For those of you who rent living space to others…
 

I’m looking for information on converting a typical single family residence into a rental unit. What is needed by way of insurance? I have a mortgage on it, does this need to change? The residence has a wood burning stove type fireplace and I’m reluctant to let a renter use it.

Thanks for the feedback.

Insurance: you need landlord insurance, basically liability + the house. Tenant can get his own insurance for contents of the house, unless you're renting it furnished. At least in my experience for a single-family, it's the same price or slightly cheaper than owner-occupied insurance.

Mortgage: depends on the terms of your mortgage. Don't ask/don't tell might be a solution if you feel you can get away with it. With other mortgage problems being rampant, if you're making payments on time, this will be #57435346356 on the bank's worry-list.

Fireplace: can you find some elegant means of locking the doors down?

Get information from real estate companies in your state and other indy landlords in your area. There are indy landlord contracts available to you as well. Also, consult your city, town, or village in their applicable rules, regulations, and code enforcement that needs to be followed. It varies greatly!

I would require ALL tenants to carry and show active proof of minimum contents insurance. You can do this. Times have changed since decades ago when it was free reign, anything goes renting.

There are advantages to placing the rental property in an LLC to protect your other assets, properties, ect. However, that makes insurance a little of a pain to get BUT it might be considerably cheaper. One place I manage, insurance dropped a couple grand a year under the LLC vs personal. Insurance rates differ a lot via area, for example two similar properties might be 3k apart for fire and replacement policy across a state line, and the same insurance company may not insure both, plus you gotta go through middlemen like brokers who all take a taste.

Mortgage is no problem, consult a local accountant or real estate lawyer about the most advantageous to you way to structure ownership of te property. I insured a couple places that insurance didn't even ask if there is a mortgage or not, I don't think that will impact insurance really.

A regular fireplace didn't selm to freak out insurance people, but they all ask if there is a wood burning stove, that will probably increase rates, and like spdrun said, id either remove the stove, or find some elegant way to make it unusable. A lot of people do that, Ii have working fireplaces in some rental properties, its kind of a tradeoff, a fireplace depending on the region is pretty attractive to tenants, but the fire risk is of course higher.
I sort of make it a tenant by tenant judgement call, with a clause I can remove or include in the lease ect.

I don't require tenants to carry personal property insurance, that's pretty much their problem and only impacts their own property, and whether or not thy do has nothing to do with repairs to the building anyway. References, background check, credit check, all your friends. Avoid frat boys, and look for older gay couples. No one takes care of property like a gay couple.

Are you going to allow pets? Insurance may also ask about dogs and may charge more to allow them. Cats, the places I used don't seem to care

Be somewhat careful with the insurance. The typical fire policy that you get as a Landlord isn't the best, but that's not your primary concern. Those policies have no liability. You can attach one or two rental homes to your primary residence for liability, but be absolutely sure you have $1M of coverage. Usually, you can't get $1M and need an "umbrella" policy to pickup the remainder.

I was once sued by a tenant for $30M. You never know what the fools will do if they latch onto an attorney.

Do not let a tenant handle any heating appliance other than a plug in electric heater (and that's a stretch).

I just sold my last single family rental and, although it payed for itself 3X over the past 30 years, it was almost always a hassle. The market you are in is critical to success with SF's and our local market is dicey for the SF market. In an area like ours where median income is well below the state, or even county levels, multiples have huge advantages.

Good luck!
Jim

X2 on that.

My dad (actually step-dad, but he was more of a father to me than my bio-dad) owned and managed a large number of rental properties, comprising of single family homes, condos, and apartment buildings. He fixed everything himself. While the renters paid off all the mortgages several times over, it was a constant hassle. It has to be something you enjoy, or at minimum, something that you can tolerate. I quickly learned it was not the lifestyle for me.

I grew up as the kid mowing yards, painting walls, peeling off wall paper, shampooing carpets, etc.

The sad thing is that he left a multi-million dollar estate to my mom when he died about 15 years ago, and now it's all gone. My mom has managed to whittle away a lifetime of hard work and saving to finance a lifestyle of acquisition and consumption. She's gone through about $1,000,000 in cash and sold off each property systematically over the years, and it's all gone.

My advice is regarding the contract. If you have expectations or requirements... put it in the contract.

I want my tenants to water the lawn twice a week... I have it in the contract. I tell them that all I have is property ins no content. They need to get renters coverage if they want coverage. I include move out costs. Lawn care requirements. I have them initial each page of the contract and each item on the addendum page where I put all the special items.

It may be over kill but given the fact that people sue at the drop of a hat it just gives me a little piece of mind.

super important point, x2. I had to specifically get insurance companies to quote liability. You have to make sure they put that in the contract, a lot of them quote you replacement costs, but no liability, and as Brian says, its amazing what some fool might sue you for.
I managed to get one insurance policy with a $1M liability, and more through another insurance policy. I still want more.

You can take out the word "almost".

I have found that the selection of the tenant is always critical to success. Unfortunately, it's more art than science. I have become much better at it after 25 years at spotting DB's but every so often a woman will present herself in a manner that appears to be ideal, but proves out to be anything but.

1) Don't allow pets.
2) Don't allow kids over the age of 1. They tear stuff UP.
3) I new one guy who removed the garbage disposal so the renters would not put every damn thing down it.
4) Don't let renters paint or wallpaper or change stuff without permission.
5) If you are buying a place to rent out, rather than converting a house you live in, pick the type of house that is good for renting. Not too high end and not too cheap (unless you want to be a slum lord). Expect people to treat things like it is NOT theirs.
6) If you are running numbers on financials, factor in at LEAST a 15% vacancy rate. This will cover the time between renters and time to fix it up again.
7) The IRS will calculate depreciation even if you don't (not 100% sure of this anymore), so when you sell, your capital gains is based on the depreciated value.
8) But if you sell at a loss, you can write off the loss because it is now a business, a loss of your homestead you get no tax break.
9) Best renters are married couple or a single woman. 2 female roommates next and dead last is male roommates.

