Converting your residence into a rental property

In a strong buyer’s market, the decision to sell can be a costly one. Selling can cause homeowners to realize losses in equity or in some cases can even require them to bring money to the closing table. So what can you do if you need to move but can’t afford to sell your house? Is renting a viable option? What are the pitfalls that can magnify an already complicated situation?
Some of the biggest issues faced by homeowners who convert their house to a rental property are contained in their mortgage. The primary thing that homeowners need to understand is that a mortgage is nothing more than a loan that is collateralized by the value of their home. For this reason, the terms of most mortgages prohibit homeowners from engaging in conduct that could jeopardize the value of the property. To this end, some mortgages require that the property be owner occupied or at a minimum that the lender has the right to screen potential tenants to ensure that their collateral is in good hands. Before attempting to rent out your home, you should, at a minimum, read your mortgage to determine if it addresses your ability to do so.
Another issue in your mortgage deals with default and the ability of the lender to accelerate the entire principal balance. As with any landlord situation, there may be times where your renters fall behind in their payments or worse, your property sits vacant, so you should make sure that you have a few mortgage payments saved up so that you do not fall behind in your obligation.
Finally, you must pay attention to details to ensure that your lease is well drafted, your tenant screening procedures are in compliance with state and federal law, and your property insurance policy is appropriate for a rental property. Among the many considerations in drafting your lease, you should be sure to provide for maintenance and upkeep, utilities, termination procedures, insurance, and occupancy restrictions (including pets).
With proper planning, renting your home can be an effective way of building your real estate portfolio or simply postponing sale until the market has rebounded. It is not however, something that should be taken lightly and inadequate planning can lead to devastating results.