in Wellfleet, Mass., recommends adding to attract a tenant willing to
pay a higher fee. She suggests spending money on air conditioning,
expanded-channel cable TV, and a Wi-Fi network.
Don’t Want the Headaches? Hire a Property Manager
You can save yourself a lot of time and effort if you engage a management company to oversee the property and take care of the details. Some firms charge a percentage of the rental fee, others a flat monthly fee, based on the extent of services. Joe Aimone of GoRenter in Phoenix, Ariz., says his firm offers a variety of services, starting at as little as $50 a month, including general maintenance, rent collection, and–if necessary–eviction.
A management company can help you figure out how much to charge,
find and vet tenants, and prepare a lease. It will also pay the real estate
taxes on your behalf and present you with an annual 1099 form. Many management
companies maintain 24-hour emergency lines and a roster of approved service
people, so they can take care of plumbing or electrical problems and bill you
later. A property manager will also see that driveways and sidewalks are
shoveled, so you don’t find yourself with an unpleasant claim against your
liability insurance.
Expect to pay a management company 8% to 10% of the annual gross rent, on
average, with a $50 to $85 monthly minimum.
Keep Scrupulous Records
Whether or not you use a management company, you’ll have to keep extensive business records. DeDe Jones, CFP, CPA, in Lakewood, Colo., advises owners to save receipts for any expenses and to file them carefully.
The IRS treats maintenance expenditures, like a new hot-water
heater, differently from capital improvements, such as a new deck or patio, so
you’ll want to consult a tax professional. Meanwhile, keep the two types of
receipts separate to make tax prep easier. You’ll have to file Schedule E on Form 1040, which can also serve as a template for the kinds of records
you’ll need.
Finally, because of the complex tax and liability issues involved, many
financial experts suggest forming a corporation when you become a landlord. An
attorney can advise you about whether incorporating makes sense in your
situation.
HOUSELOGIC
HouseLogic helps consumers make smart, confident decisions about all aspects of home ownership. Made possible by REALTORS®, the site helps owners get the most value and enjoyment from their existing home and helps buyers and sellers make the best deal possible.
RICHARD KORETO
Richard Koretois a freelance writer. He’s been editor of many financial magazines and is the author of “Run It Like a Business,” a practice management book for financial planners. He and his wife own a pre-Civil War house in New York.
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