1. Treating a rental casually
Renting out your home is a business. Fail to treat it as such and you could be hit with fines or legal judgments that far exceed a few mortgage payments. Collect any rent and you are a business in the eyes of:
The tax man: Rent is business income and must be reported to the Internal Revenue Service. On the flip side, certain repairs and upkeep, in addition to mortgage interest, can be deducted as business expenses. Don't skip the extra paperwork; if the IRS finds unreported income, you can be ordered to pay penalties, back taxes and interest. Also, at some point your house could be reclassified as an investment property, which has different tax implications than a primary residence.
Insurance companies: Turning your home into a business isn't necessarily covered under your homeowner's insurance. "If there's a fire and you're not living there, the homeowner’s policy won't cover the loss," says Mark Adams, a real-estate lawyer with Hall, Render, Killian, Heath & Lyman, in Troy, Mich. Get liability insurance to protect your house and its occupants.
Authorities: A host of federal, state and local regulations exist to protect renters from hazardous living conditions and discriminatory housing practices. Think of it this way: You are free to be as stupid as you like in your own home, by failing to install a smoke detector, for example. But as a business you are responsible for protecting your tenants. Even an occupant without a lease can be considered a "tenant at will" and has legal protections.
2. Going it alone
Thick books are devoted to the many ways in which landlords can be successfully sued. The experts recommend talking to — and preferably hiring — a property manager (if not a lawyer) familiar with the regulations in your city and state.
Some of the large companies might not take single-property clients, says Liz Berg, owner of Landlord’s Best Friend Property Services, in Portland, Maine, and one of many who don’t advertise. "They do exist, but they're not always easy to find."
Try linking to the local affiliates of the National Association of Residential Property Managers to find a property manager. The National Apartment Association has local groups that publish "red books" with regional regulations. Or start by reviewing the statutes for your state.
Property managers can tell you if your property is up to code and what to charge, and do the advertising, screening and lease management for a fee, typically around 10% of the rent.
3. Confusing 'rent' with 'mortgage'
It's natural to assume the rent should cover the mortgage. After all, it's what you paid to live there, right? But this is not how it works. It is the most common misperception new landlords have, say property managers.
The mortgage is an agreement you made with the bank based on the sum of the loan, the percentage you put down, your credit history and the market valuation of the property at the time of sale.
Not one of these factors goes into determining rent.
"There's no relationship whatsoever between what they pay for mortgage and what they rent it for and pay us," says Bob Alldredge, a property manager and owner of Jericho Properties Realty, near Denver.
Remember that the two also buy different things. A mortgage pays for an investment. Rent pays for a temporary roof with none of the financial or tax benefits of ownership.kaho
1. Treating a rental casually
Renting out your home is a business. Fail to treat it as such and you could be hit with fines or legal judgments that far exceed a few mortgage payments. Collect any rent and you are a business in the eyes of:
The tax man: Rent is business income and must be reported to the Internal Revenue Service. On the flip side, certain repairs and upkeep, in addition to mortgage interest, can be deducted as business expenses. Don't skip the extra paperwork; if the IRS finds unreported income, you can be ordered to pay penalties, back taxes and interest. Also, at some point your house could be reclassified as an investment property, which has different tax implications than a primary residence.
Insurance companies: Turning your home into a business isn't necessarily covered under your homeowner's insurance. "If there's a fire and you're not living there, the homeowner’s policy won't cover the loss," says Mark Adams, a real-estate lawyer with Hall, Render, Killian, Heath & Lyman, in Troy, Mich. Get liability insurance to protect your house and its occupants.
Authorities: A host of federal, state and local regulations exist to protect renters from hazardous living conditions and discriminatory housing practices. Think of it this way: You are free to be as stupid as you like in your own home, by failing to install a smoke detector, for example. But as a business you are responsible for protecting your tenants. Even an occupant without a lease can be considered a "tenant at will" and has legal protections.
2. Going it alone
Thick books are devoted to the many ways in which landlords can be successfully sued. The experts recommend talking to — and preferably hiring — a property manager (if not a lawyer) familiar with the regulations in your city and state.
Some of the large companies might not take single-property clients, says Liz Berg, owner of Landlord’s Best Friend Property Services, in Portland, Maine, and one of many who don’t advertise. "They do exist, but they're not always easy to find."
Try linking to the local affiliates of the National Association of Residential Property Managers to find a property manager. The National Apartment Association has local groups that publish "red books" with regional regulations. Or start by reviewing the statutes for your state.
Property managers can tell you if your property is up to code and what to charge, and do the advertising, screening and lease management for a fee, typically around 10% of the rent.
3. Confusing 'rent' with 'mortgage'
It's natural to assume the rent should cover the mortgage. After all, it's what you paid to live there, right? But this is not how it works. It is the most common misperception new landlords have, say property managers.
The mortgage is an agreement you made with the bank based on the sum of the loan, the percentage you put down, your credit history and the market valuation of the property at the time of sale.
Not one of these factors goes into determining rent.
"There's no relationship whatsoever between what they pay for mortgage and what they rent it for and pay us," says Bob Alldredge, a property manager and owner of Jericho Properties Realty, near Denver.
Remember that the two also buy different things. A mortgage pays for an investment. Rent pays for a temporary roof with none of the financial or tax benefits of ownership.kaho