Turning Your Home Into an Investment Property
When homeowners purchase a new residence, they typically hope to sell their existing house as quickly as possible. This way, they can apply any equity they’ve accumulated to the new property. However, savvy individuals understand they can substantially improve their financial standing by converting the old home into an investment property.
This process allows them to rent the home to earn additional income. Additionally, they can overcome what could be a significant monetary loss if a slow housing market makes it difficult to sell the house. Read on to learn more about renting out your primary residence to see whether it’s right for you.
What Are the Pros and Cons of Renting Out a Primary Residence?
Converting a home into an investment property offers a host of potential benefits:
- Passive income source: This refers to money you earn via minimal or no labor. If you rent your home to someone else, you can collect a monthly check without working for it in the traditional sense.
- Opportunity to time the housing market: When renting out your old home, you don’t have to be in as much of a hurry to sell it. Instead, you can continue to collect the monthly rent checks and wait for the next seller’s market opportunity to unload the property at a higher price.
- Managing relocation effectively: Suppose a job opportunity requires you to move to another city or state. It could take time to find a home that’s right for you and your family in the new location. Temporarily renting out your home allows you to continue to cover the mortgage in the meantime.
- Meeting a non-permanent housing need: If a life situation like taking care of a sick relative in another state or relocating for work for a year or two arises, renting out your home enables you to cover the mortgage while you rent an apartment in the new locale. Then, you can return to the house when your circumstances change.
On the downside, being a landlord isn’t for everyone. As a landlord, you may have to deal with tenants who fall behind on the rent or damage the home. Plus, you’ll need to ensure the property remains occupied and you have the funds to cover emergencies. If you’re moving far away, you’ll likely need to hire a property manager to take care of the house. Fortunately, you can always start with short-term leases while you adjust to being a landlord.
Considerations When You Convert a Primary Residence to a Rental Property
Before you decide to turn your home into an investment property, you’ll need to evaluate a range of factors:
- Lender’s requirements: When you purchase a home to be a primary residence, you’ll enjoy more perks than when buying a property for rental purposes. Examples include a lower down payment requirement and a reduced interest rate. In return, the lender stipulates that you must live in the home for at least 12 months. If you attempt to rent it out sooner, you’re committing mortgage fraud.
- New living arrangements: Before moving forward, make sure you have a new place to live, whether you’re buying a new home or renting an apartment. The last thing you want to do is lease your current home to a tenant and have your plans for a new residence fall through.
- Landlord/property manager dilemma: Decide whether being a hands-on landlord or hiring a property manager to look after the home is the better option for your situation. If you choose the former, learn everything you can about the landlord process, roles and legal responsibilities in your state specifically.
- HOA restrictions: If your current home is a condominium, you probably deal with a homeowner’s association (HOA) that serves as the community’s governing body. The association may have rules that restrict the ability to rent a home to another individual or family. Be sure to verify if renting is permissible and whether any limitations apply.
- Potential tax implications: There are some significant taxation differences regarding rental property ownership and income. Sit down with a certified accountant or another knowledgeable tax professional to determine how they apply to your situation. After all, you don’t want any unwanted surprises when it’s time to file your taxes.
How to Turn Your Home Into an Investment Property
If you determine that renting out your primary residence is the right move for your situation, take the following steps:
Prepare the Property
Ensure your property is in ready-to-rent condition and as livable as possible. Making low-cost upgrades like applying a fresh coat of paint and handling any necessary repairs will make the home more appealing to prospective tenants and allow you to advertise a higher monthly rent. Depending on the house’s location, you may also need to make safety enhancements to comply with local ordinances.
Update Your Insurance
When you convert your home into a rental, your homeowner’s insurance provider will view your property differently and require you to change or add coverages. If you fail to make the necessary modifications, the insurer could deny a claim. In the same vein, you may want your tenants to show proof of carrying a renter’s insurance policy, as your plan won’t cover losses or damage to their personal property resulting from theft, vandalism and other perils.
Note that your local municipality may require you to apply for a permit when converting your home into a rental property. An inspector will examine the property to ensure it complies with all health and safety standards. Examples of items that undergo scrutiny are the heating, electrical and plumbing systems and access to exits in case of a fire. Save time and hassles by correcting any potential issues beforehand.
Hire a Property Manager
If you’ve decided to use a property manager, vet all candidates carefully. Examples of traits to look for include experience with your type of property, the thoroughness of their tenant screening process and their renter turnover rate. Professional credentials and licensing are also important. Begin your search for a certified property manager in your area by visiting the Institute of Real Estate Management (IREM) online directory or the National Association of Residential Property Managers (NARPM) website.
Learn More About Turning Your Home Into a Rental Property
Are you thinking of converting your primary residence into a rental property in Albuquerque, Santa Fe, Bernalillo, Farmington, Los Lunas or elsewhere in New Mexico? The team at Elevated Management Group, LLC can help. As an experienced property management firm, we can assist you in meeting your investment goals, working with you from start to finish.
Contact us today to learn more about renting out your primary residence.