How to convert your home to a rental property

Written by Laura Agadoni on December 19, 2018. Posted in edited, For Landlords, Income Ideas, Laws & Regulations, Maintenance & Renovations, Mortgages & Loans, paid

Turning your house into a rental You’ve made the decision to convert the home in which you live, in other words, your primary residence, to a rental house.

Maybe you’re moving, or maybe you figure you can make some good money, collecting that all-important cash flow, by making your home your rental property. Whatever the reason for the change, congratulations on your decision!

But you can’t just move out and declare your home a rental. There are some things you need to do first. Find out what they are.

You need to take care of some business before you can turn your primary home into a rental property.

You might need to wait if you have a mortgage

Do you have a mortgage on your home? If so, you generally need to live in the home for at least 12 months before converting it into a rental. Why? Certain perks are associated with buying a primary residence as opposed to investment property.

You often get a lower interest rate and can put down less of a down payment when the mortgage loan is for your primary home versus a vacation home or an investment property.

If you say you’ll live in the house but you really are buying it as investment property, you are committing mortgage fraud. The penalty? Your lender could call in the loan immediately upon finding out. And that will probably lead to foreclosure.

Read your loan paperwork or call your lender to find out the waiting rules that apply to your loan. After you’ve lived in the home for the required time for your mortgage, you’re free to turn your primary residence to rental property.

Find out whether you can get another mortgage

When you move from your primary home, you might want to buy another home to live in. If that’s the case, find out whether you’ll qualify for another mortgage before you rent out your current home.

Your lender might consider the rental income you’ll get, but they might not. Either way, get the ball rolling by talking with a mortgage lender before you make any moves.

Check with your homeowners association

If your home is in a neighborhood governed by an HOA, you need to find out whether there are any restrictions regarding renting out your house. Some HOAs have no restrictions, some allow only a certain percentage or a certain number of homes in the neighborhood to be rentals, and some ban the practice altogether.

Change your homeowners insurance policy

Insurance policies for primary homes differ from insurance policies for rental properties. “In my experience, the insurance classification is really the biggest issue when converting a primary home to a rental property,” says Lucas Hall, Landlordology’s founder and Head of Industry Relations at Cozy.

And Lucas makes a great point. Why? If you need to file an insurance claim after you convert your home to a rental, but your policy has not been changed to a landlord policy, your insurer could deny your claim. “New landlords need to make sure they change the policy from a homeowner occupied policy to a landlord’s policy,” says Lucas.

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Learn about tax changes

It’s best to consult a tax professional both for your rental property and for your primary residence. But you shouldn’t be totally in the dark about taxes. Here’s what you need to know.

The bad news (regarding taxes) is that if you make money, that money is taxable income, so you should figure out how that might change your tax rate.

But here’s some good news. Once you have rental property, you get to take these deductions for rental property expenses:

Utilities (if you pay them)
Homeowners association fees
Landlord insurance policy
Repairs you make to the house
Property taxes
Mortgage interest

Ask your tax advisor or find out from your local municipality about the homestead exemption you probably have on your current home. You are allowed to have that only on your primary residence, so find out what you need to do when you wish to convert your home to a rental.

Ready your property

Look at the competition. Are the rental homes in your area upgraded? If they are and your home isn’t, you should consider putting some money into your home to help ensure you’ll get renters and at market rate.

A new coat of neutral paint throughout the house and nice landscaping in front are good starts. You might want to then make a list of all the improvements you’d like to make and get them done gradually. At the very least, make sure your home is well-maintained and that everything is in working order.

Learn how to be a landlord

Once you rent out your home … hello, you’re a landlord. Many of us, myself included, learned the business by jumping in headfirst. But, you are apt to make costly mistakes this way. I know I did.

But lucky you: If you happened to find this site, browse around. We are here to help you along the way with informative articles, a comprehensive state law section, and a toolbox with tons of resources to help landlords succeed.

Tags: Taxes