Four Musts To Consider Before Turning Your Home into a Rental

Turning your current home into a rental property is one way to kick start your rental business and put cash in your pocket. The advantages of renting out your home are obvious: you are familiar with all the amenities and features your home offers, and you have likely kept up with the maintenance and made improvements along the way. However, renting a home- even one you know well- is serious business. If done poorly, it can cause nothing but problems. So before you decide to use your home as your first investment property, here's a few things to consider:

Your Home's Location

A home in a desirable location where rents are rising may be worth renting out, particularly if it is close to shopping centers, transportation and high job growth areas. However, if your home is five miles from the nearest store and it takes a twenty minute drive to get to the doctor, this can be a turn-off to tenants who want easy access to community resources. 

Knowing the availability of housing in your location is also important. An abundance of vacant rentals in your area can make it difficult to get top dollar for your home. View ads  on Craigslist and Zillow to see how many rentals in your area are currently on the market that compare to your home. The website Rent-o-Meter can also help you determine the market rent for your home.

Home Condition and Amenities

Consider the condition of your home before renting it out. If your home is equipped with newer plumbing or updated appliances, then it's unlikely you'll have to handle a lot of repairs early on. Conversely, older systems can break down leading to calls in the middle of the night from unhappy tenants. 

Your home's amenities can be an advantage or a liability. For example, pools and spas can pose a huge liability risk and a big expense to maintain. However, tile and wood flooring can be an asset and will stand up to a tenant's abuse far better than a home that is fully carpeted.

Expenses vs Income

Once you determine what your home can rent for, crunch the numbers. For expenses, don't just calculate the mortgage, taxes and insurance; Include garbage and sewage bills and tack on 7 percent of gross rent to go toward maintenance repairs and 5 percent of gross rent for vacancy periods. If you plan on hiring a property management company, add in another 8-10 percent of gross rent to cover the fee. Water is one expense that should be billed to the tenant separately or added into the rent. You will also want to include a percentage amount for capital expenses. This is a sink fund to pay for the replacement of expensive items such as a new roof or HVAC system. Tally up the expenses and subtract this number from rental income. If cash flow does not exceed $150-200, renting out your home may not be worth the risk. And it won't leave room to fund the unexpected and costly repair of a burst pipe.

Risk Level

Turning your home into a rental property involves risk and your comfort level in handling that risk. Could you evict the tenant who loses his job for health reasons but refuses to move? Can you screen your applicants with objectivity based on sound written criteria? Are you prepared to purchase additional liability insurance for the property in order to protect yourself against tenant lawsuits? Selling your home rather than keeping it as a rental may be a better option if you are unprepared to deal with these situations.

If renting your home makes financial sense and you can tolerate the risk, consider doing it on a trial basis. After all, you can always hire a property manager or sell your home if being a landlord is not for you.

Are there any investors out there who used their first home as a rental property? Please share your experience!