quaint house with garden

If you’re planning on moving, you might consider turning your primary residence into a rental property, also known as an investment property. Before we get into the weeds, let’s take a moment to understand the definitions of these property types.

Primary Residence: This is the home you live in, whether it’s an apartment or a house. You can only have a single primary residence at a time. When buying a home as your primary residence, there are often perks, such as a lower interest rates, a lower down payment and, in some situations, tax benefits.

Investment Property: This is a property that’s been purchased for the purpose of creating income, such as an apartment. When purchasing a house as an investment property, you’ll often need a larger down payment and pay a larger interest rate.

Why to Turn Your Home into a Rental

Typically, people sell their homes when they move, taking the equity they’ve built in one house and applying it to the next. But not always. Some savvy homeowners convert their primary residences into investment properties. This is typically done for one of two reasons. First and foremost, a homeowner might go this route if the housing market is struggling. If they’re concerned their home’s value has dropped, they can hold off on selling the property, rent it out to pay for the monthly mortgage payments and then sell it when the value has risen. During the financial crisis of 2008, many homeowners went this route, staying afloat while the economy got back on its feet.

Another common reason to turn your primary residence into a rental is to increase your income. This path can be a great opportunity, often with a better return on investment than the stock market. Furthermore, if the home was originally purchased as a primary residence, it likely had a low interest rate. When you transition your home to an investment property, you’ll be able to keep this perk.

That being said, going this route comes with its own set of challenges, so before you put the “For Rent” sign on your front lawn, take some time to think about the pros and cons of being a landlord.

How to Turn Your Home into a Rental

When you turn your primary residence into an investment property, there are many mortgage and tax implications, so you should consider working with a certified public accountant to make this transition a smooth one.

Your Mortgage

When it comes to your mortgage, the biggest consideration is the length of time you’ve lived in your primary residence. With any mortgage, you’ll be asked to sign a legal document stating you intend to occupy the property as your primary residence for a specific amount of time (typically one or two years). For instance, let’s say that your mortgage company requires you to live in your primary residence for a year. You won’t be allowed to turn that property into a rental before the year is up. If you try to, it could be considered mortgage fraud, which can come with some hefty consequences.

If you are considering transitioning your home from a primary residence to an investment property after the period of occupancy has passed, you should be free and clear to do so.

Another variable to consider when turning your home into a rental is your next primary residence. After all, you’ll have to live somewhere when you move. Be sure to contact a Home Loan Expert to see your options for qualifying for two properties at once. According to Dana Staniec, director of mortgage banking at Quicken Loans, “Depending on the [mortgage] product you are looking to move forward with, we may not be able to use rental income from that property to offset the payment.” In other words, before you make the switch, spend some time talking through the numbers with experts.

Taxes

Once you convert your home into an investment property, the taxes will be handled differently. Unlike with a primary residence, you’ll be able to make a wide variety of deductions on your investment property taxes. Utilities, homeowner association fees, repairs to the house, insurance, property taxes, mortgage interest and more can be deducted each year. There are other potential deductions, such as depreciation, that should be considered as well.

You should also contact your tax assessor’s office if you qualify for a homestead exemption. Since the homestead exemption can only be applied to a primary residence, there’s a good chance that, once you turn the house into a rental, you’ll have slightly higher taxes on that property.

Home Insurance

Before you begin this transition, be sure to speak with your insurance company. You’ll need to switch your current insurance to rental property insurance. Request personal liability insurance as well, which will protect you against being sued by a tenant. In some cases, switching to rental property insurance will actually lower your rates, as it covers the building but doesn’t cover renters’ personal items.

Moving Forward

If you decide that turning your house into a rental is right for you, take some time to think through the challenges. Turning your current home into an investment property can have some appealing advantages, but it takes proper planning to make it a reality. Make sure you do your due diligence before moving forward with this option.

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This Post Has 18 Comments

  1. My house will be paid off in 5 years and I would like to turn it into a rental and purchase my dream home. Should I get a equity loan to use as a down payment for the new house? Or what would you suggest I do.

