Renting Out Your First Home After Buying Your Second

How to convert a former primary residence into a rental property

Two identical red doors in Dublin, Ireland
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Once you've decided to upgrade from your first home and close on your second, you possibly mulled over getting that first home off your plate by selling it. But what if you wanted to maintain ownership of that property instead and keep it in your family for years to come? 

If your goal is to earn some passive income by renting out your first home, there's a case to be made for taking that route. After all, rent prices have been steadily on the rise—clocking in at a national average of $1,381 in May 2018, according to a RENTcafe report. That's a 2 percent bump year over year. Home values have been consistently increasing as well. The latest S&P CoreLogic Case-Shiller home price index shows a 9.5 percent annual gain in November 2020.

But before you invite renters to potentially occupy your property, you'll first have to prove you will use the rental income to cover the mortgage payments on your first home. There are some additional hurdles you'll have to clear, too.

Here's your step-by-step guide on how to rent out your first home after buying your second.

  1. Determine If the Terms of Your Home Loan Have Owner-Occupier Restrictions: Unless you're rolling in dough, you likely still have a mortgage on your first home, which means you'd need to verify that you're allowed to have tenants occupying your property. If you have an FHA-insured loan, you're more than likely required to occupy the property for a certain time period before a tenant is permitted to occupy it, though some exceptions may apply. Check with the Department of Housing and Urban Development for additional information.
    Conventional Loans those that conform to Fannie Mae and Freddie Mac standards, also typically come with owner-occupier requirements. Lenders may have their own stipulations in addition to those of Fannie or Freddie, so be sure to confirm your lender's rules.
  2. Double-Check With Your Homeowners Association: If you're among the 73.5 million Americans who own a property in an HOA-managed community, you'll want to check the association's bylaws and covenants for rules related to renting out your home. Many HOAs are risk-averse to renters for the sake of maintaining home values and safety, according to a Zillow article.
    While many renters are respectful caretakers, they might be more likely than homeowners to neglect the property or disregard association rules, which can, in turn, lower home values and the overall quality of the neighborhood—creating a negative perception of renters among some HOAs.
    Your HOA could outright ban rentals in your community or impose different limits, such as capping the amount of rentals that exist simultaneously, requiring a predetermined lease term or excluding tenants from certain community amenities.
  3. Brush up on Local Laws: You're entering new territory by becoming a landlord, so you'll need to familiarize yourself with your state's landlord-tenant laws. Consider working with a real estate attorney to ensure you're in compliance before you approve a tenant and draft a lease agreement. 
  4. Notify Your Insurance Company: As this is no longer your primary residence, you'll need to contact your homeowners insurance company and make changes to your coverage. Your rental property may require a landlord's insurance policy, which often includes coverage for property damage, liability claims and loss of rental income. 

However, your tenants' personal property won't be covered—they will need a separate renter's insurance policy. Landlord insurance also doesn't cover appliances that need to be repaired or replaced. 

Other Factors to Consider 

If you're serious about converting your former primary residence into a rental property, the list of to-dos doesn't stop with the responsibilities listed above. There are other items you must factor into your decision, such as the tax considerations. 

All income you earn from the rental property must be reported on your annual tax return, according to the Internal Revenue Service, though the expenses related to managing your rental property can be deducted from the rental income you receive. 

Deductible expenses include: 

  • Interest from your mortgage payments
  • Property taxes 
  • Insurance
  • Maintenance
  • Utilities
  • Advertising
  • Materials and supplies 
  • Repairs
  • Certain tenant-paid expenses 

Expenses related to home improvements aren't deductible. Additionally, security deposits you don't intend to refund to your tenant are taxable.

You'll also want to keep in mind your responsibilities as a landlord to your tenants as you move forward in the process of renting out your property. 

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