The average U.S. homeowner sells their home and moves every five to seven years.
Even if you purchased your home with the idea of it being your forever home, life happens.
For a variety of reasons, homeowners decide to make a change – homes become too small, homes become too large, job transfer, marital status change, retirement, health issues and many other reasons.
But what if you don’t want to sell your current home? What if, instead, your goal is to turn your home into an investment property?
It isn’t as easy as it might sound, but if you follow the right steps it certainly is possible.
Primary Residence Vs Investment Property Requirements
Unlike buying a primary residence, there are a number of additional requirements when it comes to financing an investment property.
For example, purchasing a rental property will require a down payment that will typically range from 15 percent to 25 percent.
Depending on the loan program, the minimum down payment needed for an owner-occupied primary residence will range from zero down to 5% down.
Other than the larger down payment, one of the most noticeable differences when buying an investment property is the higher interest rate. Non-owner occupied mortgage loans can have interest rates that are .5 percent to .75 percent higher than their owner occupied counterparts.
Also, buying a non-owner occupied home will typically require higher credit scores than what’s needed for primary residences.
Sometimes, asset reserves are also required when buying a non-owner occupied home. Asset reserves are the amounts required by your lender for PITI (principle, interest, taxes and insurance).
Reserve requirements for investment properties are typically six months PITI or more.
Renting Out the Home You Bought as Your Primary Residence
New home buyers may want to strategically pick the home they purchase if they plan to rent out the home.
Remember, financing the home as an owner occupied property would mean a significantly lower downpayment. Buyers would also have the benefit of a lower interest rate, as well as a number of other distinct advantages.
However, doing so would also constitute the “F” word in mortgage lending – fraud. Mortgage fraud is a serious matter, and one from which you’ll want to stay far away.
At the closing table, you sign documentation stating your intention to occupy the home as your primary residence.
But what if you have legitimate reasons for needing to convert your recently acquired primary residence to an investment property? There are ways to convert your primary residence into a rental property.
Converting Your Primary Residence to an Investment Property
As a general rule, lenders assume that all owner occupied transactions come with the intention that the homeowner will live in the home for a minimum of 12 months. But there may be valid reasons for converting your primary residence to a rental property.
For example, what if you have an expected change to your family size and your current home just don’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 bought your existing home as a starter home, knowing you would be selling it in two years in order to buy a larger home. However, due to your lack of downpayment, or a slow real estate market, now you can’t sell your home without having to bring money to the closing table?
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 originally purchased as your primary residence.
Going from Homeowner to Landlord
With the cost of rent rising across the country, renting out your home can be a great way to earn income.
Being a landlord isn’t always easy, though. For homeowners looking to make the move to landlord, consider these factors.
- Contact your insurance company – As a non-owner occupied home, your current homeowner’s insurance policy no longer applies. You will need to contact your insurance company to inform them of your intentions.
- Research landlord and tenant laws – Each state is different when it comes to landlord and tenant laws. You need to understand your obligations as a landlord with regard to security deposits, tenant screening, lease agreements, etc.
- Learn the tax rules – To use the tax laws to your benefit, you should be aware of what can and can’t be claimed on your taxes. What you received for your interest deductions isn’t the same for investment properties. Tax laws vary. Always consult with your accountant.
- Landlords wear many hats – 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.
Not long ago, renting was considered a temporary solution until you could afford to buy a home. Nowadays, renters are increasingly former homeowners who have decided to convert their home to an investment property.
Chances are, your current home will not suit your needs indefinitely. Converting your home to an investment property could be ideal for your situation.