    1. Hi Teresa:

      A home-equity loan is an option, although we don’t do them. We do cash-out refinances. I think you may find it to be the better option because you can get a better rate potentially because it’s a first-lien loan as opposed to your second mortgage on the property. One thing to note is that because you’re looking to turn it into an investment property, your rate will be slightly higher than if you were to keep it as a primary property. If you would like to go over your options, feel free to give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

      Thanks,
      Kevin

    2. Hi Teresa,

      Mortgage guidelines do not allow for a down payment on a home to come from a loan at the time of purchase, like an equity loan. However, if you took out an equity loan several months prior to starting your mortgage process and had the money sitting in your bank then you do not have to explain where the money came from. You only need to explain deposits made into your bank accounts that show on the statements you provide.

  2. Hi, we have a condo apt that we own without a mortgage. Are all condos eligible to be converted to investment property to then rent out to tenants? Do you have a link or contact I can reach out to start this process?

    1. Hi Jocelyn:

      If you already own the property outright, anything is eligible to be an investment property from the perspective of the mortgage company. Your condo association may have its own rules regarding whether you can have tenants. If you’re looking to take cash out of the property to fix it up and then rent it out, I’m going to recommend you speak with one of our home loan experts by filling out this form or calling (888) 980-6716. Have a great day!

      Thanks,
      Kevin Graham

  3. My husband and I own a home and are planning to move in the Spring. I would like to rent out our current home to my daughter and her family. We do not have a mortgage on our current home but have a home equity loan. For the new mortgage, would we need to be approve for the combined total of the new house plus the amount of the home equity loan?

    1. Hi Dory:

      When you’re approved for a new home loan, all of your debts are factored into your debt-to-income ratio, so the home equity loan would be part of that. Once all of your debts are factored in, lenders calculate how much you can afford. If you’d like to look into your options online, you can get started at Rocket Mortgage. Otherwise, one of our Home Loan Experts would be happy to talk to you if you call (888) 980-6716.

      Thanks,
      Kevin Graham

  4. My husband have lived in our home for 12 and a half years. We are separating and our plan was to sell the house and the kids and I to find an apartment. However, I can not find an apartment in our town, and the rent of 2 bedroom apartments is higher than our mortgage. I am now considering converting our big house into an apartment. I do not know how to pursue this. Any resources you could send my way I would appreciate.
    Thank you,

    1. This gets a little complex and I want to make sure you get the right information about what you can and cannot do. I’m going to recommend you speak with one of our Home Loan Experts by calling (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

  5. Hi, I would like to turn my primary residence of 2 years into a rental property. Apart from insurance and taxes, will my mortgage be changing? What should I do?

    It says above that “If you are considering transitioning your home from a primary residence to an investment property after the period of occupancy has passed, you should be free and clear to do so.”, but I want to make sure I wouldn’t be facing refinance of any sort beyond different taxes and changing of insurance. I just need to move closer to school for a year.

    Please let me know. Thanks!

    1. Hi Dee:

      Your lender will have to be notified anyway, so you can double check with them on their policies. However, if you’ve occupied the home for longer than the minimum period specified in your loan documents, you should be able to convert the property to an investment property without your rate changing. You should be OK. Hope this helps!

      Thanks,
      Kevin Graham

  6. I want to purchase my parents’ home and flip it into an Investment property.
    •I am a first time home-owner
    •House appraised for 85k
    •My brother will still live there as an “inhouse” landlord and I will be the mechanic.
    •I will remain at my apartment (5 minutes away) while going through college.

    I have potential tenants lined up for this August. Can you point me in the right direction as far as finding the best loan for my brother and I to Co-sign on?

    Thank you kindly,

    Timothy Sands

    1. Hi Timothy:

      I’m going to suggest you speak with one of our Home Loan Experts to go over your situation in detail. We can get you pointed in the right direction. Please call (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

    1. Hi Carole:

      I think you want to sell your own home. I’m going to put you in touch with someone from our friends at In-House Realty. They’ll be able to help you out.

      Thanks,
      Kevin Graham

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