Real estate investors frequently extol the benefits of buying and managing rental properties. If you keep your properties occupied, and your tenants keep paying rent, you’ll often generate more than enough income to cover all your expenses and make a consistent profit. That’s on top of benefiting from long-term property appreciation.
For many consumers, buying a house is difficult, so buying an additional rental property is practically out of the question. But what if you could convert your primary residence into a rental?
Let’s start with the basics. If you have a house currently, you’re already in a prime position to begin your rental property investment strategy. The property is yours, even if you’re continuing to pay off a mortgage, and you have a good idea of how valuable this property is to prospective tenants in this neighborhood. If the neighborhood is clean and safe, and if it has access to strong schools and amenities, it’s probably already in a good position to attract tenants.
To make the transition, you’ll need to move somewhere else (possibly purchasing a new house or renting a different place). After that, you can begin marketing the house to tenants, you can screen those tenants, and if you find a qualified candidate, you can let them move in and begin charging them rent. Depending on the conditions, the rent may more than cover your mortgage payment and expenses related to the property and may even pay some or most of your expenses at the new place.
There are a couple of potential legal issues that could stand in your way. When you take out a mortgage on a primary residence, you typically qualify for lower rates. If you claim to buy a primary residence and then immediately convert it into a rental, the bank could accuse you of fraud. If you’ve already lived in the house for several years, and you’re ready to convert the house into a rental, you probably won’t face legal issues, but it’s still a good idea to talk to a real estate lawyer to make sure.
Crunching the Numbers
Before you get too excited, it’s important to crunch some numbers. Not every house is suited to become a rental property.
First, calculate your ongoing expenses. Be sure to include your mortgage payment, including principal and interest, property taxes, insurance (which will need to change if you’re renting the property), and the costs of maintenance and repairs. Be as conservative as possible, overestimating the costs of upkeep and repairs.
Next, estimate your rental income. Look at properties similar to yours in the same neighborhood and see how much those landlords are charging for rent. Make sure to adjust your estimate to account for potential vacancies; it may take you several months to find a viable tenant.
Are you able to charge more in rent than you pay in expenses? If so, that’s very promising.
You should also consider the 1 percent rule of real estate investing. If your property can charge monthly rent of at least 1 percent of its purchase price, you’re probably in a good spot. For example, if you bought your house for $250,000, you should charge a total monthly rent of at least $2,500.
Modifying the Property
In some cases, it can benefit you to modify the property before preparing it for rent. Depending on the structure of the property, you may be able to make renovations that allow multiple families to rent the property at once. You may need to replace certain fixtures or make miscellaneous repairs, and you may need to make additions to comply with local laws. Do your research, talk to a lawyer, and get advice from a professional real estate investor if you can.
Preparing for Rental Property Management
Now for the hard part. Managing a rental property can be expensive and time consuming, since you’ll have several responsibilities to juggle, including:
- Marketing. You’ll need to list the property to attract tenants.
- Screening. Not all tenants are viable candidates.
- Onboarding. It’s important to ensure your tenants understand the lease agreement and are ready to move in.
- Rent collection. Tenants will occasionally miss or delay payments, so it’s important to stay on top of them.
- Maintenance and repairs. It’s your responsibility to maintain the property and respond to repair requests.
- Issue resolution. When conflicts arise, you’ll need to do your best to deescalate them.
- Evictions. If tenants are problematic, you may need to initiate eviction.
Hiring a property management company can make light work of this, since they’ll take care of most of these tasks on your behalf.
Turning your primary residence into a rental property isn’t always the right financial move, but if you adequately prepare, and you’re willing to put in the work, it could be a massive benefit. Always do your due diligence before making major financial decisions and estimate things conservatively to minimize risk.