Thinking about converting your primary residence into a rental property? Whether you’re looking to move and generate passive income from your current home, or just exploring new investment opportunities, turning your home into a rental can be a lucrative decision. Here’s a comprehensive guide to help you through the process in six easy steps:
1. Check Local Regulations
Verify Zoning Laws and HOA Rules
Before you proceed, it’s crucial to confirm that your local zoning laws, Homeowners Association (HOA) rules, or condominium bylaws permit renting out your property. Some communities have specific restrictions on short-term or long-term rentals, so make sure you’re fully compliant to avoid any legal issues down the line.
2. Update Your Insurance
Transition to Landlord Insurance
Once you’ve verified that renting is allowed, your next step is to inform your insurance company about the change in your property's use. You’ll need to switch from a homeowner’s insurance policy to a landlord insurance policy, which covers rental-specific risks such as tenant injuries, property damage, and loss of rental income due to covered perils.
3. Notify Your Lender
Communicate with Your Mortgage Lender
Check your loan agreement to see if there are any stipulations regarding renting out your home. Notify your mortgage lender about the change in the use of the property. Some lenders may have requirements or need documentation to update your loan terms accordingly.
4. Get a Cost Segregation Study Done
Leverage Bonus Depreciation
Once your primary residence is converted into a rental property, you can benefit from a new cost segregation study. This study will allow you to take advantage of bonus depreciation to offset the new rental income. A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation timeline, which can significantly reduce your taxable income in the early years of the rental.
5. Market Your Property and Get Tenants
Effective Marketing Strategies
Now it’s time to find tenants. Use various rental property marketing strategies such as:
- Online Rental Marketplaces: List your property on popular rental websites.
- Social Media: Utilize platforms like Facebook, Instagram, and LinkedIn to reach potential renters.
- Local Advertising: Place ads in local newspapers, community bulletin boards, and through direct mail campaigns.
- Flyers and Signage: Distribute flyers in high-traffic areas and place “For Rent” signs on the property.
6. Hire a Property Manager
Decide on Self-Management vs. Hiring a Professional
Consider whether you want to manage the property yourself or hire a property manager. Self-management involves handling tenant communications, maintenance requests, and rent collection, which can be time-consuming. If you prefer a hands-off approach, hiring a property manager can streamline the process. Ensure you keep detailed records of all rental income and expenses for tax compliance.
How to List Your House for Rent
Use this checklist to list your house for rent and turn your former primary residence into an income-producing property:
- Set the rent: Research comparable rentals in your neighborhood, account for seasonality and amenities, and choose a rent that is competitive but still covers your mortgage, taxes, insurance, maintenance, and vacancy risk.
- Prepare the property: Complete repairs, deep clean the home, document the condition with photos, and make sure smoke detectors, locks, appliances, and safety features are working.
- Take listing photos: Use bright, clear photos of the kitchen, bedrooms, bathrooms, living areas, outdoor space, parking, and any upgrades that justify your rent.
- Write the rental listing: Include the monthly rent, deposit, lease length, bedroom and bathroom count, square footage, pet policy, utilities, parking, move-in date, and nearby schools or amenities.
- Choose listing platforms: Publish the rental on major rental listing platforms, social media, local classifieds, and community groups. If you hire a property manager, ask where they syndicate listings.
- Screen tenants: Require a rental application, verify income, check credit, review rental history, contact references, and follow fair housing rules consistently for every applicant.
- Use a written lease: Put the lease terms in writing, including rent due dates, late fees, security deposit rules, maintenance responsibilities, pet terms, occupancy limits, and move-out procedures.
- Collect deposits and document move-in: Collect the security deposit and first month’s rent according to local law, complete a move-in inspection, and keep all rental records for tax and compliance purposes.
Need a Cost Segregation Study?
If you’re in the process of converting your primary residence into a rental property and need a cost segregation study, we’re here to help. Request a free cost segregation proposal to learn how leveraging depreciation can maximize your tax benefits and improve your rental property's profitability.
By following these steps, you’ll be well on your way to transforming your home into a successful rental property.
Primary Residence to Rental Property FAQ
Can I rent out my primary residence?
Yes. You can rent out your primary residence if your local zoning rules, HOA or condo bylaws, mortgage terms, and insurance policy allow it. Before listing the property, confirm the rules, notify your lender if required, and switch to landlord insurance.
How to convert primary residence to rental property?
To convert a primary residence to a rental property, confirm local rental rules, update insurance, notify your lender, document the conversion date, prepare the home for tenants, set market rent, and begin tracking rental income and expenses for tax purposes.
Can you rent your primary residence?
Yes, you can rent your primary residence, but the property’s use changes from personal to rental once it is placed in service for tenants. That change affects insurance, tax reporting, depreciation, and recordkeeping.
Can I rent out my primary residence and buy another?
Yes. Many homeowners rent out their current primary residence and buy another home. Your lender will evaluate your debt-to-income ratio, rental income, reserves, and mortgage terms, so speak with your lender before making the move.
Can I turn my primary residence into a rental property?
Yes. You can turn your primary residence into a rental property by making it available for rent and treating it as an income-producing asset. From that point forward, you should track rental income, expenses, depreciation, repairs, and the property’s adjusted basis.
What happens when you convert a primary residence to a rental property?
When you convert a primary residence to a rental property, the home becomes an investment property for tax purposes. You may begin depreciating the building portion of the property, deduct ordinary rental expenses, and potentially use a cost segregation study to accelerate eligible depreciation.
Do I need to tell my mortgage company if I rent out my house?
Usually, yes. Many mortgage agreements require you to notify the lender if the property is no longer owner-occupied. Review your loan documents before renting the home so you do not violate occupancy or loan-use requirements.
Do I need landlord insurance to rent out my primary residence?
Yes. A standard homeowner’s policy usually does not cover rental activity. Landlord insurance is designed to cover rental-specific risks, including tenant-related liability, property damage, and potential loss of rental income after covered events.
Can I depreciate my primary residence after converting it to a rental?
Yes. Once the home is converted to a rental and placed in service, you can generally depreciate the building portion of the property, but not the land. Your depreciable basis is typically based on the lesser of adjusted basis or fair market value at the time of conversion, excluding land.
Should I get a cost segregation study after converting my home to a rental?
A cost segregation study can make sense after converting a primary residence to a rental if the property has enough depreciable basis and you can use the deductions. The study identifies components that may qualify for shorter depreciation lives, which can increase early-year tax deductions.
Use our free rental property depreciation calculator to estimate your potential tax savings today.
