Renting Your Home For Income - Should You Do It?

Thinking of becoming a landlord? The experience can be both rewarding and nerve-wracking

. A reliable tenant who pays the rent on time and takes care of your place is your best-case scenario. But be advised: Renting out your residence has financial implications.

Financial ramifications of renting residence:

First and foremost, turning your residence into a rental property generates a new stream of income. However, reaping the benefits requires being in it for the long haul.

While rental income is taxed as ordinary income, your tax bill could be reduced thanks to numerous tax breaks for landlords. Because youll be able to deduct certain expenses and depreciate your property, its important to consult your accountant.

When you sell the property, tax implications will be based on the period of time you lived in the home prior to the sale. You may be required to repay any depreciation deductions taken.

With rent comes responsibility:

Renting comes with a huge financial and management responsibility. If you are moving out of state or prefer not to deal with the tenants directly, find a property management company to do the heavy lifting for you. This will cost you about 10 percent of the rental fee.

It will be very important to have money set aside to cover unexpected repairs and/or unpaid rent.

To determine the amount to charge for monthly rent, check to see what a similar property in your area rents for. Look in the newspaper and on websites such as Craigslist.com and Rent.com.

So, how do you vet a prospective tenant?

1) Attract a better quality tenant by making your home more appealing. You dont have to break the bank, but a fresh coat of paint and updated carpeting may do the trick. An attractive exterior and well-tended yard sends the right message too.

2) Research prospective tenants by checking credit scores, proof of income and references. Carefully study the rental application and verify their employment.

3) Ask a friend to sit in on the interview this will help you be objective.

4) Have an airtight lease agreement reviewed by an attorney and make sure to collect a security deposit.

The bottom line: Renting out your home may appear to be the answer to your cash flow problems. But before you start dreaming about what you could buy with your newfound largesse, play out the worst-case scenario. Determine how long you would be able to cover unpaid rent and how much you willing and are able to fork out for repairs. Before you decide to become a landlord, understand the risks and consider the financial pitfalls.

by: Denisa Tova, MBA, CFP,CDFA, ChFC, CLU

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