Converting Primary Residence to Rental

[Joe Schriever]

We recently listed our primary residence for sale. We have no other real estate holdings YET. We recently started executing a plan to start our REI business, and the first step was to get rid of our primary residence - it's costing us too much money that could be spent on investing (thanks, Rich Dad Poor Dad). We wanted to sell our home, free up some cash, then start buying rentals.

Our home has only been on the market 3 weeks. No offers yet, but someone recently offered to rent it from us for 12 months since they are new to our area. Turning our home into a rental never really crossed our mind - it's at a price range where people don't normally rent and in an area where prices are too high for us to start investing. However, if the numbers work, we are strongly considering it. 

We also intend to purchase another home after this one to live in - a new primary residence. 

A few questions 

1. Are there any 'gotchas' when converting your primary residence into a rental?
2. Do you evaluate rentals at high price points ($3k per month rent for single family house) the same as lower price points? 
3. We built our current home and the majority of items are still under builder warranty - do I still need to put aside 5-10% for CapEx and repairs?
4. How do mortgage lenders look at this situation (keeping current home as rental and buying a new primary residence)? 

Thanks BP!!

[Kevin Romines]

On the insurance front. You will replace your existing policy with a landlord policy. Good news, they tend to be less expensive because you don't have the same levels of contents on a landlord policy that you do on a home owners policy. The contents coverage on a landlord policy is for items such as appliances that you have furnished.

Mandate that the renter has and keeps renters insurance. This will protect your policy from claims that arise from the renters or their guests. I would mandate a min. liability coverage on their policy, set it high, its cheap and it protects you. Be listed as an additional insured and also a certificate holder. If your listed as an additional insured, then this policy protects you as it protects them. As a certificate holder, you will be notified if for any reason the policy lapses or terminates.

Next, on your landlord policy, max. out your liability coverage, again this is inexpensive, but can save your butt. Follow this policy up with an umbrella policy 1-5 million depending. Sit down with your agent, tell them of your immediate plans and longer range goals. They should set you up with policies that will protect you based on your longer range goals. Have conversations with your agent (Reviews) every time a major event happens in your life, new home, new kid, various life events. Stay up to date on your coverages. This is what protects what your wanting to build. Take it seriously and plan.