Homebuyers

Thinking Ahead: 7 Things to Consider When Buying a Home to Live in Now and Rent Out Later

When you buy your first home, it’s tempting to get swept up by a beautiful kitchen or a big backyard. But homebuyers may also want to consider how the property may support your long-term financial goals.

Depending on your situation, it might make sense to turn your home into a rental property down the road. 

“This option usually works best if you’re buying a home to live in for a few years but not planning to stay in it forever,” said real estate broker Erik Leland of Realty First in Lake Oswego, Ore. “Usually this is during transition times, like when you’re early in your career with a plan to change offices, or buying a starter home with the intention to upgrade once you’re able.”

By being proactive and knowing what to look for in a potential investment property, you may be able to avoid common roadblocks and ensure a smoother transition when the time comes.

Here are several tips to point you in the right direction.

1. Understand potential rental restrictions

Many mortgage lenders and homeowner associations (HOAs) have restrictions on rental properties. 

“Some [HOAs] cap the max rentals, don’t allow certain types, or outright prohibit rentals,” said Leland. “I sold a condo to a client years ago who signed up for the HOA rental waitlist and is still waiting to be approved.”

There may also be town or city regulations prohibiting short-term rentals, such as Airbnbs.

Read the fine print of your mortgage agreement, local regulations, and HOA’s covenants, conditions, and restrictions (CC&Rs), so you’re clear on any limitations that might exist. If you’re still unsure, don’t hesitate to ask.

2. Learn the local rental market 

As you consider renting out your property, look at the numbers as if you’re running a business.

Check comparable rentals in the area and figure out what the property would rent for realistically. Compare that to your mortgage payment, taxes, insurance, and any HOA dues. Then factor is expected maintenance and repairs.

Also realize these numbers could change when the time comes for you to turn it into a rental.

“Remember that the income from rentals often does not cover all of this,” said Leland. “You need to be honest with yourself about whether you are comfortable subsidizing it.”

3. Buy a home in an area with a strong local economy 

The local economy matters. After all, you want to ensure there is demand for your rental and you can find tenants who can afford to pay rent consistently. 

“Consider the employment base and what is driving the demand. If there is only one dominant employer, that is a risk,” Leland said. That’s because if that employer lays off workers, moves, or shutters, it could impact the rental market.

Fortunately, demand from a college town or areas near major medical centers can help reduce the economic risk of your local area.

4. Run the numbers

Leland warns that landlord insurance costs more than a standard homeowners’ policy and you need to budget for it. You also need cash reserves to cover the mortgage if the property sits vacant for a month or two between tenants.

“Plan for two to three months of carrying costs with no tenant per year,” said Leland.

Don’t forget about maintenance and property management fees if you’re not running the rental yourself. Management companies generally charge between 8% and 12% of the monthly rent to find tenants, run credit checks, coordinate repairs, and collect rent payments.

“If the numbers only work in months the property is occupied and when nothing breaks, you know the plan isn’t where it needs to be,” said Leland.

5. Prioritize major improvements

If you want to turn your first home into a rental, your goal should be to eliminate the risk of major issues down the line.

“I purchased my home with the intention of eventually turning it into a rental and during the five years I lived there, I focused heavily on upgrading the major systems,” said Michaela Carbone Le, real estate agent at First Team Real Estate in Garden Grove, Calif. “I replaced the roof, installed a brand-new AC and updated portions of the plumbing and electrical.”

In many cases, the money you put into these improvements early on can save you significantly over time.

6. Gauge your willingness to be a landlord 

You can use a property management company to run your rental, but that will take a bite out of your earnings.  

If you decide to become a landlord yourself, make sure you’re okay with late-night calls about broken water heaters and leaky pipes. In addition, you’ll need to chase down late rent payments, screen tenants, find legal lease agreements, and handle evictions. 

Carbone Le recommends you have a handyperson on call for minor issues like leaks or small repairs. You can also use platforms to automate the rent payment process.

“Landlords need to understand the legal framework thoroughly before they take on a tenant. It is not passive income the way lots of people imagine it to be,” explained Leland.

7. Consider an exit strategy

Think about what your exit strategy will be before you buy your first home. If you can’t find a tenant, can you still sell the property quickly and at a reasonable price?

“If your plan is only successful in very specific outcomes, that is a red flag,” said Leland. “Also, make sure to talk to an [accountant.]”

There are tax implications surrounding all of these decisions. Getting that advice early on may save you money.