Should I turn my primary residence into a rental property?

Question

Hey Bigger Pockets Community,

I wanted to know some pros and cons to turning my primary residence into a rental property.

Back story : I have lived in my home for over 2 years now and currently the value has gone up about 80k. If I rent this home out for 1-2 years can I still sell the property tax free since I lived here 2 out of the last 5 years?

Also, do I need to change my loan agreement to a rental loan?

Thank you and look forward to your responses. Cheers!

Anthony King · Answer

@Nathan Simons providing numbers would allow for better advice, without that this is all theoretical. With that said, if you're new to investing and being a landlord it might make sense to rent it out for up to 3 years to learn the ropes. You are correct about the capital gains tax that's why I said selling by year three so you lived there 2 of the last 5 years. In the meantime if it cash flows, continues to appreciate, and someone else pays down your existing mortgage then I say rent it out for a bit. I would really think on what your goals are and the best way to achieve them over the next 3 years if you do rent it out. Then sell and redeploy that money when you've narrowed your focus and developed a plan. You can always sell earlier if something comes up sooner.

Anthony King · Answer

@Nathan Simons you do not have to change your loan, refinance, or even notify them. You fulfilled your obligation and can keep the loan you have even if you rent out the home.

Reid Chauvin · Answer

Hi @Nathan Simons - as others have said, it depends on the rental income vs holding costs. If you are planning to hold it and rent it out, then there is no reason to refinance or change the loan agreement unless you need to get to some of the equity for your next purchase or to pay off some debts through a cash-out refi. Refinance could possibly lead to a higher mortgage pmt with switching from a primary residence loan to investment loan, though it depends on a few things like your current rate vs new rate and how much of your mortgage you've already paid off.

Michael Noto · Answer

@Nathan Simons How many years of cash flow does $80k equal? If you can get 8-10 years or more of cash flow now and you are OK with the tax implications then I would sell.

Drew Sygit · Answer

@Nathan Simons you should determine the following:

1) What is your long-term investment goal? - Being a landlord, flipper, invest more passively in syndications?

2) How does renting or selling your primary move you towards that goal?- Look 3 & 5 years out, not today, next month or just the next 12 months!

3) If you sold, what would you invest the funds in & how would the ROI compare to renting your primary?

4) Why can't you do "both"?- Cashout refi to 75-80% LTV and invest those funds in another property, while renting it out?

Basit Siddiqi · Answer

Also, do I need to change my loan agreement to a rental loan? NoIf I rent this home out for 1-2 years can I still sell the property tax free since I lived here 2 out of the last 5 years? You have to sell within 3 years of moving out. Furthermore, you would pay taxes on the depreciation that you claimed when the property was a rental.

Natalie Kolodij · Answer

You can rent the home for 3 years from the date you move out and still qualify to sell it tax free.

Joshua Janus · Answer

@Nathan Simons Renting out your primary residence might be a good move, but I would make sure that the cash flow on it is better than the opportunities that are around you. If you can use that capital to buy a multi family and net more on appreciation and cash flow, that will probably be the more favorable route. I would seek professional advice on your question regarding the capital tax avoidance. Even if your area isn't the best for cash flow, you can look out of state for better markets and try that route as well.

Taylor L. · Answer

To me the biggest question is whether this will cash flow or not with 3rd party property management in place. My fiancee and I have been asking ourselves the same question about our primary residence, because we are planning to relocate/upgrade in 2022.

Ultimately we've decided to sell because:

• the cash flow would only be marginally positive
• even with property management in place it would be a hassle not worth the $/hr it generates, and 
• pulling out the equity will allow us to put that equity into more syndicated commercial deals.

Should I turn my primary residence into a rental property?

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