Are you considering renting out a property you own? Maybe you recently moved but you haven’t sold your previous place yet. Perhaps you inherited a property and think it could provide some passive income. Maybe you don’t even own a rental property yet, but it’s something you want to pursue.
No matter your reason for looking into renting out a property, you need to know a few things before following through on it. These range from various tax breaks to landlord insurance cost. Let’s take a closer look at six of the key things you need to know before renting out a property.
1. Tax Breaks
Once you have your rental property established, your best strategy is to consult with a tax professional about the various tax breaks you are entitled to. Typically, you can claim tax deductions for mortgage interest payments, property taxes, and landlord insurance cost. Other tax-deductible expenses include ongoing maintenance and repairs to the property. A tax professional can verify you are claiming all of the deductions properly to maximize your tax benefits.
2. Landlord Insurance Cost
You do not want your investment idea to become a massive liability. Landlord insurance protects you and your property from large expenses based on the type of coverage you choose. This is different from renters insurance, which protects the personal belongings of your tenant. Renters insurance is the responsibility of the renter. However, landlord insurance is your responsibility. Similar policies can have a big difference in premiums, so shop around and find the proper coverage at a price you are happy with.
3. How to Calculate Cash Flow
With any rental property, the most important number is arguably cash flow. This is how much income you are receiving after subtracting your monthly expenditures. You should already know how much money your tenants are paying for rent. Once you have that number, take out your mortgage payment, property taxes, and landlord insurance. Other costs to include might be regular maintenance, such as lawn care or monthly pest control.
If you pay for some of the utilities or services at the place like internet or electricity, add these expenses to the list. Once you subtract all of your regular expenses from your rent, you will know your property’s monthly cash flow. If this number is negative, you need to make an immediate adjustment. Either you should be paying less in monthly expenses or you need to raise the rent.
4. How to Handle High-Maintenance Tenants or Property
The most dreaded aspect of renting out a property is dealing with high-maintenance tenants. A close second might be becoming stuck in a money pit when your property requires constant repairs. Although these worst-case scenarios happen less frequently than people think, realize that these are both possibilities. One way to mitigate the stress of handling tenants is by outsourcing it to a property management company.
5. Renting Increases Your Illiquidity
Real estate is already an illiquid investment. In other words, it requires a high level of time and effort to convert your investment’s value into cash. Your property might be worth $250,000, but it can take months to find a buyer and close the transaction.
Renting out your property only adds to this. Depending on the lease agreement, you may have to give your tenants 60 days’ notice if you are planning to sell the property. In other cases, the lease may prevent you from selling the house until it expires, meaning it could be months before you even list the property. After that, it will take many additional months to complete a sale.
6. Market Expectations
We discussed high-maintenance tenants earlier, and market expectations contribute to that. If you are renting out a property that you previously lived in, realize that other people may not be as easy-going with some of the issues you tolerated. That dripping faucet needs to be repaired, and the issue with the thermostat needs to be investigated. You may have been comfortable with a few inconveniences because you didn’t want to invest the time or money to resolve them. However, most tenants will not be as understanding.
Another thing to consider when it comes to market expectations is how your rental property compares to similar-priced units. Look at other properties in the same rent range as yours. Do they have a driveway while yours doesn’t? Do they have a fenced backyard or other amenities that yours lacks? Knowing what else is available on the market will help you price your rental properly while also increasing the odds of satisfied tenants.
Renting out a property can be a great idea to add to your monthly budget. Don’t go into it expecting everything to work out perfectly. You need to do your research ahead of time on landlord insurance, anticipated cash flow, and market expectations. If you are aware of these factors and others, renting out your property can be a wonderful source of passive income.