Many homeowners are looking for different ways to expand their investment portfolio – whether it be through real estate or other investments. One of the easiest ways for buyers to expand their investment portfolio is by leveraging the equity in their existing home and converting it into an investment property. There are several key advantages to this strategy:
1. Tax benefits – many homeowner’s can take advantage of tax laws that are written in their favor when it comes to converting primary residences into rentals. There are several articles online providing tips to homeowners:
(http://www.marketwatch.com/story/tax-angles-when-converting-your-home-into-a-rental-2013-05-14)
(http://www.marcumllp.com/publications-1/converting-a-personal-residence-to-rental-property)
2. You are already familiar with the ‘quirks’ in the property. So there will be no surprises when the electrical panel needs to be replaced after 2 years because this was already on your radar while living in the house.
3. Use the extra funds from the rental income to pay down your old house quicker. This will help you increase your profit later by paying less in overall interest on the loan.
The qualifications to convert an existing primary residence into a rental property in order to use the rental income on the loan application requires at least 30% equity in the primary residence, a lease agreement from the new tenant including depositing the security deposit into your bank account, and show proof the check has cleared your account, and an exterior appraisal of the existing property to confirm the value (this typically costs $300). Be sure to also contact your homeowner’s insurance rep to confirm if the insurance payment will increase once the property is converted from a primary residence to a rental.
Deciding to convert your principal residence into a rental property shouldn’t be taken lightly. It’s important to gather all the facts from the professionals who work on your behalf – tax advisor; real estate agent; loan officer; homeowner’s insurance agent.
Contributor, designer & admin for JohnHart Gazette.
