Should You Convert Your Home into a Rental?
Are you thinking of making a move? Maybe you need a bigger home for your growing family – or a smaller space as your children leave the nest. Maybe you are relocating for work. Whatever the reason, converting your home into a rental property can be a smart way to enter the real estate investment game. What do you need to know before you put up the “For Rent” sign?
Primary Residence vs. Investment Property
Your primary residence is the house in which you live; when you purchase your residence, you often enjoy lower interests rates and down payments. An investment property is different: you purchased it with the intent of generating income. Because of the increased risk, you’ll often contend with higher interest rates and down payments.
Converting your home into a rental property has a few key advantages:
- It can help you during sluggish housing markets. The housing market fluctuates; that’s no secret. Your home may have lost value, as most did during the 2008 financial crisis, for example. Selling can mean taking a significant financial hit. The rental market, however, will be stronger during these periods. If you can hold off on a sale, renting can help you weather economic storms.
- It generates income. ‘Nuff said! When you have carefully selected tenants, renting can provide a stronger return than other investment vehicles.
There are considerations of which you must be aware. These include:
- Your mortgage. When you purchased your home as a primary residence, you signed documents confirming that you would occupy the property for a specified period of time. This depends on the specific loan and lender, but two years is typical. If you are within that window, you cannot convert your home into a rental property.
- Your living arrangements. Where will you live? How will you fund your move/another home? You may not always be able to use your rental income to offset the down payment required by lenders.
- Taxes. Rental property taxes are an entirely different beast from primary residences. You will be able to make a variety of deductions (e.g. repairs, insurance, mortgage interest, depreciation, etc.). If you currently qualify for a homestead exemption, be aware that you will lose that exemption and your taxes will increase (if only slightly).
- Insurance. Likewise, your insurance needs will change when you turn your primary residence into a rental property – and you will certainly need personal liability protection. Don’t be intimidated; with the right agency, your rates may actually decrease.
Another important consideration is time and stress! Do you have the resources to find and select quality tenants? To maintain your propertly adequately? To fix plumbing issues at midnight? You may want to look into turnkey real estate investment opportunities that generate the passive income you need without requiring 24/7/365 hands-on attention.