Homeowners decide to move for a variety of reasons. Their homes become too small or too large. They move because of job or marital status changes, or because they retire or face health issues.
But what if you don’t want to sell your current home after moving out? What if, instead, you could turn your home into an investment property that produces rental income?
Here are the steps to make that a reality.
Renting out the home you bought as your primary residence
Before putting a “For Rent” sign in the yard, make sure you’re following your mortgage company’s rules.
Whether using a conventional loan or a government-backed FHA, USDA or VA loan, home buyers get a better deal when buying a primary residence. Borrowers can make lower down payments and lock in lower interest rates when they plan to live in the home.
Plus, government-backed loans — such as USDA, VA and FHA loans — work only if you’re buying a primary home.
They won’t finance a second home or investment property.
As a result, using a primary residence loan and then immediately placing renters in the new home can constitute fraud. Mortgage fraud is a serious matter and one from which you’ll want to stay far away.
It’s best to be upfront with your lender and ask about any rules and requirements that will apply if you want to rent out your existing home.
How soon can you rent a house after buying it?
If you financed the home as your primary home, you’ll need to live there for 12 months before turning it into an investment property.
But your lender may make an exception to its occupancy requirements and allow you to rent out your home sooner.
For example, what if you have an unexpected new family member and your current home just doesn’t suit your needs? Or, what if you have a job transfer opportunity that wasn’t on the table when you bought your home? What if you’re on active duty in the military and get deployed?
You may legitimately need to rent your home instead of selling it.
Fortunately, there are a number of instances where it is completely acceptable to rent out the home you recently bought as your primary residence. And you shouldn’t need to refinance out of your primary residence loan to make it work.
Tips for going from homeowner to landlord
If you need to move but don’t want to sell your home, becoming a landlord may seem like a no-brainer — especially with the cost of rent rising across the country.
Being a landlord isn’t always easy, though. Homeowners who are thinking about welcoming renters into their homes should first:
Check with the HOA
This is an important first step if your home is a condo, townhome, or any other property that belongs to a homeowners association (HOA). Your home loan servicer may be OK with you renting the home, but your homeowners association may not be.
Some HOAs require owner occupancy. Others allow a percentage of the neighborhood’s homes to be rented. Others allow renters but set rules about the terms of the lease.
If your home is not governed by an HOA, you can skip this step.
Research landlord-tenant laws
Each state and city is different when it comes to landlord-tenant laws. Make sure you understand your obligations as a landlord with regard to security deposits, tenant screening, and lease agreements.
It may help to talk to another real estate investor in your area for guidance. Property management companies are usually experts in landlord-tenant laws, too.
Get the right home insurance coverage
Homeowner insurance policies for owner-occupied homes won’t always provide enough insurance coverage when you’re renting out the home.
Before a tenant moves in, tell your insurance agent or company about the change in property status. You may have to pay more in premiums, but that’s a lot better than discovering your policy won’t pay for expensive repairs because your home wasn’t properly covered.
Encourage your renters to get their own renters insurance policy to cover their personal belongings.
Have enough cash flow for maintenance
It’s a good idea to set aside some of the rent you’re earning to maintain the home. But if the home needs a repair before you’ve built up enough cash from rent payments, you’ll still need to make the repair.
So be sure to have some money set aside for repairs even before the renters move in.
Be prepared for the work
Being a landlord isn’t just about sitting back and collecting rent payments. Landlords can play the role of a real estate agent, a negotiator, a repairman and, at times, an evictor.
If you’re not interested in taking on so much responsibility, look for a property management company in your area.
Tax implications of renting out your primary residence
Being a landlord could complicate your income taxes, both with the IRS and your state’s revenue department. The rent you earn becomes taxable income, and since there is no employer withholding taxes from this income, your annual tax bill could be significant.
To limit your tax liability, you can claim tax deductions such as property taxes, insurance premiums, HOA dues, mortgage interest, the cost of repairs and depreciation. This requires good record keeping throughout the year.
Keeping good records could also affect the capital gains tax you’d owe when you sell the rental home.
Always consult with your accountant to get your tax return right. The accountant’s fees can pay for themselves when the accountant knows about tax benefits you didn’t know about.
Renting out a primary residence FAQs
Can I rent out my primary residence?
Yes. But check with your mortgage loan servicer first, especially if you bought the house within the past year. Also, check with your HOA which may have owner-occupancy requirements.
Can I rent out part of my primary residence?
Yes. You’d still need to follow landlord-tenant laws. One mortgage loan program, Fannie Mae’s HomeReady, lets you use this kind of rental income to qualify for a new mortgage, which means you could qualify for a loan for a higher purchase price.
How long can I rent out my primary residence?
You can rent out your primary residence by the month or for an extended lease. Many homeowners prefer a six- or 12-month lease which helps ensure ongoing rental income while still allowing for flexibility after the lease expires.
Can I rent out a room in my primary residence?
Yes. This can be a good way to help make mortgage payments. But you’re still a landlord and should follow landlord-tenant laws to protect yourself and your tenant.
Can you rent out your main residence?
Yes, but be sure to check with your mortgage company first, especially if you bought the house as a primary residence within the past year. Becoming a landlord has tax implications, so check with a tax accountant, too.
Can I rent out my house without telling my mortgage lender?
For many homeowners, living in the home for at least a year fulfills the loan’s occupancy requirements. If you’re not sure about your lender’s rules, be sure to check before converting your primary residence into a rental or Airbnb. Even if you know you’re in the clear, it never hurts to let your lender know about your new plans. Informing your lender can keep your escrow contributions on track since your property taxes and insurance premiums will likely increase.
What happens if I don’t tell my lender I’m renting out my home?
Since it tracks insurance and tax data, there’s a good chance your lender will find out you’re renting your primary residence. The lender could file fraud charges against you for misrepresenting your intention to live in the single-family home you financed.
How do I change my primary residence to a rental property?
You’ll need to move out, remove any personal belongings that won’t be part of the rental, and offer the home for rent. But first, check with your home loan servicer, read up on landlord-tenant laws, and consider the tax implications of becoming a landlord. If you don’t have time for all this extra work, you may need to work with a property management company.
How soon after buying a house can you rent it out?
In most cases, you’ll need to wait a year before renting out your home — if you bought the home as a primary residence. If you used an investment property loan to buy the home, you can rent out the home right away.
The bottom line
With home costs — and rents — rising in many markets, you might not want to sell your home even if it no longer suits your needs.
Most homeowners can become real estate investors by renting out their primary residences.
Just be sure you know what you’re getting into before advertising your home for rent.