There are many reasons you might consider renting out your home. You might want to purchase a new primary residence new primary residence and earn extra income by renting out the first one. But can you rent out your primary residence?
The answer is “yes.” However, the exact process can depend on several factors. Here’s everything you need to know about turning your primary residence into a rental property.
Benefits of Renting Out Your Primary Residence
Why might you consider renting out your primary residence? Turning your home into an investment property has its advantages, including:
- You’ll receive additional, passive income
- While you live elsewhere, someone occupies your home.
- You’ll maintain equity in your home even while earning rental income
- You may be eligible for certain tax deductions
Renting out your home can be a wiser choice than selling. You can move back in after the rental agreement ends.
Legal and Financial Implications of Renting out Your Primary Residence
Can you rent out your primary residence without ending up in legal or financial hot water? There are some things to consider before converting your primary residence to a rental property.
Local Laws and Regulations
Local landlord-tenant laws may influence your ability to rent out your home. Check with your city or county to determine what laws may apply. Your homeowner’s association (HOA) may also have policies regulating when and if a home can be occupied by someone other than the primary owner.
Mortgage and Insurance Requirements
Your mortgage lender may have specific requirements about who occupies your home.
The same is true for specific loan programs. For example, if the current primary residence is encumbered by an FHA loan and a new FHA loan is being granted, FHA has specific guidelines regarding distance requiring at least 100 miles between the departure residence and the new residence.
Tax Implications and Benefits
On one hand, renting out your home can offer tax benefits. You can take tax deductions on expenses such as repairs, insurance, HOA fees, property taxes, and other costs that go into maintaining the rental property.
On the other hand, you’ll have to pay income tax on rental income. There are other tax implications to think of, as well, such as capital gains tax. If you decide to sell the property, you’ll pay capital gains taxes unless you’ve been the home’s primary occupant for at least two of the previous five years.
Permits and Licenses
First-time landlords may need to secure additional permits or licenses from their local government to ensure that the home meets all basic safety and habitation standards.
Managing the Rental Process
You'll officially become a landlord if you choose to rent out your primary residence. That means you’ll have to make some key decisions about how to manage the property and its tenants.
Self-Management vs. Hiring a Property Manager
Being a landlord is a major responsibility. You’ll have to handle duties like collecting rent, securing tenants, and performing basic maintenance and repairs to the property.
If you’re in the area, you can save money by doing these things yourself. You have the option of outsourcing to a property management company. Doing so may add to your total costs but will save you the time and the hassle of managing the property on your own.
Finding and Screening Tenants
As a landlord, one of your most important tasks will be to find reliable tenants. You’ll want to find someone to live in the home who you can depend on to pay their rent on time and be respectful of your property.
Property Inspections & Handling Maintenance Requests
Your home must be kept in safe, livable condition. You may need a property inspection before renters move in. After this, you’ll need a system for handling maintenance requests. This is where it helps to have a property manager perform maintenance and repairs on your behalf.
Rental Agreements & Contracts
Before you advertise your rental property, you’ll need to draft a rental agreement. This document serves as a legally binding contract that outlines what’s expected of both you and the prospective tenant.
Important Clauses and Provisions to Include in Rental Agreement
The most important clauses and provisions include things like:
- The tenant’s responsibility for the full rent amount, even if they have roommates
- Limiting the property to residential use only (no home businesses)
- The landlord’s right to access the premises
- The details of renewal clauses
- Addendums related to lifestyle factors (smoking, pets)
- Disclosures about repair history (such as a history of asbestos and lead paint)
When in doubt, contact a real estate attorney for additional guidance on how to draft a rental agreement.
Security Deposits & Rental Payment Terms
Naturally, the most important information revolves around rental income. You’ll need to establish policies and procedures regarding things like:
- The amount of the security deposit (typically one month’s rent)
- Rental due dates (and any potential “grace period”)
- Late fees for unpaid rent
- The right to evict for nonpayment of rent
These provisions give you legal recourse when dealing with delinquent tenants and protect you from unpaid rent.
Challenges and Risks of Renting out Your Primary Residence
Renting out your home can be a good source of income, but it’s not without its drawbacks. Here are some issues to navigate when renting out your primary residence.
Common Challenges When Renting Out Your Primary Residence
There are a number of difficulties associated with renting out your primary residence, such as:
- You’ll pay capital gains tax if you sell a home you haven’t occupied
- You’ll have to manage the property
- You may need additional insurance coverage for a rental property
- You may face challenges with local zoning boards or HOAs
Being a landlord isn’t easy. Be prepared to navigate these challenges when renting your home.
Staying Informed about Laws and Regulations
Many of the laws that regulate rental properties are unique to different areas. Consequently, you’ll need to learn all you can about landlord-tenant laws. You’ll also need to stay informed about regulations surrounding the Fair Housing Act to ensure that your property complies with all regulations.
Assess Your Individual Situation & Seek Professional Advice
Can you rent out your primary residence? Yes, but you’ll need to decide whether it’s the best decision for you.
CrossCountry Mortgage is here to help. Our friendly experts can offer professional advice on how to navigate your future.
Learn how a second mortgage can help you access the equity in your home. Find out the pros and cons of second mortgages, and what you need to know before you apply.
Discover the key differences between renovation and remodel. Uncover the nuances, costs, and benefits to help you make an informed decision for your home transformation.
Learn about accessory dwelling units (ADUs): the types, features, pros/cons, and financing options. Find out how to rent and manage your ADU effectively.
A guide to seasonal home maintenance tasks. With this checklist, you can ensure that your home is properly maintained and protected from the elements.