A great way to get into owning rentals is to turn your current home into a rental when it’s time to move. The first step, of course, is to run the numbers and see if your current home will cash flow as a rental. If that is the case, there are 7 advantages that I see. It’s often the easiest and fastest way to get into the rental income game if you are planning on moving anyways.
1. Better interest rates
If you finance a rental property, you will mostly likely have to pay a higher interest rate for the mortgage. (Technically the rates are the same but the fees built into the mortgage are higher and result in a higher rate, blah blah blah.) All things considered you might end up paying .25-1% more.
But when you have financed your primary home at a basic interest rate, and have lived there at least 12 months, you can move and convert into a rental. You get to keep your old mortgage, while taking out a new primary mortgage (though not the case for every loan, like if you exceed your VA loan benefit).
I always recommend interviewing a few mortgage brokers (I am not one) and finding a knowledgeable and helpful person. But most of the time, this is the easiest way to finance 2 properties.
2. Fewer transaction costs
You have already paid to finance your current home, if you sell it and buy two more properties (rental plus primary home) you will have 2 more finance expenses. Plus the cost of selling your current home verses renting it out.
3. Fewer surprises
You already know your home, and it’s issues. The biggest fears with buying rentals is all the unknowns. If you have lived in your home a few years, you have had the chance to figure out and maybe fix those issues. You know if the basement leaks when it rains. Or how your slightly old shingles will handle a strong storm.
4. Prep the home while living there
It takes time to get a home ready to be a rental. New paint. Small repairs. If you plan to convert it into a rental in a year, you can slowly start tackling some of those issues while you are living there. It will be a lot less stressful to handle slowly, instead of rushing to prep a new rental to be market ready when every day represents lost income. (Although I recommend postponing more expensive repairs until it becomes a rental or between tenants for tax write off purposes.)
You have to prepare a home to sell it anyways. Why prep one to sell only to buy another home which needs more work to get ready for renters?
5. You can still change your mind and sell without a tax hit
As the tax law stands you can sell a home that was your primary residence without incurring an extra tax bite from the profit up to $250k/$500k if you lived in it 2 out of the last 5 years. That doesn’t have to be the 2 years before it was sold. Just any 2 years.
So if you lived there 2 years, rented it for 2 years, then changed your mind about the whole rental game you can still sell it with out paying taxes on the profit. This would NOT be the case if you went out and bought a new rental then sold it 2 years later.
6. Knowledge of the market/area
Having lived in that home, you know the area better than any other place you might purchase a rental. How is the crime? What is the neighborhood like? Is it a more transient or stable neighborhood? What is the going rent price? How are the schools? You know all this about your street/neighborhood. And some of those things are tough to figure out when buying rental properties. Having the inside scoop is a huge advantage. Plus, if you made friends with your neighbors, they might give you a heads up if things get crazy with your renters.
7. Knowledge of potential renters
Remember who you were when you decided to move onto this street, in this part of town, near these schools, in this kind of home, with this number of bedrooms? That is also your ideal renter. You understand them. You know them. You probably have a fair amount in common with them.
When you are just getting started as a landlord, this is a huge advantage and will make managing those relationships easier. As will advertising and marketing your home. Plus you can speak to all those things when you talk to renters. If they have questions about noise, schools or the general community vibe, you have got that covered.
As long as you bought a home that will cash flow as a rental, converting it to a rental might be the easiest way to become a landlord when you go to move. If you ever need help navigating these kind of options, that’s what my money consultations are perfect for! I currently have 2 spots open for April.
Have you ever turned your home into a rental or are thinking about it?
Do you think that would be easier for you or better to just buy a new rental?
Do you know if your current home could cash flow as a rental?