Are You Considering Renting Out Your Home? Things to Know

Also, you likely won't be able to use all the equity in your home. Depending on the lender, you will likely only be able to borrow up to 85% of your home's value1 minus the amount you owe on your existing mortgage.

Consult with a financial advisor or mortgage loan originator for help making an informed decision.

Do You Understand the Tax Implications?

One of the potential drawbacks of turning your home into a rental property is the potential tax implications. Currently, the IRS allows homeowners to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains on the sale of their primary residence. To qualify, you must have owned and lived in the home for at least two of the last five years prior to sale.2

However, if you convert your home into a rental, you might lose this tax benefit. The key factor is the "two out of five years" rule. If you live in the home for at least two years, then rent it out and sell it (all within five years), you still qualify for the exclusion. But if you continue to rent beyond this period, the property is considered an investment rather than your primary residence. You'll owe capital gains taxes on any appreciation in value.

On the other hand, turning your home into a rental property allows you to take advantage of tax deductions that can offset your rental income and potentially reduce the tax bill. Here are some of the common expenses that you can deduct as a landlord:

• Interest (but not principal) on a mortgage or home equity loan (as long as the proceeds were used to buy, build, or substantially improve the property.)
• Property taxes
• Repairs and maintenance
• Insurance
• Utilities
• Depreciation

It's important to consult with a tax advisor to understand all the tax implications before deciding to rent out your home.

Should You Hire a Property Manager?

Managing a rental property requires a significant commitment of time and energy. As a landlord, you're responsible for finding and screening tenants, collecting rent and handling maintenance and repairs.

If managing the property yourself seems overwhelming, hiring a professional property manager can be a viable option. A property manager takes on the day-to-day tasks of property ownership, ensuring that your investment is properly cared for even if you're not on-site. They can handle everything from tenant queries to emergency repairs, allowing you to enjoy the benefits of being a landlord without the associated headaches.

However, hiring a property manager comes at a cost. On average, property management fees range from 8% to 12% of the monthly rental value, plus expenses.3

Hiring a property manager will cut into your potential profits, so weigh the costs and benefits before making a decision.

What Type of Insurance Will You Need?

As a homeowner, your current homeowner's insurance policy covers damage to your home and personal property and personal liability claims. However, when you transition your home into a rental, your insurance needs will change.

A standard homeowners insurance policy doesn't offer protection for the specific risks associated with renting out your home. For example, it won't cover the loss of rental income if your property becomes uninhabitable due to damage from a fire.

Landlord insurance, also known as rental property insurance, provides coverage for property damage (due to fire, lightning, wind, hail, etc.), liability coverage if someone is injured on the property (and the landlord is deemed responsible), and loss of rental income, among other risks that come with renting out your home. These policies typically cost about 25% more than a standard homeowners insurance policy,4 so keep that in mind when weighing the decision to turn your home into a rental.

Also, policies can differ from one company to the next, so read the policy details carefully or discuss them with your insurance agent to ensure you have the right coverage for your situation.