The thought has crossed your mind before, but now, it has become the focus of your personal financial goals. Owning a rental property can help you make more money, while not having to take on a second job, even if the job is part-time. However, do you have the financial resources to invest in the maintenance of a rental property and more important, do you have the patience to deal with the unknown called a renter?
According to the team at Utopia Management, you can develop a supplemental source of income by owning a rental property, without having to take out a second mortgage or spend what remains in your savings account. You can convert your home into your first rental property.
During uncertain economic times, many homeowners are renting out rooms of their homes to generate additional income. Why settle for just a room or two, when the benefits of converting your home into your first rental property makes sense for several reasons.
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Increase the Value of Your Home
When you decide to rent out your home as your first rental property, you immediately receive a jolt of adrenaline that screams “I’ve got to fix this place up.” From picking up a paintbrush to running the power lawnmower, renting out your home is plenty of incentive to complete long overdue home improvement projects. What does this mean for your personal finances? The answer is an increase in the value of your home. Maybe you need to replace the roof, or you have always wanted to add an outdoor living space. Making home improvements should boost your personal finances by not only making your home more valuable in terms of dollars and cents, but also more valuable to prospective tenants.
One Mortgage
Converting your home into a rental property does not mean you have to search for another place to live that requires taking out a mortgage. In fact, you can view renting out your home for the first time as a kind of role reversal. Instead of taking out a second mortgage to pay for a new home, you can assume the role of a tenant by renting out an apartment, condominium, or even a house located nearby. This is an especially appealing personal financial game plan for retirees that want to downsize their living arrangement, and still make money in the process. You can also expect to save money on transaction costs by renting out a new place to live, as opposed to taking out a second mortgage to pay for a new home.
Less of a Hassle
With all the talk about saving money, what often gets lost in the discussion concerning the renting out of a home is the reduced amount of stress. You do not have to hold open houses, nor do your have to lie awake at night wondering if you will ever find a buyer for your property. Instead of going through the highly stressful home selling process, making your home the first rental property in your portfolio should be a relatively easy process to go through. The key is to understand the steps it takes to transform a home into a rental property, which covers things like creating a legally viable lease and determining a fair value for the monthly rent.
Change of Heart, No Tax Hit
The current United States tax code for homeowners that want to rent out their homes is favorable to homeowners that change their mind about living elsewhere. You can sell your home and not have to pay taxes on a profit up to $250,000 if you live in the house for at least two out of the past five years. The two-year minimum requirement does not have to be two consecutive years. You just have to have spent at least two out of the last five years in your home. This means that if you rented your home in years three and four, and then decided to move back into it for year five, you can make a tax-free profit up to $250,000 if you decide to sell the home after year five.
You cannot enjoy the tax savings if you buy a rental property and then sold it a few years later.
You Know the Real Estate Market
You not only know the real estate market in your neighborhood., you are a part of it as well. From understanding a fair value for the rental price to promoting the benefits of the public school district covering the area, you have valuable information for renting out your home that you probably would not have for a rental property located in another area of the city. In addition, you can provide a new tenant with the inside scoop about your neighbors, as well as the best places to take children for a day trip.
Finally, think of converting your home into your first rental property as a kind of dress rehearsal for future real estate transactions. You will learn how to interact with tenants, how to stay on top of maintenance, and how to handle unexpected issues that arise with the city. Converting your home into your first rental property should prepare you to dive into the rental property market down the road.
