Benefits to living in rental property before renting

[Jarred Stangohr]

Hello, I am planning on buying my first home within the next couple months. My plan is to live in it for at least a year and then rent it out. I was wondering if anyone knew of any benefits/downsides (in terms of laws/lenders/taxes) to living in your house initially then renting it out. Thanks!

[Alan Le]

Hi @Jarred Stangohr, great decision on buying your home within the next couple of months. We're seeing buyers have relatively more bargaining power compared to recent years and so I think there is still great opportunity for finding deals in Denver!

What you are planning is a similar strategy to what I did with my first home and how I first got my feet wet with real estate investing. I house-hacked a single-family home that had separate entrances; this allowed for the comfortability of living with privacy while also getting the benefit of rental income and qualifies you for the perks of owner-occupied loans. I am not sure what your living requirements are, but I can only strongly recommend a house-hack strategy for first time home-buyers/investors if your situation allows. Doing a nomadic strategy and living in it yourself without tenants and then moving out can also be a viable option to slowly growing your investments. Downside being that it doesn't come with the benefit of offsetting your living expenses-- which can be huge in fast-tracking your savings for that next house!

Either way, sounds like you plan to occupy it for at least the first year. This would allow you to deduct the property taxes you pay as well as the interest portion of your mortgage payments from your annual gross income. When it comes time to consider buying the second home, I would first focus on getting tenants into this first home as lenders will consider 75% of the rental income towards your monthly DTI when qualifying for another loan. This was the case for me when buying my second home in the Denver metro area and was what allowed me to take another mortgage in purchasing my 2nd house. As far as tax benefits when it comes time to rent the home, you will be able to deduct even more items-- including mortgage interest, property tax, operating expenses, and depreciation.

I don't really see any of it as downsides, but rather "responsibilities" of owning a home and running a rental business.

Hope this helps you and good luck on your journey!