Ever think that spare studio in the basement, filled with boxes and clutter, could generate income one day? Have you recently purchased a new home but can’t seem to sell the first due to a lack of demand in your city? It’s not as difficult as you may think to rent out some or all of your property, whether for extra cash or to subsidize a second mortgage.
Staying focused, following the law and implementing proper marketing techniques can help you get that secondary income stream. Here are some steps to get started.
Most single-family homeowners are happy with their seclusion. Noise is much less of an issue in a detached house versus an apartment complex, and you can avoid awkward hallway encounters with unfamiliar neighbors. So, when you make the decision to rent out your home, living with tenants takes some getting used.
“At first I thought it would be weird having a tenant upstairs, but we were very selective on whom we chose. [The] first tenants were two college gentlemen out on an internship for a semester. They were great and really kept quiet and were just all around good tenants,” says Christopher of This That and the MBA.
If you’re eager to make additional income, don’t allow finances to cloud your judgment when it comes to accepting an applicant. Quick money is great, but you might end up with late rental payments, property damages and legal fees if you fail to complete landlord due diligence. Always run a background check so you can assess credit history, accounts, late payments, and, if applicable, bankruptcies and foreclosures. Running credit checks costs money, but can be covered by charging the potential tenants an application fee — usually around $25.
Like any rental property, you have to stay competitive within the market, and dingy, dated interiors just won’t cut it these days.
“When we were living downstairs for four years we updated it so it was really move-in ready for the new people who moved in last August. I refinished those hardwood floors as well to protect them,” says Christopher.
Fortunately, you can make small changes that have a big impact. Applying fresh coats of paint to walls and trim, removing dirty carpeting and cleaning windows instantly creates bright interiors. Keep decor basic by sticking to a neutral color palette and eliminating any overly-unique artwork or furnishings.
For bathrooms and kitchens, simply changing out the hardware can have a big impact and doesn’t involve overspending. If necessary, invest in new appliances like refrigerators, dishwashers and laundry units. After sprucing up the unit, make sure to take high-quality listing photos to best showcase your investments and attract more applicants.
Do your research before you list your rental. These days, you don’t have to be an industry professional to know the local real estate trends.
First, search comparable apartments and rental listings in your city to help you determine the “sweet spot” — the best price range to help pay the mortgage, and potentially make a profit, without overpricing your unit. Keep in mind, even if you aren’t necessarily lining your wallet, your mortgage is being all or somewhat funded by the rental income — so it’s a financial win in the end.
Attempting to rent out your home without documentation is illegal. And, to protect your assets and finances, it’s best that you draw up a formal lease agreement for each tenant.
“[By] working in finance and having an MBA I really knew what to look for in a contract and how to make it enforceable. It also doesn’t hurt to have a few attorneys as friends and relatives to look over our contracts. I think my wife and I have been pretty good judges of character, and the information that we ask on our rental application has really helped us narrow into a good tenant,” says Christopher.
If you’re not lucky enough to be friends with an attorney, consult with an accountant to determine the tax codes for your rental. It’s either an investment property (“No Personal Use of Dwelling”) or vacation home (“Personal Use of Dwelling”). Also spend time researching local, state and federal housing laws before drafting any agreements.
Don’t underestimate the real estate investments you already own. You can use them for positive cash flow without selling — especially in a competitive rental market where the potential for profit is high.
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