Becoming a landlord can be an excellent way to build a steady secondary income stream and expand your financial portfolio. For many, the first step into real estate investing starts with renting out their current home after they move. It’s a property you know, you’ve already invested in it, and it’s a manageable way to begin your landlord journey.
If you’re considering turning your home into a rental, here are three key financial steps to set yourself up for success.
- Review Your Mortgage Terms
If you currently have a mortgage on your home, your first step should be reviewing the terms of that loan. Many residential mortgage agreements contain clauses that address converting a property from a primary residence to an investment property. Some lenders may require a waiting period before this transition, while others might prohibit it entirely without refinancing into a different type of loan.
If you haven’t yet purchased the home you’re planning to turn into a rental, be strategic about your mortgage terms. Ensure the loan you select gives you flexibility for future investment purposes.
- Consider Refinancing Your Mortgage
Refinancing can be a valuable tool when transitioning your property into a rental. If your current mortgage allows the conversion, analyze whether keeping the existing terms is the best option. Consider questions like:
- Is the monthly payment sustainable alongside a second mortgage or additional expenses?
- Are you nearing the end of your loan term, making it more financially advantageous to keep the current setup?
Alternatively, refinancing may help you lower your monthly payments or access equity. Cash-out refinancing, for instance, could provide funds to cover rental property renovations or establish a financial buffer for potential vacancies or repairs. Stretching out the loan term through refinancing might also reduce your debt-to-income ratio, improving your chances of securing favorable terms on your next mortgage.
- Prepare for a Second Mortgage
If you’re planning to buy another home while renting out your current one, you’ll need to qualify for a second mortgage. Investment property loans often come with stricter requirements than primary residence loans. Expect higher down payment requirements, elevated interest rates, and stricter cash reserve standards.
Preparing in advance is key. Focus on the following:
- Credit Score: Check your credit report and work on improvements, such as paying down debts or correcting errors.
- Cash Reserves: Build up at least six months’ worth of expenses for your rental property, including mortgage payments, utilities, and maintenance.
- Budget: Create a realistic monthly budget that accounts for potential vacancies, repairs, and management fees.
While these requirements might seem challenging, remember that your rental property could generate enough income to offset the additional expenses of two mortgages. Research the local rental market to estimate your potential income and use this information to strengthen your case with lenders.
Becoming a small landlord takes careful planning and financial preparation, but the long-term benefits can be well worth the effort. By focusing on your mortgage terms, considering refinancing options, and preparing for a second loan, you’ll lay the groundwork for a successful rental venture.
Start today by reviewing your finances, researching your local market, and exploring your mortgage options. With the right strategy, turning your home into a rental can be a key step toward long-term financial stability.
