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Renting out a home for income can be a good way to make some extra cash, but it may not be for everyone in every situation. And there are some costs associated with owning a rental property.
Here's how to start the process, and what needs to happen well before you start.
1. Create an extra emergency fund
Replacing a major appliance, like a refrigerator, or managing a heating repair can cost thousands, and you'll need to have the cash on hand to cover it. Long-term renters could miss a rent payment, or things could go wrong through a short-term rental platform. You'll need to have cash on hand to keep yourself covered.
Freelance writer and landlord Kelly Burch set aside a large emergency fund of $10,000 before renting out her home. "With that much money on hand, I know that I will be able to respond quickly to most issues," she writes for Business Insider.
Writer Clint Proctor also suggests an emergency fund for anyone with short-term rentals in mind. "Certain months you may absolutely kill it. And the very next month, you could be checking your phone each day just hoping that a booking will come through," he writes. "To prepare for this 'up and down' income roller coaster, I recommend saving up."
Financial planner Jovan Johnson says that a separate emergency fund exclusively for your rental property is a must. "Having a rental property basically means you're running a business, so you need an emergency fund specifically for that property," he tells Business Insider. No matter what happens, you'll still owe the mortgage each month, and having cash on hand can help you avoid financial damage.
2. Make sure to have the right insurance coverage
When you're renting out your property, your standard homeowners' insurance policy may not be enough.
Most homeowners insurance policies don't cover short-term rental units, according to the National Association of Insurance Commissioners. You may need to add special coverage for short-term rentals, which could add a few dollars to the total cost of your insurance.
And people planning to have long-term tenants may need to look into a landlord insurance policy. According to Allstate, homeowners insurance is only for people who plan to live in the home. If someone else is living there long-term, landlord insurance is the better move.
Burch ultimately decided to go one step further and get an umbrella insurance policy, a type of insurance that adds extra liability coverage, which can help if you're caught in a lawsuit. While it added about $150 per month to her insurance bill, it makes her feel sure she'll be covered.
3. Do your research on the relevant laws and rules
As a property owner, you should learn the rules and limitations well before getting into renting your home. There are certain rules both you and your tenant will need to abide by, and there are laws on everything from how much you can charge to visiting your property.
It makes sense to start learning about your city's landlord and tenant laws well before listing your property. There may be rules around rentals in your city, and you'll need to know them.
It's also worth doing some research into any neighborhood rules, or homeowners association rules if you're in a larger building.
Knowing these rules can help you be a better owner, landlord, or host, and keep you from running into problems down the road.
4. Set realistic expectations and make a clear listing
When renting out your home, you'll want to have realistic expectations on the price and how much you could earn. Do your research on homes in your area, as rent prices can vary widely by your specific location.
Then, you can start making a listing. Choosing where you want to list your property is a first step, which will largely depend on what type of renter you're looking for. Those wanting short-term vacation rentals can try rental sites like Airbnb or VRBO. For long-term renters, putting your home on popular apartment rental listing sites is a good start, and sites like Craigslist and Facebook Marketplace can be helpful as well.
Take photos that are clear and high-quality. You can also hire a professional to take photos of your rental home to help your listing. Your listing should include clear and detailed information about how much you expect to charge, the highlights of your property, and feature key things important to other renters in your area. Reading through other nearby listings can help you construct your listing.
5. Keep track of all the expenses
When you're renting out your home for income, you're going to have to pay taxes on your earnings. However, you have an advantage to help offset those costs, says TurboTax tax expert and CPA Lisa Greene-Lewis.
As a rental owner, you can deduct some expenses for home improvement, or expenses related to your rental. "You still get to deduct the mortgage interest and property taxes, but you can also deduct utilities, maintenance, and anything you do to fix up the property," Greene-Lewis previously told Business Insider.
Consulting a tax expert can help you determine exactly what expenses you can deduct, and what expenses you should keep track of. Keeping careful track of these expenses and all receipts will be a big help when the next tax season comes around.
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