Turning your home into a rental property: things to consider

Picture this: you’ve been offered a two-year job in a different city, but you want to return to your home in the long run. Or maybe your children have moved out and you’re thinking about downsizing. Maybe, you’re simply ready for a permanent change of scenery.

Whatever the reason, you may be wondering why you should have to give up your current property and all the equity you’ve built up over the years. In this article, we outline what questions to ask before you turn your owner-occupied property into an investment property.

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Do I ultimately plan to return to the home I love?

If your relocation is temporary, and you intend to return to your home, then a conversion could be the right thing to do – as long as you meet the six-year rule.

This rule relates to whether or not you pay capital gains tax (CGT) when you eventually sell your property. Under the six-year rule, if your property is sold within six years of first being rented out, it will be exempt from CGT.

If you don't plan to return to your existing property and want to turn it into an investment property, then CGT will apply if you sell the home after six years. However, rental properties can have tax benefits for you (more on that later).

How will I manage the property?

Private homeowners can manage their rental properties on their own, but it can be difficult and inconvenient. Often, the costs of using experienced property managers can be well worth it in the long run. It can make your life a lot easier and free from potential errors.

Hiring an experienced real estate lawyer is also a good idea, as they can help you navigate your state’s unique tenancy laws, and assist with drawing up a rental contract for the property.

Is my property in a strong rental market?

Owners sometimes overestimate the desirability of their homes in the current rental market. To avoid this, do some research on comparable properties in the area before you assume you’ll be able to cover all your associated costs.

That same quiet street that was great for your growing family might not be convenient for young professionals in need of amenities and access to transportation. Market research and property valuation could help you get a solid idea of whether this investment is worth it.

It's also important to consider where the suburb might be headed in the future. Are there lots of newly developed properties being built? Is the age demographic younger and are there good schools in the area? Looking for potential growth in a suburb will help you decide if turning your home into a rental would be smart.

Will changing my family home to an invesment property bring me a solid income and tax benefits?

Depending on how long you’ve owned your home and whether you are positioned toward being positively geared or negatively geared, the tax benefits of owning an investment property might work out in your favour.

If your property is positively geared, this means that your rental income is enough to cover home loan repayments and property expenses.

On the other hand, if your property is negatively geared, your rental income is not enough to cover mortgage payments and property expenses.

However, negative gearing can have its advantages - your losses can be claimed as a tax deduction, and if your property sells for a capital gain, you can maximise tax savings.

It's smart to talk to a financial advisor to decide what investment strategy would be best for your property.

Do I understand the changes between an owner-occupier loan and an investment loan?

While the process of obtaining an investment loan is very similar to getting an owner-occupier home loan, some features are different.

For one, interest rates for investment loans are usually higher than those for owner-occupier loans. While interest rates aren't the only factor to consider when comparing loans, it is important to think about how much interest you'll actually be paying over the life of the loan.

Investment loans also usually incur higher establishment and maintenance fees. Even though it might seem easier to stick with your current lender when changing your owner occupier loan to an investment loan, it pays to shop around.

Still have questions about investment home loans? Lendi's Home Loan Specialists can help at a time that suits you. Book an appointment at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.