If your goal is to earn some passive income by renting out your first home, there’s a case to be made for taking that route. After all, rent prices have been steadily on the rise—clocking in at a national average of $1,381 in May 2018, according to a RENTcafe report. That’s a 2 percent bump year over year. Home values have been consistently increasing as well. The latest S&P CoreLogic Case-Shiller home price index shows a 9.5 percent annual gain in November 2020. But before you invite renters to potentially occupy your property, you’ll first have to prove you will use the rental income to cover the mortgage payments on your first home. There are some additional hurdles you’ll have to clear, too. Here’s your step-by-step guide on how to rent out your first home after buying your second. However, your tenants’ personal property won’t be covered—they will need a separate renter’s insurance policy. Landlord insurance also doesn’t cover appliances that need to be repaired or replaced.
Other Factors to Consider
If you’re serious about converting your former primary residence into a rental property, the list of to-dos doesn’t stop with the responsibilities listed above. There are other items you must factor into your decision, such as the tax considerations. All income you earn from the rental property must be reported on your annual tax return, according to the Internal Revenue Service, though the expenses related to managing your rental property can be deducted from the rental income you receive. Deductible expenses include:
Interest from your mortgage paymentsProperty taxes InsuranceMaintenanceUtilitiesAdvertisingMaterials and supplies RepairsCertain tenant-paid expenses
Expenses related to home improvements aren’t deductible. Additionally, security deposits you don’t intend to refund to your tenant are taxable. You’ll also want to keep in mind your responsibilities as a landlord to your tenants as you move forward in the process of renting out your property.
