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Deciding whether to sell your first home or convert it into a rental property is a significant financial crossroads. For many homeowners, keeping the first home as a rental can be a strategic move to build long-term wealth, provided you can qualify for a second mortgage and manage the responsibilities of being a landlord. This guide breaks down the key financial, tax, and logistical considerations to help you make an informed choice.
The primary financial advantage of converting your current residence into a rental is the potential to build a real estate investment portfolio with more favorable financing. When you purchase a home as your primary residence, you typically secure a mortgage with a lower down payment and a more competitive interest rate.
According to industry assessment, owner-occupied mortgages can have down payments as low as 3.5% with interest rates significantly lower than those for investment properties. In contrast, buying a non-owner-occupied property (a home specifically intended for rent) usually requires a 20-25% down payment and carries an interest rate that is 0.375% to 0.75% higher.
Bottom line: It is often less expensive to convert your existing home into a rental and buy a new primary residence than to purchase a standalone investment property. The main hurdle is qualifying for a second mortgage. Lenders will scrutinize your debt-to-income (DTI) ratio, which is a key metric comparing your monthly debt payments to your gross monthly income. If you have a signed lease on your first home before closing on the second, some lenders may count a portion of the future rental income to help you qualify, though they often prefer to see prior property management experience.
The tax implications of owning a rental property are complex, and consulting with a qualified accountant is a critical first step. Generally, the most substantial benefits come from three areas:
These deductions can significantly offset your rental income, reducing your overall tax liability. However, rules are specific, and professional guidance is essential.
Not every home makes a good rental. The ideal rental property has broad market appeal. Based on market analysis, one- to three-bedroom homes are often easier to rent than larger, more niche properties. To assess your home's potential, research the local rental market. Identify the dominant renter demographics—such as young professionals, students, or families—and the types of properties they typically rent. A home with features that appeal to a larger audience will generate more interest and reduce vacancy periods. The most reliable method is to meet with a local real estate professional to create a strategy tailored to your specific property and market conditions.
Setting the right rent is crucial for attracting tenants and ensuring profitability. Since rental rates for private homes are not centrally tracked, the most reliable method is to conduct a comparative market analysis (CMA). Search online listings for homes similar to yours in size, location, and condition to see what they are renting for in real-time.
When calculating your potential profit, you must account for all costs, including:
Plan for expenses beyond the mortgage payment. Repairs, tenant turnover, and periods of vacancy are inevitable costs of being a landlord. If you prefer not to handle maintenance and tenant relations yourself, hiring a property management company is an option, but this cost must be factored into your financial projections from the beginning.
The decision to sell or rent is highly personal. Before leaping, conduct a thorough financial analysis. If you are in a strong seller's market, you might consider whether the equity in your first home is needed for the down payment on your next one. In some cases, a cash-out refinance could provide those funds while keeping the property, but this increases your mortgage debt. Based on our experience assessment, "buy and hold" is often a successful long-term wealth-building strategy, but it requires careful planning, a solid financial position, and a readiness to take on the role of a landlord.
