When property values increase in a hot seller’s market, some owners cash in on their equity by selling. Others turn their home into a rental property, drawing some income while their property likely continues to appreciate.
Here are some considerations to keep in mind in becoming a landlord:
Wear and tear: Tenants and pets can be hard on the home, especially on the carpet and paint. It’s a good idea to replace any carpet with tile or vinyl planks and avoid using flat paint on the walls.
A budget for repairs: As landlord, you’ll need to budget for repairs, not only for when the tenant vacates but to be prepared in case the air conditioning and other appliances break. Consider a home warranty plan. If you have nice landscaping or a pool in the backyard, you may want to hire someone to maintain them and include those costs in the rent amount.
Credit and background screening: This is a must to protect yourself. The application alone is not enough to tell the worthiness of a prospective tenant. You want them to pay the rent every month — on time.
Hire a property manager: If you want to be a landlord, but not have the related responsibilities, hire an experienced professional to manage the marketing, screening and drafting of the lease documents. A property manager can provide expertise on tenant/landlord laws and keep you out of expensive tenant litigation.
Taxes: If the home is no longer your primary residence, you may have to pay higher property taxes. Moreover, when you sell you, may have to pay capital gains tax. Engage the services of an accountant with real estate experience to help you prepare for and avoid the pitfalls of tax time.
Property values: Playing the real estate market is a bit like the stock market. There is no guarantee property values will consistently go up year after year. If prices fall, you lose equity, plus rent values will also likely decrease.
This column appears in the January issue of InMaricopa magazine.