Turning Your Home Into a Rental? 3 Key Financial Steps

1. Check Your Mortgage Terms

Do you, like most homeowners, currently pay a monthly mortgage? Then the best place to begin your quest to become a landlord is by reading the terms of that loan. The mortgage terms may address the process of changing the property from a primary home to an investment property. The lender may stipulate a minimum waiting period or even disallow such a move on the existing mortgage. 



If you have not yet bought the property you will someday convert, make sure the loan terms you agree to are favorable for this option. A little planning now will make boost your flexibility when the time comes.

2. Consider Refinancing

The decision to keep your existing mortgage or refinance when converting a rental is complex. If your residential mortgage allows you to convert the property and keep the loan, analyze the terms to see if this is the best option. Is the monthly payment comfortable if you take on another mortgage and a second set of potential expenses? Are you close to paying off the loan? If so, the benefit may be worth continuing as-is.

However, refinancing is often a smart move. It allows you to lower the monthly cost of the mortgage so you can budget for the additional expense of owning two homes. Refinancing to stretch out the loan can also reduce your debt-to-income ratio and help you qualify for better rates. Or you could take out cash from a refinance and use it for anything from paying for rental renovations to setting up a cash buffer. 

3. Prepare for a Second Mortgage

Along with planning for your current home's mortgage, you'll need to prepare to take on a second one. If you opt to take out an investment real estate loan, you may need to meet different, stricter lending rules. This generally includes having a higher down payment, maintaining a better credit score, paying a higher interest rate, and having more cash reserves to cover both overhead and expenses between tenants. 

The good news is that having a rental property may increase your income levels to help counter the extra expense of two loans and expenses. Local investors and real estate agents can help you determine how much income you can expect and how you can present this to lenders. 

Start prepping as early as possible to get your budget, credit score, and reserves in order. Work with a lender to learn the specific requirements for the type and size loan you want to take. Check your credit score and make improvements, such as paying down other debt. Build up your cash buffer to at least six months' worth of rental expenses. And hone your monthly budget. 

Certainly, getting started as a small landlord can take some effort and time. But by investing both now, you can secure a more financially stable future. Start by learning more about mortgages, primary and rental properties, and ways to get the best deal.

The financing pros at Secure One Capital Corporation can assist. We'll help you understand all your options and find the right path to landlord success. Call today to make an appointment or find answers to your questions.