Many homebuyers experience an increase in overall wealth after becoming a homeowner. This can be through the growth of their home’s equity or the fact that their monthly payment can stay low while rents skyrocket.
If you are in this situation and are looking to grow that wealth, even more, you may have thought about investing in a rental property. While rental properties are a great way to increase your monthly cash flow, they come with their challenges.
Can you rent out your primary residence?
There are two keys reasons that you would want to rent out the home you are currently living in.
- You may have outgrown your primary residence, want to move into something bigger while renting out your current home.
- You may want to optimize for cash flow and buy something smaller for yourself and rent out your current home.
While in theory either option can work, there are some things you will want to check first. Look at your current loan and determine whether it allows for renting your primary residence. If it doesn’t, you could commit mortgage fraud without even knowing it.
Many people are caught each year with this type of fraud because primary residence loans come with lower down payments and interest rates. While this can seem enticing, it is considered a felony and not worth the risk.
Have enough reserves
While owning a rental property can provide you with positive cash flow every month, it comes with risk. Without notice you could have:
- Large expenses
- Legal disputes
- Tenants stop paying rent
The reason many people buy rentals is to build “passive income”. However, anyone that has managed their rental property before knows that it can be far from passive. Using a property management company stop you from turning this into a part-time job.
For a small fee, the management company will take care of:
- Communicating with the tenant
- Dealing with disputes
- Collecting rent payments
- Fixing and maintaining the property
Managing it yourself
If you prefer to take things into your own hands, you will avoid paying the fee of a management company. However, there are some things to keep in mind when you manage the rental property yourself.
Since you will be renting your home to strangers, it is critical to screen them first. Make sure before saying yes to a tenant you look at the following:
- Monthly income
- Credit profile
- Criminal background report (depending on the state)
Make sure you have an attorney write and look at all agreements between you and the tenant. While you should have a good understanding of the laws in your local area, consult with an expert to keep you and your property safe.
Make sure that you document absolutely everything. Keeping a record of everything can help to deal with taxes, tenant disputes, and running a P&L monthly. Don’t forget the following items:
- Rent payments
- Repair requests
- Tenant notices
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