How To Convert Your Home To A Rental Property
Since there are significant costs to selling a house it can make good sense to try and hang onto it as a rental property. But of course some houses make better rentals than others and then there is the finance and tax issues to consider.
Will your home make a good rental?
Making this decision should be based on some goals and a good strategy so ask yourself honestly and get advise from a good property manager to help decide if your current home will make a good rental property.
- Will the rent cover the costs including a mortgage for 100% of the value?
- Will the property increase in value?
If the answer is no to both these questions then you may be better off selling up and using the money to buy another rental property or to reduce debt on your new home you are building.
Do I have the right tax structure?
The debt on a rental is tax deductible so you’ll want to put as much into your investment property as possible. The most common way to do this is to sell your existing home to a Look Through Company (LTC) which you will own. The LTC buys the home at a fair market price (based on a valuation or appraisal) and then your mortgage broker will arrange a loan for the same value (100% of the value used) meaning you can claim interest as an expense. You then provide a personal guarantee to the lender using your new property as additional security.
You use the proceeds of the sale to clear the mortgage on the old property and put any extra into your new home that is being built. In this way you can move the equity from your old property to your new home and ensure things are tax efficient.
You should speak to an accountant to ensure that this is the right thing for you to do.
What about the finance for a rental property?
You may have heard that The Reserve Bank has restricted borrowing on a rental property to 60% of the house value.
This is correct when the property is a rental property, so why do we suggest that you borrow 100%?
There are a couple of things to consider;
- The existing property is currently your home and for this reason we can refinance your home now to 80% of the value whereas if we leave it until you convert your home to a rental we would be restricted to the 60%.
- There will be two loans – one on the existing home for 80% and another on your new home for the remaining 20%;hence this makes up the 100%.
Speak to an experienced mortgage broker like myself (Stuart Wills) and I can go through this in more detail.
When you decide to build a new home it makes common sense to at least consider keeping your existing home as a rental property rather than selling it and I am happy to discuss the options with you and explain in more detail how this might work for your specific situation.