It’s time to move on from your first home. Maybe you’ve outgrown it and need a larger family home. Maybe you’re relocating for work. Either way, you might immediately think you need to sell your home before buying or moving.

But have you considered turning your first home into a rental property instead?

Benefits of turning your first home into a rental property

There are lots of benefits to turning your first home into a rental property.

• Keep the equity you’ve built up over the years.
• Expenses associated with owning the home could be tax deductible.*
• Interest rates on the original home loan could be tax deductible.*
• There are fewer transaction costs which would drastically increase when selling the home.
• You can prepare the home while living there.
• You can take advantage of your deep knowledge of the local area and market.
• Best of all… you could find yourself with extra income each month.

How to turn your first home into a rental property

When it comes to the practical ins and outs of turning your first home into a rental property, there are a few questions you should consider before taking the plunge.

How will you manage the property?

Many homeowners do manage their rental properties on their own, but it’s not always the best case scenario. It can be challenging to find and keep good tenants (and may involve marketing). There will be a fairly steady flow of maintenance and fixes that will need to be handled. And we haven’t even mentioned the collection of rent (which can present its own difficulties).

Experienced property managers are often well worth the cost of their services. They don’t just take over the day-to-day management of the property. They also put a bit of space between you and the management (and the tenants) which could significantly decrease your own stress.

Are you in a strong rental market?

Before deciding to turn your home into a rental property you’ll need to consider your local rental market. While at the moment, investors/property owners are in a much better position than tenants, that may not always be the case.

Currently, for many areas – such as Brisbane and Greater Queensland – it has been a record year for rental property owners. Property values have climbed 38.1% and rents have increased 23% since March 2020. This means there has been greater competition for rental properties which has put property rental owners in an excellent position.

Of course, you have to look to your own local area to see its desirability for renters as not every area will have the same results. You should also determine the type of renters who might be suited for your home, and the range of rents that you could reasonably charge. And you should request a property valuation from an expert valuer.

Finally, consider where your local area is headed. Are new properties being built, and old ones being renovated? Or are people moving out in droves and houses running to ruin? How is the local school district perceived? Are new shops or infrastructure being built? These questions will help you to determine whether your property is suitable for turning into a rental property.

Will I get good financial results?

When it comes to turning your first home into a rental property you will certainly want to determine whether you’ll have a good financial return. The first step is to consider how much rent you may be able to charge. And how much you will need to pay each month to keep the home.

Remember, the amount you are paying is more than just the mortgage amount. It needs to also include the rates, insurance and the costs of managing the property (whether on your own or with an external property manager). You should also budget for maintenance and fixes that will definitely come up over the course of the rental period.

Once you have these numbers, you’ll be able to determine whether the rental income is enough to cover the expenses, or even leave you with a windfall.

What are the tax implications?

You also need to consider the tax implications of course. Depending on how long you’ve owned your home – and whether you’re negatively geared or positively geared – the tax benefits might work out favourably. Even in the situation where your rental income doesn’t cover all your expenses (i.e., negatively geared), if you can claim your losses as a tax deduction it might be a good financial position.

For all tax questions, however, it’s best to speak to your tax specialist, accountant or financial advisor to determine the best strategy for you.

Will I return to the home or move on?

Whether you are planning to return to the home, or are looking to buy a new home, this will impact on your decision to turn your first home into a rental property. First, turning your first home into a rental property is a great idea if you are moving somewhere temporarily and plan to return. You’ll have a home to come back to and will continue to build equity during your time away.

There are also capital gains tax (CGT) considerations to take into account. If you are planning on returning to the home within six years, then you could avoid CGT if you then decide to sell it. But if you don’t, and then sell the property, you might be subject to CGT. Whether or not this is a deal breaker is something to discuss with your tax advisor as well.

Expert Advice

If you’re unsure on the best approach for you, speak to the experts. That’s your financial advisors, your tax advisors and us, as your lending specialists! We’re here to help you determine the right approach for you, and help you get the right loan to get you started. And we’ve got loads of additional information about building your property portfolio or buying your next home as well.

If you are ready to start the process of turning your first home into a rental property, get in touch. We’re here to help you navigate every step of the borrowing process.

Of course, if you have any other questions about your mortgage, your interest rates, refinancing or more, get in touch. We’d be happy to help.