Buying a New Home and Converting Your Current Home Into a Rental Property

As it stands right now, in less than six months’ time, we plan to buy a new home and at the same time become the landlord of the town home we currently live in. Here’s our plan:

Step One – Refinance Our Mortgage

We’ve already completed this step. By refinancing our mortgage, we reduced our mortgage payment by enough to allow us to rent out the property by at least a hundred more per month than all of our expenses: mortgage, property taxes, insurance, home owners association dues, repairs, and property management fees. Here’s what our rental investment should look like per month:

  • Rent – $1,700
  • Mortgage – (850)
  • Property Taxes – (350)
  • HOA* – (175)
  • Insurance (25)
  • Management (100)
  • Misc. (0-100)
  • Cash Flow – $100-$200 a Month
*Includes external maintenance and insurance on the town home.

Step Two – Save Up a New Down Payment

We are in the process of saving up for a down payment on a new home. We should be able to reach our goal of a 20% down payment by next February. The big x-factor is 2011 self-employment taxes. This will be our first full year with only self-employment income, and so I’m not exactly sure where our taxes will land. I plan to sit down with my father (who’s CPA firm is now managing my accounting) and get an estimate going. One radical thing we are planning to do to get the down payment quicker is to sell our second vehicle. More on that in a future post.

Step Three – Find a Property Management Company

I’m not interested in going this alone, especially my first time out. I’m sure I *could* do it, but I want the hand-holding, and our expenses should be low enough to afford this and still “cash-flow” the property.

Step Four – Get a Rental Agreement

I’ve been told by several people that have successfully pulled this off (two mortgages) that we will help our chances of getting a loan for our new house by getting a rental agreement in place prior to applying for the mortgage. This makes sense. A bank needs to know that you are capable of paying both mortgages, one with your business/employment income, and the other with rental income. I’m confident we can do this quickly. Rents are strong right now and getting a tenant should not be a problem, especially using a property management company.

One thing to consider before converting your home into a rental property is the change in tax treatment. You have to pay taxes on any gain from the sale of a rental property. You don’t if it’s your residence.

Step Five – Get New Financing and Find a Home

This is where it gets tricky. Once we get a rental agreement with a tenant, we will need to move out of the home to make way for them. We want our next house to be the one we are in for a long time (i.e. till the kids graduate). So, I don’t want to rush this process. I’m mentally preparing that we may need to rent an apartment or do an extended stay hotel until we can find the right home, close the loan, and move in.

Why We Are Doing This

  1. For starters, we bought this town home with the idea that it could possibly become a rental property for us in the future.
  2. Second, we want a new home with a yard and more space.
  3. Third, selling isn’t an option because we cannot stomach the idea of losing money to sell our home. We bought this home at the top of the market in December of 2006 with a 20% down payment. It’s now worth $10,000 less than what we paid for it. Neither Mrs. PT or I feel good about selling this home and losing the hard-earned money we put into it. We’d rather take our chances on becoming land lords.

What are your thoughts on our plan? Are we missing anything? Will this be a slam dunk, or will it be harder than we think?

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Last Edited: October 17, 2011 @ 1:51 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.