Turn Your House Into a Rental Property

If you're moving but don't want to sell your house, here's what you must know to prosper from tenants.

Start by hiring a real estate agent who has experience leasing properties. The agent can screen prospective tenants and help you decide how much to charge, says Michael Corbett, a real estate expert at Trulia (opens in new tab), an online home-value estimator. Ideally, you should meet prospective renters so you can ask questions that aren’t covered by boilerplate applications. Do they work at home? Throw a lot of parties? Collect and repair antique motorcycles?

See Also: Find the Best, Latest Mortgage Rates in Your Area via Bankrate.com

Put as much detail in the lease as you can. The lease should specify the expenses the tenant will be responsible for, such as trash collection, utilities and landscaping. Many states and municipalities have laws and regulations for multiunit buildings, but most don’t cover single-family-home rentals.

Because you’re moving to another city, you’ll probably need to hire someone to manage the property. Ask your real estate agent and other landlords for referrals. The National Association of Residential Property Managers (opens in new tab) offers a tool to search for property managers in your area. Fees vary depending on the services provided, but in general you can expect to pay 10% of the monthly rent, according to ManageMyProperty.com, which provides quotes for property-management companies. Some firms charge a flat monthly fee.

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When interviewing property managers, ask them how they handle emergencies. Do they have someone on staff to deal with routine problems, such as a stopped-up toilet? Will the firm contact you before making repairs that exceed a specified amount of money?

Insurance. Call your insurance agent before you hand over the keys to your new tenant because you’ll need to change your coverage, says Bryan Wolfe, director of product management for USAA. In most cases, your rates will drop because rental property insurance covers the structure but not personal belongings, he says. If you plan to leave some of your belongings, such as large appliances, in the house, you may need additional coverage. Make sure you maintain your personal liability insurance to protect yourself against tenant lawsuits. In fact, you may want to increase your liability coverage because you won’t be around to stop potentially litigious events. At USAA, liability coverage for $1 million in damages costs about $30 per year.

Encourage your tenant to buy renters insurance. Some landlords require renters insurance because tenants who have coverage may be less likely to sue.

Taxes. Rental income is taxable at your ordinary income rate, so don’t overlook deductible expenses that will lower your tax bill. Property-management fees, insurance, mortgage interest, property taxes, cleaning services and repairs, plus travel expenses to make repairs or collect rent, are all deductible.

As a landlord, you’re also allowed to deduct depreciation. Depreciation is based on the lesser of the fair market value of your home at the time you convert it to a rental or your tax basis, which is basically the amount you paid for the home plus improvements and additions. In either case, you must subtract the value of the land; only the value of the structure can be depreciated. Once you’ve established the appropriate value, divide it by 27.5 (the tax code assumes residential real estate has a useful life of 27½ years) to calculate a full year’s deduction.

There’s a catch. When you sell your home, you’ll have to pay tax on the amount you claimed for depreciation at a maximum rate of 25%. Consider getting help from a tax professional. (Learn more about tax planning for selling your home.)

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.