Liz and I are officially landlords! We started “growing the roots” of our investment by scrimping and saving in 2014 and 2015. On November 30th, 2015 we bought a Fannie Mae foreclosure and the “seedling” was finally visible. And, as of two days ago we handed the keys to three responsible young men that have agreed to pay us $1,200 a month in rent. Our passive income money tree has finally budded and we’re looking forward to putting the money into the next one!
So what happened between the house purchase and the first rent check?
And it’s all important stuff too. If you want to turn a second home into a rental property – or even if you want to turn your own home into a rental property – there are a handful of things you’ll need to do to attract those good renters and a number of things that you really should do to protect yourself with your new business venture.
Want to turn your home into a rental property? I suggest you follow the steps laid out in the article below.
How to Turn Your Home Into a Rental Property
If you’re buying a second home and turning it into a rental property, here’s what worked great for us!
1) Imagine Your Ideal Renter
If you want to rent to a responsible young family that has recently relocated to your area for work, then you probably shouldn’t buy a dumpy house in the bad part of town…even if it is the best deal you’ve ever seen. But, if you want to target those that have had a bad string of luck with bad credit, but high morals, then maybe that dumpy house near the bad part of town is a good idea.
Liz and I had two types of renters in mind:
- A young family that can’t yet afford to buy a home, but are looking for a great looking rental house in a decent area of town
- A few young guys or gals that are fresh out of college, want a nicer place, but don’t want to commit to a house purchase yet
By keeping our desired renters in mind, we scored a house that would cater to either type of renter.
- one block away from the best charter school in the area
- seven blocks away from the local college
- close to grocery stores, the quaint downtown area, and right across the street from the neighborhood park
2) Buy Below the Market
If you’re planning on buying and turning a home into a rental property, it’s not just about the location of your place. It all starts with the deal you can find on your property.
We started eyeballing a house early, knowing that it was priced way too high for the market. Our realtor suggested that we walk through it and then bid once the price came down.
Everything went as planned. We decided that we’d offer $80k, so once the price was lowered to $89k, we put our bid in immediately. They countered at $86.5k and we countered back at $81k, sticking close to our desired bid. To our surprise, instead of countering again they accepted our $81k offer!
Because of some ugly carpet and chipping paint, we scored a $100k house for just $81,000.
Buy below the market, and you’ll have a great start to turning your home into a rental property
3) Make It Appealing, but Not Costly
Liz had to bring me down to earth on multiple occasions when fixing up this rental house. I wanted to install all new cabinetry and put new stainless steel appliances throughout the kitchen. It would have looked great, and it would have attracted a few more applicants, but would it have allowed us to raise the rent from $1,200 to $1,400? Probably not…
No matter how nice stainless steel appliances might look when you turn your home into a rental property, you have to ask yourself the honest question about how much additional rent you’ll get for this upgrade. If it costs an extra $5,000, but will only allow you to increase your rent by $50 because of your location, then it’s absolutely not worth the additional dollars.
The key is to make your rental house appealing, but not costly. Instead of going through with my grandiose thoughts of remodeling the entire kitchen, I decided to heed the wisdom of my wife and keep it simple:
- The kitchen had no cupboard doors, so my dad and I built some new ones out of plywood (for the bottom cabinets – we left the top open)
- For the appliances, I found the stove on Craigslist for $175 and bought a simple white fridge brand new for just $400
- For the pass-through to the sun-room, we took down the ugly accordion door and installed a cool windowed door that we found at the local Restore for just $35
The completed kitchen definitely didn’t take your breath away, but it was clean and attractive. Best of all, it was quite inexpensive to fix up. All in all, the cabinets, appliances, and the sun-room door cost just $600. That’s a beautiful thing!
Turn Your Home Into a Rental Property – Nuts and Bolts
Whether you’re trying to turn your existing home into a rental property, or if you bought a second one, you’ll still want to cross your “t’s” and dot your “i’s” before you let renters into your place. Here are the nuts and bolts of what you should do if your goal is to turn your home into a rental property.
This one is important. If you don’t create a business for your new rental venture and something goes wrong, then your personal assets might be at risk – your home, your car, even your retirement account. If you want to turn your home into a rental property, it’s best to put your business name on the deed.
If you already purchased the home and have it in your personal name, don’t worry. It can still be switched into your business name. All you need to do is fill out a quit claim deed and the county will transfer ownership within a matter of weeks.
If you don’t yet have a business name set up, don’t hyperventilate. It’s pretty painless. Just hop on your state’s main website and register a new business name. Once that’s complete, create an Operating Agreement (needed for an LLC to clearly state the title and expectations of each party). Liz and I had an attorney help us out with this, just to make sure we did it right.
5) Create a Binding Lease Contract
Initially, I went on BiggerPockets.com, found their free rental lease agreement, tweaked it a bit, and figured I was good to go! Well…we soon discovered that this wouldn’t have been the best idea.
After speaking with our attorney, we found out that the city was pretty anal about the contract – even the font needed to be a certain type! In addition to this, we found out that our $5-per-day late fee was more than the acceptable amount and could have gotten us into legal trouble.
If you’re going to let tenants into your property, it’s probably best to let an attorney review your contract. You definitely don’t want stuff biting you in the butt later because you cheaped out on the attorney fees!
6) Consider an Umbrella Policy
If you have your property deeded under your business name and your rental is insured, then you’ve probably got adequate coverage. But, if you have a number of personal assets that make you a target for a lawsuit, then you might want to consider an umbrella policy. I looked into the cost for us recently and it was only an extra $10 a month for a million dollar policy. That’s pretty cheap for the peace of mind it could give you.
Summing It Up – Turn Your Home into a Rental Property
If you want to turn your home into a rental property to start earning passive income. I say you should absolutely go for it! Sure, there are some things you should keep in mind before you hand over the keys, but with the proper preparation, rental income can be one of the best ways to get your passive income moving!
Liz and I want to have options in our life, which is why we chose to turn our home into a rental property. Do you want options? Do you want wealth? Do you want mailbox money? Then you may want to turn your home into a rental property. If you have the money set aside, you might want to consider moving immediately!
Will you turn your home into a rental property?