What to know if you rent out your house
Here's what you need to know about taxes and insurance if you turn your home into a rental property.
Q: I will be transferred to a new city soon for my job, but housing prices have dropped so much since we bought our house that we can’t afford to sell it. Our only real option is to rent it out and wait for the market to recover. What do I need to know about insurance and taxes?
A: First on your to-do list: Replace your homeowners insurance policy with rental-home insurance. It covers the building and provides liability protection but doesn’t cover possessions. In some cases, it can cost less than a regular homeowners policy, but don't be surprised if it's more expensive. The fact that the owner is not occupying and caring for the property can drive up the price, says June Walbert, of insurer USAA. She also recommends including a section in the lease requiring your tenants to buy renters insurance, which will cover their liability and belongings.
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When you file your tax return, you’ll generally report rental income and expenses on Schedule E. You’ll be able to deduct your mortgage interest on the rental property, as well as insurance premiums, real estate taxes, advertising costs to rent the house, rental management fees, utilities you pay, travel to and from the property and legal and accounting costs.
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And you can deduct depreciation -- basically the purchase price of the house (but not the land) divided by 27.5 each year -- and the cost of repairs. You can’t deduct home improvements that add value to the property, but you add the cost of improvements when figuring depreciation. If your expenses exceed your rental income, you can deduct up to $25,000 of the loss against other kinds of income. (That loss allowance declines if your income is more than $100,000.)
- MSN Money: Do you have what it takes to be a landlord?
Keep a close eye on the calendar, recommends Mark Luscombe, of CCH Tax and Accounting. If you rent for more than three years, you’ll lose the opportunity to claim any tax-free profit from the eventual sale. To qualify for up to $500,000 in profit tax-free when you sell a home, you generally must have lived in it for two of the five years leading up to the sale. For more details, see IRS Publication 527, Residential Rental Property.
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One of the most COSTLY mistakes that new landlords make: not checking the tenants’ background. Yes, people may seem nice when you meet them, but you never know what kind of history they had. I usually use this website: www.TenantBackgroundSearch.com and I have been pretty happy with it. This search is INSTANT, unlike with some other websites. You also don’t have to go through a property inspection (yes, some services will make you do it as a landlord).
I don't rent out my home but my Son does. I pick the tenant. I am very upfront with them, I let them know from the beginning that I am a 100% service-connected veterans because I am a psychopath. I will not rent to any one unless I know where all their closest family members live and I do go to their homes to meet them. Good paper work, sufficient deposit and i have yet to have to take care of problems because there haven't been any.
The thing that everyone should understand, first and foremost, is that a Real Estate Agent/REALTOR is NOT a Property Manager!!! The Landlord/Tenant laws are so very different from any and all other real estate laws (at least in FL) that it is very easy for an agent to blur between the two, usually unintentionally. Suave tenants know the legal loopholes and, if you or your agent do not, you can be in for a very long haul to have them removed from your property. The rental laws are so very intricate and explicit that you should NEVER try to manage your own property, nor allow anyone else to, unless you have throughly inspected their background. I've been a Property Manager in FL for over 15 years and it saddens me when I take over a property that has been mishandled by an untrained agent, or the owner themselves. Usually they come to us to take over once they have mismanaged things into a destructive hole. Make certain to ask lots of "what if" questions when interviewing a Property Manager, ask about thier training, make certain to read any and all agreements. Then sit back, collect your proceeds, and LET THEM DO THEIR JOB! 90% of issues are when owners get themselves involved, taking away the power from the professional and openeing an avenue of "oh, now I can get away with..." to the tenants. A true Property Manager's job is to protect their owners and minimalize the liability above all. Hire them, let them do their job, and you'll be better off, wealthier, and happier in the long run!
We have been renting out our beautiful home for the past 4 years ( 3 more to go). DO NOT use a real eastate agent as a property manager. The real eastate co 'gave' our property to whichever agent felt like taking it on, and changed the agent 3 x. We paid for full service and got unqualified people who were doing it as a part time moonlighting job. They also basically gave the handyman the key and he just submitted bills. They charged a full month's rent for findind a new tenant at this last changeover ; no references were checked; no credit checked. This all came to our notice because of a change in tenants and we began to get alarmed. My first hint: when asking about the prospective tenants the realtor ( will NOT call her the property manager) said " your first offer is your best offer". Well I've heard THAT before in reall estate, but I do believe it is nuts if applied to screening tenants. We spent almost $9000.00 in the tenant changeover; the bills kept arriving, and I kept begging for communication and an accounting of how the money was being spent. The realty agent 'acting' as property manager actually told me she was 'too busy'.
