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Seven questions to ask before converting your home into a rental property

Seven questions to ask before converting your home into a rental property

Many homeowners are considering whether they should sell or lease their Pensacola home as they are relocating out of the area or looking for alternative housing. With so many homeowners locked in at record low 2.5- 4% mortgage rates, many have affordable payments and don’t want to lose their interest rate. If you’re considering becoming a landlord, we’ve got 5 important questions you should ask yourself before doing. 

1. Can I afford to own this property as a rental? Is there any net profit? 

This is the most important question to consider in owning a rental property long-term. Are you able to afford the ongoing financial investment owning income-producing properties require? Ask yourself the following questions:

  • What are the monthly expenses for the property? Your mortgage payment is a large portion, but not all, of your expenses. What other monthly, quarterly, or annual expenses should you consider like a termite policy, HOA dues, and more.
  • What is the potential market rent? Have a professional evaluate your home. There are so many overpriced homes on the market not renting after 90+ days so don’t make the mistake of evaluating your market rent based on a few active rentals in your area. 
  • What is your net profit on the property after you consider your expenses and the potential income? Does this number work for you? We find most landlords come to a break even point when they have bought in the past few years. Consider that your payment may change slightly when you rent your house out. We often see homestead tax deductions removed and a slight decrease in insurance when the policy transitions to a landlord policy. Insurance has been tricky in recent years though, and you may need to find a new carrier which could result in a four-point inspection, repairs, and a higher insurance. Shop for insurance quotes now while you consider your options, so you don’t experience any unnecessary delays in binding a new policy or surprise expenses. 
  • Do I have adequate savings to budget and save for capital expenditures? In addition to typical maintenance expenses like plumbing, electrical, appliance and HVAC repairs, you need to save for capital expenditures like a new roof or an HVAC replacement. 

2. Is my property a good rental property?

Considering whether your specific property is low or high maintenance goes a long way in this decision. If you have a newer construction home, you’re going to have lower maintenance expenses over the next five years. Take a moment to date the major components in your home like your heating and cooling system, water heater, appliances, and roof. If your home is aging, or you have any aged components you should consider this in your financial analysis. 

The type of construction can be a major factor in budgeting for maintenance. Brick, vinyl sided, or hardie plank siding homes will be lower maintenance. Aside from pressure washing routinely, it doesn’t take much to keep these types of siding in good condition. Items like exterior storage buildings and sheds are often built with wood siding, do not age well, and may need to be replaced over time.  If you have a wood siding home, you are subject to continual maintenance from wood rot and a higher possibility of a major expense like termites. We also see many termites in off grade homes and homes that have additions like a sunroom or screened porch so you may decide to invest in a termite bond that renews annually if your home has. Homes built on a concrete slab are significantly less likely to have moisture issues and costly subfloor repairs. If you’ve got a lot of landscaping or a pool, you may need to budget for professional maintenance on these items. 

3. What will it take to get my home rent ready? While you can sell your home as is, we can't rent it out that way. To attract a quality renter, you need to have your home in good condition and even if it’s in good condition, it may require some initial investment to get it rent ready. Do you have window screens and window coverings in your home? Do you have 10-year tamper proof smoke detectors or a carbon monoxide detector? Most of these items are required under Florida Landlord Tenant Law. 

We recommend going outside and walking around your house to look for potential future maintenance issues. Clean the gutters, pressure wash, trim trees back and cut shrubs below four feet. Remove any large vegetation growing too close to the home and clear your fence line. Then, go inside with fresh eyes and look for cosmetic issues or preventative maintenance items that you can take care of now to save money in the future. Caulk windows, sinks, and tubs. Check for any safety hazards. Make a list of items that you should address. Check all plumbing. Clean the inside of the HVAC closet. We’ll also need professional carpet cleaning and the home be “white glove” clean upon turnover to a new tenant. 

4. What are my long-term goals for the home? Ask yourself what your long-term goal for the property is before making this decision. Is this a property you want to own long-term? Are you prepared to hold this as a rental for the foreseeable future? Will owning this home prevent you from getting a new mortgage loan? If you are in the military, your remaining VA loan entitlement may prevent you from getting another VA mortgage. If you’re going to rent your home here and plan to purchase a home in another location, talk with a mortgage broker to discuss your options. If you’re interested in earning passive, long-term appreciation growth and holding this property for retirement, you’ll be happier navigating landlord life with this end-goal in mind.

5. What are my other options?

If renting is not a good option, what are your other options? We can give you a market analysis of both the rental value and sales value of your home. Depending on your financial situation, you may consider doing one, or both, to see what brings the fastest result. If renting and selling are both not possible financially, what other options do you have with this property? 

6. What are the tax implications? If this is your personal, primary residence, and you’ve lived in your home two of the previous five years, you should be exempt from capital gains taxes on the sale of your property. If you’ve lived in your home for two years and rent your home for three, you’ll have to pay additional taxes when you do sell. There are some exclusions for active-duty military, but we always recommend asking a tax professional about your specific situation.

7. Can you handle being a landlord and can you emotionally detach from this property? If you’ve lived in the property you’re considering leasing, ask yourself if the house has too much sentimental value for you to rent out. If you were raised in this house or brought your first child home from the hospital here, you may have a harder time being a landlord. If you have certain items of value (like your great aunt’s rose bushes), you must be prepared for those items to be lost over time. Like any good business investment, you’ll have to emotionally detach and make business decisions, not emotional ones.