Explore the potential complications of converting your home into a rental property, including mortgage and tax fraud and handling destructive tenants.
As a homeowner seeking a new source of income or a change of pace, you might be considering transforming your personal residence into a rental property. However, you shouldn’t take this decision lightly. There are many potential complications when turning your home into a rental you need to know how to avoid. Learn the key ones below.
Mortgage Fraud: A Risky Business
When you first purchased your home, you likely did so under owner-occupied financing terms. However, once you decide to transform your home into a rental property, these original financing terms may no longer apply. Renting out your property under owner-occupied terms without notifying your lender constitutes mortgage fraud, which carries the risk of fines, foreclosure, and even imprisonment.
To avoid these potentially disastrous complications, contact your lender before embarking on your rental property journey. This communication is one of the critical steps to turning your house into a rental property. Your lender may refinance your mortgage to convert it into an investment property loan that complies with regulatory requirements.
Destructive Tenants: Keeping the Trouble Out
It’s every rental property owner’s nightmare: tenants who cause damage beyond the limits of their security deposit. These destructive tenants can lead to costly home repairs that eat into your overall rental income.
Before renting out your property, do your due diligence by thoroughly screening each potential tenant. Background checks, credit reports, and contacting previous landlords can help paint a picture of a prospective renter’s responsibility. Keep in mind that a professional property management company can assist in this process and help you handle other aspects of tenant relations.
Tax Fraud: Doing Your Homework
Another potential complication when turning your home into a rental is tax fraud. Even the accidental misreporting of income, deductions, or depreciation on your rental property can land you in hot water with the IRS.
To avoid unpleasant surprises at tax time, familiarize yourself with the tax laws applicable to rental property owners. Don’t hesitate to hire a tax professional or accountant knowledgeable in rental property tax accounting to help you navigate the complexities of the system.
While turning your home into a rental property can be lucrative, it is not without risks. Certain potential complications when turning your home into a rental, such as mortgage fraud, destructive tenants, and tax fraud, can seriously impact your overall experience. By being aware of these potential issues and taking necessary precautions, you can navigate this journey smoothly.