Steps to take If i want to rent my home out
Most Popular Reply
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yQuote from @Tee H.:
The only thing you NEED to do is notify your insurance. They will make some changes to your policy once it becomes a rental.
You do not need umbrella insurance. You do not need an LLC. A lot of people will tell you those are necessarily - or highly encouraged - but it's simply not true. Read below.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 13 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.
The DIY Landlord Book4.7247 Reviews
13 Replies
- Investor · Teaneck · Member since 2022 · 49 posts · 29 votes3y
Quote from @Tee H.:
Hi,
I have an FHA loan on our primary residence, and we have lived in the home for more than a year. We are moving and I want to rent our home out.
What are things I NEED to make sure are completed before renting my home out?
Some things I was thinking were, notifying lender of home becoming investment property, Titling home to LLC, Finding umbrella insurance for
my rental home/landlord insurance, etc.
Is there something specific I need to make sure? I am new to this and I would love to get advice from those experienced.
Congratulations! And welcome to the forums. In my opinion I would notify the lender. You live there for a year or intended that is all you need to meet the FHA requirement. I would open an LLC for a first property . I would suggest getting the required insurance coverage an umbrella insurance. Also landlord insurance. Besides that I would do all repairs and maintenance that it will be needed soon. It is easier to do while the property is vacant than having to do it once a tenant is in place. I hope this help . Best of luck!
- 3yRaymond J. RodriguesBusiness MemberLender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
Hi Kilisitina,
I do not think that you have to notify the lender of the property becoming an investment property, but it wouldn't be a terrible idea. Definitely switch your homeowners insurance policy to a landlord policy. Umbrella insurance wouldn't be a bad idea for extra protection. Regarding titling a home to an LLC, I do not think that's allowed for an FHA loan, but do know that it's possible for a conventional loan underwritten through Fannie Mae, depending on your loan servicer. I would ask your mortgage servicer to confirm on titling to an LLC and see what they say. If you plan on buying a new primary residence with a conventional loan, make sure to have an annual lease in place for your departing primary residence along with two months rent receipt to offset the mortgage so that your debt to income ratio doesn't get affected on your next purchase. If you have any lending related questions, I'd be happy to answer them for you!
Helm Mortgage Corp.5126 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Tee H.:
The only thing you NEED to do is notify your insurance. They will make some changes to your policy once it becomes a rental.
You do not need umbrella insurance. You do not need an LLC. A lot of people will tell you those are necessarily - or highly encouraged - but it's simply not true. Read below.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 13 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.The DIY Landlord Book4.7247 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Do not switch the title to your LLC. The house needs to be rentable, you need to price it attractively, especially in this market. Get a rental policy on your insurance.
- Member since 2022 · 72 posts · 10 votes3y
@Raymond J. Rodrigues Hi could we connect I have a similar situation which I need advise on?
- 3yRaymond J. RodriguesBusiness MemberLender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
@Yocheved Beer certainly, send me a message.
Helm Mortgage Corp.5126 Reviews - New to Real Estate · NY · Member since 2020 · 196 posts · 29 votes3y
What takes place with the insurance and insurance company when one notifies them that the property is going to be used as a rental instead of personal use?
- Member since 2022 · 405 posts · 455 votes3y
Make sure you have adequate insurance for the property (landlord's policy) and that the property is in rentable condition and list it. I would not overcomplicate and overspend on putting into an LLC.
- 3yTee H.Member since 2021 · 24 posts · 6 votesOP
Quote from @Nathan Gesner:
Quote from @Tee H.:
The only thing you NEED to do is notify your insurance. They will make some changes to your policy once it becomes a rental.
You do not need umbrella insurance. You do not need an LLC. A lot of people will tell you those are necessarily - or highly encouraged - but it's simply not true. Read below.
An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 13 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.YOU ARE AMAZING!! I truly appreciate the time you took to explain this to me! It means the world! Thank you for clarifying this, it has put me at ease! Thank you, Thank you again for your comment!
- 3yTee H.Member since 2021 · 24 posts · 6 votesOP
Quote from @Zachary Ware:
Make sure you have adequate insurance for the property (landlord's policy) and that the property is in rentable condition and list it. I would not overcomplicate and overspend on putting into an LLC.
Thank you so much!
- Property Manager · Orlando, FL · Member since 2023 · 107 posts · 64 votes3y
There have already been some great replies covering the NEEDS, so I won't comment on the LLC, insurance, or lender variables.
But I do have a few pieces of advice:
1) Prepare the house to be listed and have it reflect the type of tenants you want.
Far too often you see owners transition their property to a rental and don't properly prep the residence for renters, which leads to longer vacancy periods, lower rental rates, and sometimes less desirable tenants.
When we transitioned our primary to a rental, we patched all the holes, painted most of the walls and touched up the baseboards, cleaned the tile and grout, deep cleaned the appliances, and manicured the landscaping. Then I had a friend come in and walk the house with fresh eyes and evaluate the property and he said it looked good.
We spent about $500 in supplies and it took a sweat, but the result was approved tenants in 4 days at the top of the rental range for the area.
2) Get a good CPA who is experienced in real estate investing. There are a lot of tax advantages to owning a rental property. Also, look into a cost segregation study once the property is in service as a rental.
Good luck with the transition!
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