You can't really (legally) discriminate against kids or by gender. Pets can be charged a higher rent in some areas -- we did that with a lady who had a cat. Not sure if removing the garbage disposal is such a wonderful thing -- you're more likely to get people just flushing stuff down the sink without grinding it. Draino time, baby!

Also, don't discount students:
I live near a major university and associated hospital. As far as renting my apartment short-term while traveling, I've had good luck renting to medical students and internes. Yeah, they're students, but they're usually far too overworked/dog-tired to party, or they just needed a place to hole up and study for their medical board exams in peace. Also to a med student's parents once -- med student had a tiny studio flatlet and needed a cheaper place for his Israeli parents to stay than a hotel.

As a private homeowner, you might have more freedom to pick your renters. If you own an apartment complex, then no. It would vary depending on what state you live in too.

Students are a GREAT way to get steady renters, however plan on some serious damage and wear. Buy with that in mind, go low end, they don't care, they are temporary and are looking for a crash pad.

The med students all left the apartment in good condition. Worst damage was a broken cup. Another student actually left the place CLEANER than before, which amused me greatly.

As far as discrimination, I think it's OK (legally, not necessarily morally) to do so if you live in one half of a duplex, but not if you don't live on premises.

Thanks to all for the feedback.

WRT the mortgage, what needs to be done for the mortgage to satisfy the bank for renting the place? What is the risk if I don’t meet the bank’s requirements for this? I haven’t asked them.

Not that I know, but if I add/change the insurance to cover my risks for renters, does the insurance company contact the bank at some point?

How does one go about getting a sense of what the rent price should be?

Depends what your mortgage stipulates. Some only require that you live in the place for 12 mo after purchase, others prohibit conversion to rental. Worst case, they can call in the loan and you'd have to refi at about 1% higher rate than prevailing. Since rates are low now due to Counterfeiter Ben's policies, now may be the time to just convert to a commercial mortgage and get it over with.

However, if you're discreet about renting, I suspect you'd never get caught.

My recommendation is not to contact the bank. What they don't know will not affect you in the slightest. They wish to be paid on time.........and to get their annual insurance certificate..........that is it.

The insurance company never contacts the bank. You contact the bank by providing the insurance certificate. Some banks get onerous over the level of insurance that you have. If you have a basic fire policy with limited coverage, they could get antsy about it.........but, will let you know forthwith.

The best sense of value is provided by local real estate agents who do rentals. You can give them the listing for a trial basis. Some do quite well at vetting tenants...........some don't. You limit the number of available tenants because of the fee, however, and for the long haul, you're going to want to advertise and screen tenants yourself. But, for the first time, an agent can be of value to you.

Sorry to read that, Suginami. :(

Although tragic that your Mother has lost to the extent she has, without someone to reign in some ppl's money and management of that money's decisions in with sage advice, then it's Katy bar the doors, in what can happen to liquid assets in very short order.

I was fortunate to have both a Mother and a Father that understood the ramifications of the RE assets they built over 30 years. The tremendous hard work, dedication and attention to a RE business, doesn't always have to be frittered away, but it does happen to some families. :o

As far as possessing income-producing RE? It's not for the faint of heart or will, IMO.

Depends on the exact location/condition of the RE. All things being equal, one should use 1% +/- a month as recoupment of one's total investment.

One way to get an idea of the rent price is to look at comparable Craigslist ads in the surrounding area, average them out, and deduct 10% or so (since anything is negotiable). Other less nice way is to grab pics of the property, make a description, and advertise it online before you buy it with a throwaway e-mail addy and Google Voice number. See how many responses you get :)

Pull the wood stove.

I took mine out of the rental and replaced it with a pellet burner.
I did the install and made it bomb proof.
No issues, and the tenants are not at the mercy of the electric heat.

another tip based on this morning :D-

If an existing tenant has an existing personal property insurance policy at the rental address, and you purchase the property and take over his lease, find out the name of his insurance and DO NOT call them for a property insurance quote.

I was calling around, and the local state farm agent while in discussion of quoting insuring the property mentioned he was insuring the renter at that address. Somehow, with a general quote provided, and me going with another insurance agency a number of months ago, I have started to receive bills for the tenants personal property insurance through some kind of bureaucratic snafu.
digging now, but state farm would like 450 bucks a month to insure the tenants crap, and they are sending both of us bills for the same amount. Im a good landlord, but I draw the line at insuring their possessions for them. :D

> My recommendation is not to contact the bank. What they don't know will not affect you in the slightest. They wish to be paid on time.........and to get their annual insurance certificate..........that is it.

Perhaps, but what is the risk if the bank finds out? What can they do?

I don’t have a problem paying for suitable insurance for having a renter, but have no knowledge of if the insurance company will contact the bank about a change in the insured use of the property.

> Depends on the exact location/condition of the RE. All things being equal, one should use 1% +/- a month as recoupment of one's total investment.

I have no idea about the answer but do others agree or disagree with this as a valid assessment for a typical 1 year lease type of rental?

For the specifics of what they can do, you'll have to read your note. It specifies the terms of the loan and whether you must occupy the premises as your primary residence.

If you violate the terms of the loan, technically, they are permitted to call it. However, I'd seriously doubt that would ever happen.