Top 6 Tips for Turning Your Home Into a Rental Property

There are many reasons for using your property as a rental. Maybe your home has been on the market for a long period, and you've determined that you can't sell it at a value that allows you to break even. Maybe you have an extra home due to an inheritance or another gift that you don't want to sell, or maybe you want to supplement your income as a landlord.

Regardless of your reason, you'll first need to get your house in order both financially and physically. Below are key steps you should take before renting. 

Although you have homeowner's insurance on your home, that isn't enough if your home serves as a rental property. Anytime you have people on a property that you own; you take on some degree of responsibility for their safety. What if a tree falls on the home injuring your tenants? What if there is a gas leak causing an explosion? What if something relatively minor turns into a major legal headache?

Next, what if you purchased this property for the sole purpose of renting and that tree caused so much damage that extensive repairs have to be made making the house unsuitable for renting? A homeowner's insurance policy for renters will often include reimbursement for lost rental income. (For related reading, see The Beginner's Guide To Homeowner's Insurance.)

The requirements will vary by locality, but for a residential property to serve as a rental property, a permit is required. The purpose of the permit is safety oriented. Often, an inspector from the local government will inspect the house for various safety hazards including electrical, heating, adequate exits from the home, and other health and safety concerns. These permits aren't expensive, but they are required.

In addition to the basic requirements, remember that just as you would if you were selling your property, anything you repair or upgrade adds value to the home and makes it more appealing to those who are comparing your rental property to others. Make sure it is clean, freshly painted, and anything that looks severely dated should be replaced providing the cost isn't outlandish. You have to build the costs of the upgrades into your rental rates so don't go overboard.

List all of your costs and what you would like to see as a monthly profit. Don't forget to add into your costs a premium for any repairs you'll have to make during the lease. Once you arrive at a rental rate, check rental rates in the home's area for a house as close to the same as yours. This gives you an idea of how competitive your rate will be to others.

Before you look for tenants, be sure to understand Fair Housing laws, which originally came about as a way to prohibit discrimination based on sex and race. Those laws have changed and are now more complicated. On top of Fair Housing laws, you should run a credit check on prospective renters.

Discerning who is a good prospective tenant can be challenging. Even if you were legally allowed to judge them based on your intuition, experienced landlords will tell you that first, there is never a perfect renter and second, gut feelings are often wrong. You will most likely need the help of an attorney if you plan to make your own application and contract, but a property management group can help you with the rental paperwork.

If your rental property is not a short distance from where you live, or you don't want the headaches that come with the day-to-day tasks of being a landlord, consider hiring a property management company to serve as the landlord for you. A property management company will handle all paperwork, take care of the repairs, collect rent and communicate with the tenants. The company will often charge an average of 10% of your rent for this service.

Property Management companies will also assist you with the legal procedures for evicting tenants. One of the largest worries that come with renting a property is when a tenant doesn't pay. Evicting a tenant is a legal process that takes a lot of time and resources to complete. Although the landlord can't control the actions of their tenants, avoiding eviction procedures whenever possible is advisable due to the cost, time and potential damage to the property as a result of disgruntled tenants. (Find out why this job more closely resembles the role of a CEO than an asset manager. For more, see A Career In Real Estate Portfolio Management.)

TUTORIAL: Buying And Owning Real Estate

Finding horror stories of landlords who found more headaches than profits isn't difficult. Before you decide that renting your home is the best solution, take an adequate amount of time to talk to other landlords and do a detailed analysis of the costs involved. You may find that selling your home is a better use of your time, and could ultimately save you money.