4 things you must do before renting
If you want to rent your house, here's what you need to do:
Be flexible. If you need to rent your house, chances are others do, too. Your house may go unrented for a few weeks or even a few months. If you rent your house to a company, particularly for use by an overseas employee, it may require a "diplomatic clause" that allows the company to break the lease with 60 days' notice. "Prepare for some down time," advises Hans Stahl. "A two-year lease doesn't necessarily mean two years."
Talk to your accountant or tax adviser. Renting has tax implications for landlords. Rental income is taxable. Some states revoke the homestead exemption on your property taxes if a house is no longer owner-occupied. You can depreciate a rental property, which can offset your property-tax gain, but also be aware of depreciation recapture, in which depreciation allowances are taxed, upon sale, as capital gains. "That's one thing I wished I'd known about going in," said Robert Haskins, who rented his house in Maine for four years.
Call your insurance agent. Your owner-occupied homeowners' policy likely won't cover your house as a rental. Stahl said to expect about a 50% increase in your annual premiums once you move out and renters move in. He also advises setting up a limited-liability corporation, or LLC, and signing a quitclaim deed to turn your house over to the LLC. This will protect your personal assets, should a tenant or guest sue you. An attorney can set this up.
Know your market rate. Rules of thumb may no longer apply, depending on where you live. "In Detroit, for years, it used to be $1 of rent per square foot," said Stahl. "Now that's more like 80 cents." But in college towns, it could be far higher, even if you're not renting to students. Know your local occupancy rate and set your rents accordingly. This is a good place for a reality check, too; if your mortgage payment is already above what you could charge for rent, you're going into it backwards. It's probably time to lower your selling price and get out from under it.