Converting Your Former Home To A Rental Property

How do many people initially become rental real estate investors? By converting their former residence into a rental property. This happens most with folks over the age of 60 who are ready to retire and transition into a new life phase. That said, many young people are also asking themselves, am I better off renting out my current home or living in it?

Making the decision to rent out your former home isn’t easy. There are several factors to consider before you choose to become the landlord of your previous residence.

First, run the numbers. The idea of earning rental income from your former house is appealing, but what does this scenario look like on paper?

You need to get a realistic idea of the rent you can charge your tenants. Have a professional (like me) run a rent analysis for you. It’s a mistake, likely a huge mistake, to make a phone call or two, get a rough idea of the rent you can charge, and make a significant life decision based on anecdotal evidence.

Another way to get a reliable estimate of how much rent you can charge is to purchase a Fannie Mae Form 1007, a Single-Family Comparable Rent Schedule. It’s like an appraisal, but for rental income, not home value. Here’s a reputable online source for individual homeowners to get a Fannie Mae Form 1007 –

Next, analyze the costs involved in your new landlord venture. If you own your home outright (no mortgage), then you have fewer numbers to crunch. Do you know how to accurately calculate the costs involved in owning and maintaining your new rental property? If not, find out exactly how to produce these numbers.

Be realistic in your analysis. For example, if the roof on your soon to be rental property is 15 years old, it will need to be replaced within the next five years. Budget for that accordingly. How old is your HVAC system? Do your appliances need replacement soon? How about the flooring in the home?

Create a spreadsheet. Share your investment analysis with a neutral real estate rental professional (not a family member or a close friend) and get their input.

Now compare those results with what you could accomplish by selling the home. If you’re looking for income, what’s the ROI (Return On Investment) for your rental property versus other alternatives, such as bonds, stocks, or cash? Every investment opportunity has risks. What are the risks you’re assuming by becoming a landlord versus selling your home and then re-investing the money?

Your analysis gets more complicated if you still have a mortgage on your property. Many lenders impose rules for homeowners converting a primary residence into a rental property. If you’re going to buy another home to serve as your residence, be sure you can qualify for a new mortgage given your existing debt. Ask questions of knowledgeable people before you pull the trigger. Assume nothing, verify everything.

Evaluate the tax angle of your decision. Generally speaking, if you sell your residence and make $200,000 in profit while you are still living in the home, that’s likely tax-free money to you.

Once your house becomes an investment property, the rules change. For example, you can write off all of your improvement costs and maintenance expenses. But when it comes time to sell your rental property, all of your capital gains are taxable income.

Yes, you will need to do some homework and make serious choices if you want to rent out your former residence. While tackling all of this seems daunting, it’s much, much easier if you get some professional help right from the start.

There is one other very important aspect to the residence to investment property decision that you must consider, especially if you have lived in your home for many years. Your emotions.

Your home is filled with memories. Peek in your broom closet and see where you marked on the wall your children’s height as they grew up. What about those family handprints in the back patio when you poured new cement ten years ago? Even seemingly inconsequential things, like that soot stain on the fireplace mantle that reminds you of a Christmas long ago with now-departed loved ones, means a lot to you.

While you are not selling your house, it is no longer your home once you rent it out. Can you consider it to only be an investment? A property that’s strictly a business venture? Some people have zero problems doing this. For others, it is literally an impossible barrier to overcome.

If you don’t have the right mindset, you might subconsciously sabotage your efforts to rent out the house. This is a very common issue, so take it seriously. If the only way to let go of your home is to sell it, do that. If you can detach from your home emotionally, then let an objective investment analysis guide your decision.

If you are considering converting your Westchester County residence into a rental property, then please reach out. Our professional team can answer all of your questions and ease your concerns.

Please give me a ring at 914-355-3277 or send me an email at [email protected].