Are you thinking about turning your home into a rental property? Property investment is a big gig, with more than 2.2 million Australians owning one or more investment properties.
From legal considerations to financial options to property management, there are a lot of moving parts when it comes to turning your home into a rental property. The multitude of stuff you have to be aware of is enough to make many owners nervous - but we guarantee that it gets easier with experience!
Let’s break down what you need to know before you take the leap and turn your home into a rental property, and the steps to get there!
Before making the leap and turning your home into a rental property, you’ll need to get your house in order - pun intended. Property management can be expensive, but when done right the eventual benefit outweighs the costs.
Let’s talk money.
Refinancing your property
If you’re considering transforming your home into a rental property you might be wondering - can I rent out my house on a normal mortgage?
If you have a mortgage for primary residences - you might be required to be living in your property. Veteran Affairs or VA loans are financial schemes to help veterans and service people buy or build properties and they also usually require the owners to live at the property.
The occupancy clause of the loan agreement will specify the amount of time you’ll have to live in the property before you can rent it out. Make sure to check the fine print so you don’t get caught in mortgage fraud!
Now you might be thinking, well, if I can’t rent out my house on a normal mortgage right now, I’ll change my mortgage.
And you’d be right. Technically, you can refinance your home, or change the loan/mortgage you have to a more competitive loan with a lower rate.
Generally speaking, owner mortgages have lower rates than mortgages for investment properties, so it might end up being more cost efficient for you to wait it out and rent your property as your loan agreement stipulates.
Is it necessary to renovate?
If you’re in the clear to convert your home into a rental, the first steps will be to get your property ready for rent.
First things first: compliance. Compliance comes up a lot as a major concern for about 53% of the property owners that reach out to us.
- Structural safety
- Adequate ventilation and lighting
- Working electricity/gas systems/appliances
- Adequate plumbing and drainage systems
You’ve probably kept your home in good condition. But you can still conduct an inspection to make sure that compliance issues don’t pop up later down the track.
If you’re good to go from a compliance standpoint, you might be asking: if I want to rent my house, do I have to give it a makeover?
Costs of having a rental
While owning an investment property is a great way to get cash in, it also comes with a price tag. So, a lot of what you make will go back into expenses, not your pocket.
Before you make the decision to turn your home into a rental property, you need to be aware of the costs.
The major expenses you can expect include:
- Land Tax
- Landlord Insurance
- Council Rates
- Maintenance and Property Management (unless you want to go DIY)
However, it’s not all bad news. Even if your property doesn’t bring in the rent to cover the expenses, you can get a tax concession on your income.
What are the financial benefits of owning an investment property?
There’s a lot of hype when it comes to owning an investment property. And that’s because it can be very profitable when done right and with patience. So let’s break down the financial benefits of having an investment property.
Positive and negative gearing
A positively geared property is a property that generates more money than what you spend on it - i.e it generates positive cashflow. So, a negatively geared property - yep, you guessed it - generates less money than what you spend to manage it.
Positively Geared v/s Negatively Geared
1) Extra cash
1) Extra cash won’t be much
1) Capital growth over time
2) Tax exemptions on:
- Maintenance costs
1) No cash in hand
Capital gains tax
According to the ATO, Australian property owners can treat rental properties as their own home so they can make claims on capital gains tax and get exemptions.
You can treat your property as your main dwelling even after you’ve vacated it:
- For up to 6 years if you use it for income
- Indefinitely if you don’t use it for income
A good landlord knows where it’s at in terms of keeping tenants happy, meeting their legal obligations, and their property well looked after. They think on matters more like: I give my tenants a safe and pristine home, and they give my house TLC. It’s a win win!
Familiarise yourself with the responsibilities of a landlord
A good property owner meets their legal obligations towards tenants and understands tenant responsibilities.
Your responsibilities are:
- Ensuring the property meets minimum living requirements and is kept at that standard when the tenants move in
- Responding to maintenance requests within a reasonable time frame
- Respecting the tenant’s right to privacy
Draw up a leasing agreement
Your leasing agreement is your first line of defense for yourself and your property if things go awry.
The leasing agreement defines the relationship parameters between yourself and tenants and specifies:
- When tenants pay the rent, how frequently and with which method
- If subletting is permitted (AirBnB subclause)
- Property modifications
- Tenants can receive eviction notices if agreement is breached
You can include as much detail as you want in the leasing agreement. Your tenants will need to sign it and keep a copy before they move into the property.
A good landlord insurance policy is your safety net should anything go wrong between you and your tenants.
Now, 30% of insurance claims are on loss of rent, so most insurance policies will cover rent arrears. But there is lots insurance policies should cover you for, like:
- Landlord contents
- Damage to property
- Personal injury
Insurance policies aren’t cheap. But, there are a lot of deals out there.
So, before you commit to a particular policy, do your research.
When/should you do it?
You’ve got an idea of the responsibilities when it comes to managing an investment property. Before converting your home into a rental property, you should:
- Be clear on your financial goals and long term investment plan
- Assess your budget
- Prepare to meet all your legal responsibilities
- Be willing to put in the time and energy for managing an investment property (especially if you DIY)
If making extra cash is a primary goal for you, and you own a positively geared property, then turning it into a rental might be the way to go.
But if you’re more interested in tax benefits and can cope with the financial losses, you might be better off investing in turning your home into a rental property if it’s negatively geared. You’re more likely to make big profit if you come to sell a negatively geared property down the line.
Moreover, if you can cope as a DIY property manager or can afford a good property manager to care for your property, then it’s probably worthwhile for you to go ahead and turn your home into a rental.
If you can’t however, it may be wise to spend more time saving and strategizing before turning your home into a rental property.
Getting tenants into your rental
Good tenants are like butter to bread. They’re the difference between a good landlord experience and a bad one.
We’ve prepared a few tips to make finding tenants easy. You’re almost there!
Determine the right renter
It’s important to have an idea of who your target demographic is before you advertise your home.
In order to determine the right renter, consider:
- How many bedrooms and bathrooms you have in your property
- The location of the property
For example, if your property is located in a quiet suburb, a family will be better suited than a group of students.
Set the rent
Next up - setting the rent. You’ll need to determine what to charge tenants before you rent your property out to them.
If you’re keen on learning the ropes yourself, read our guide on how to conduct a DIY rental appraisal.
Market your property
Now that you know who your ideal tenants are and what you’ll be charging them, you’re ready to get out there and put your property on the market.
Having a property manager will come in handy here as property managers will be able to list your property on sites like domain.com.au where you’ll get more exposure and better quality applicants
You can’t just let anybody into your rental property. You’ve got to take advantage of opportunities to figure out the right candidates for your property.
Here are some key tips on finding good tenants:
- Open homes: make sure your house is spick and span before you open it to potential renters. On the day, keep an eye out for inconsistencies and bad habits like smoking. First impressions go a long way!
- Interviews: Not everyone conducts interviews, but they’re a good avenue to dig deeper if you’re concerned about aspects of a certain renter’s application.
- Background checks: Screening applicants is very effective in weeding out problematic applicants. Make sure to cross check:
- Professional and personal references
- Tenant database
- Rental history
Have a read of our guide on how to find tenants that’ll take care of your property.
In the long run, having an investment property is always a winner. Turning your home into a rental will be a bit of a trek but with this guide, you’ve got what you need to get started. With time, you’ll develop an instinct for what tenants want and the best ways to manage your property.
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