5 Things To Consider Before You Turn Your Primary Home Into A Rental
As mortgage interest rates continue to hover around 7% for a 30-year fixed-rate mortgage. The prospect of renting ones home here in Bellevue, WA and the surrounding Seattle Metro Area has crossed the minds of many a homeowner. However, owning a rental units involves a lot more than just fixing leaky faucets and screening tenants. Things like vacancies, fair housing laws, "Just Cause Evictions," business licensing, major repairs, and property management expenses are just a handful of the often overlooked factors for newer landlords.
Renting your current primary home and buying something new can be a great way to build generational wealth, it’s what my wife and I are doing. However, Washington state has some pretty strict laws regarding the relationship between landlords and tenants. So I wanted to give you five things to consider if you're thinking about turning your current home into a rental.
NOTE: This info is catered to Washington State and the Seattle Metro Area, but the general concepts work for any location. Just be mindful of your own local regulations and costs.
Be mindful of soft costs.
Remember this, appreciation comes and appreciation goes, but the cash should always flow. Yes, there are some circumstances where you may have a rental unit solely for the depreciation aspect, but that isn't going to be your go-to exit strategy usually. Washington State has one of the lowest average vacancy rates in the nation according to a University of Washington study. However, it can vary from year to year based on factors like job/wage growth and supply available. The placeholder vacancy rate in the Seattle Metro we usually recommend is 5% of the monthly rent you receive. Putting that amount aside in a savings account for a rainy day is recommended. Another expense that new investors often overlook is the cost of maintenance and major repairs. How much you save for this category will be determined by the age and condition of the property. A good rule of thumb is to take 5-10% of the monthly rent and save it for later. Also be aware that there may be licensing costs and property management fees if you decide not to self-manage. A good property manager will cost you about 8-10% of the monthly rent and may have one-time setup fees.
Educate yourself on the local landlord-tenant regulations and fair housing laws.
Washington state has some of the nation's most intense regulations surrounding the relationship between tenants and landlords. Washington also adds additional protected classes and rules to the federal fair housing laws further dictating how you can market and manage your rental. You can put yourself in a situation for legal trouble real quick if you're not extremely careful! If you're self-managing your rental unit(s) you should be educating yourself about the Washington State Landlord-Tenant Act especially with regard to notices, landlord/tenant duties, and the eviction process should things go sideways.
THIS IS NOT LEGAL ADVICE. FOR ACTUAL LEGAL ADVICE ON LOCAL AND STATE LAWS RELATED TO HOUSING YOU SHOULD CONSULT WITH AN ATTORNEY THAT IS WELL-VERSED IN THESE AREAS.
These cities have additional rules that you must follow:
You should expect more cities to follow suit in the future and lean more in favor of the tenant over the landlord like Kirkland.
Know your duties as a landlord as well as your tenant's duties.
The Washington Residential Landlord-Tenant Act outlines the responsibilities of a tenant and a landlord. Some cities have their own rules as mentioned above, so ensure that you know what those are ahead of time!
Landlord Duties In Washington:
Ensure the premises meet laws, ordinances, and building codes;
Maintain all property structural components;
Keep shared areas clean and safe;
Offer pest control services when needed;
Make repairs and keep premises in good condition;
Provide adequate locks and keys;
Safeguard master keys or duplicate keys;
Keep electrical, plumbing, water, and heating systems in good order;
Make certain the property is weathertight;
Supply trash and recycling collection containers (unless property is a single-family home);
Furnish fire safety and protection equipment and information, including residential smoke detectors;
Provide information to tenants about mold hazards; and
Disclose the landlord/property manager's name and address.
Tenant Duties in Washington:
Keep the unit clean and sanitary, and properly dispose of all trash.
Cover extermination and fumigation costs if an infestation is determined to be the tenant’s fault.
Refrain from intentionally or negligently damaging the structure or systems.
Replace the batteries in the smoke detector.
Avoid hazardous or unlawful activity, including the unlawful use of firearms, drug-related activity, or gang-related activity.
Restore the property to original condition upon lease termination.
Know what's acceptable behavior as a landlord/property manager.
Certain actions you take shouldn’t be construed as harassment. For instance:
Routine inspections with proper notice
Entering a property in the case of an emergency (i.e., a gas leak or flood)
Routine drive-by inspections
Installing outdoor security cameras for tenant and property safety
Calling tenants regularly to collect past due rent
Sending tenants notices to rectify a lease violation
Giving a tenant an eviction notice for failure to pay rent or for other lease violations
Raising the rent to match market rates and providing proper notice
Collecting money for property damage caused by the tenant beyond normal wear and tear
Not repairing equipment owned by the tenant (i.e., a tenant-owned washing machine)
Carry the right amount of insurance.
The general rule is that landlords can expect to pay roughly 15% more for landlord insurance than a standard homeowner policy. According to Insurance.com, the national average cost of a homeowner policy in 2022 is $2,777. Therefore, most landlords can expect to pay roughly $3,194 a year for landlord insurance. The higher cost is because insurers are taking on additional risk for landlord insurance because of the presence of renters. Here are some other factors that affect the price of your landlord insurance:
Security features
Age and condition of the property
Smart home devices that provide early warnings of potential issues
Number of rental units
Location
Safety equipment on the premise
High-risk features such as wood fireplaces, pools, and hot tubs
Long-term vs short-term tenants (different coverage is needed for each case)
Always consult your local insurance provider to get the actual numbers and type of policy you need based on your individual circumstances. Here are some of the common insurance policy features you’ll want to consider:
Property protection (structure)
Personal property protection (contents)
Liability
Rental loss protection (only if the unit is uninhabitable for various reasons)
Flood
Acts of nature (be sure to ask your broker what is covered, and what isn’t)
IF YOU NEED MORE RESOURCES ON BECOMING A LANDLORD, INCLUDING CONNECTIONS TO OTHER LOCAL, VETTED PROFESSIONALS LIKE ATTORNEYS AND INSURANCE AGENTS PLEASE CALL/TEXT US AT 206-202-6008 OR FILL OUT THE CONTACT FORM!
Happy landlording!