We now have a trustworthy, and very organized, and efficient property management company. We were careful to get the companies references from quite a few of their clients who have a similar situation to us. Go online and google 'bad property management' and get pointers of red flags, and how it SHOULD work for you, as well as how fees etc SHOULD be charged and handled. It CAN all be really good, but look out for the negligent ones who take your money and don't do the job you are paying them for.
I own two real estate brokerages in South Florida and we are seeing an excessive demand for rentals. Lately, especially in Boca Raton/Delray/Fort Lauderdale we have actually seen rental prices signinficantly increase because of the demand exceeding supply. There has also been a huge increase in what we call "foreclosure rentals" in which owners are renting out properties that are not current on their mortgages. Renters need to realize that if a deal seems too good to be true, it most likely is.
If you want to play it safe then stick with professionally owned and managed apartment complexes. We provide a free service for clients to search over 100,000 homes for rent, and we do all of the pre-screening so you dont get scammed or caught off guard by any of the real estate schemes out there.
I live in South Dakota, but have been renting my condo in Colorado for the past year. My insurance went from $300/year to $120 a year. My real estate taxes have gone down this past year because the value of the home has gone down. I have a property manager looking over the property right now.
I don't believe that everyone should automatically sell their home. We would have lost a minimum of $15,000 of we sold the property, but instead we're making almost $7000 a year from renting it out. (That's after all of the expenses come out.)
I would watch out for various property managers if you decide to go with one. The first one I had charged 10% rent, plus $40 an hour of maintenance. We have a new home, so this didn't sound like a bad deal. But, each month she tacked on more things that were "wrong with the home." Plus you HAVE to go with their contractors. I was charged $100 to have JUST the kitchen cleaned, when I could have paid my cleaning lady $100 for the entire home! So, just interview your manager very well, and don't be afraid to fire him/her if things don't work out.
But of course renting doesn't make sense for everyone.
"Replace your homeowners insurance policy with rental-home insurance. It covers the building and provides liability protection but doesn’t cover possessions, so it tends to cost about 20% less than a regular homeowners policy, says June Walbert, of insurer USAA."
In my homes I am renting, I upgraded items in my homes so I do have possessions in my rental homes. The townhouse associations only covers the basics. If you upgraded the trim, cabinets, electrical, etc..., they will not be covered if you only get renters insurance.
I recently hired an eviction company to legally kick the tenants out of my property. As of yesterday, the Sheriff's came and did the whole lock out... Here's the time-line:
>> (October - They never paid rent; kept asking us to delay a week)
>> (Early November - we gave them eviction notice)
>> (Late November - Eviction company setup an appointment with the court)
>> (Mid December - Went to court and "won" the case ; tenant decide not to show)
>> (Early January - Setup lock out date with the local Sheriff ; eviction company did it for me
>> (January 13th, 2010 - Police came and gave paperwork to regain control of the property
It is true... Being a landlord is pretty tough, especially when you have a dead beat tenants. I have yet to seen any benefit of being a landlord (5 years). Right now, all three houses (including the one I'm living in) are worth less than what I had paid for. As mentioned by others, sometimes it is better to take the loss now, but my advise is, try to keep the property and do everything you can do to pay off your loan. If you could rent it, then think of it as your tenants paying off your bank loan... Everyday, you're gaining a small % of owning your house. I'm sure the cost of living will rise in the future, and I'm anticipating 25 years from now, I'll be thinking back to realize what a bargain it was to purchase my houses back in 2005. I'm now 31 years old... As long as I can survive paying the mortgage payments, I will own my duplex (debt free) and retire at the age of 56 by collecting the rent money from both properties. If you lose your house now, you won't be able to purchase any other property until your credit is fixed. Loans will become much harder to get approved and by foreclosing, the housing market will continue to suffer, only to help the rich people to buy houses cheap in "Cash". Stop the bleeding!
You also need to check your own mortgage documents prior to renting out your home. Some of the newer loans have clauses requiring the home to be owner occupied or the lender can call the loan due....