If your family home is getting a bit too small for your growing household, then chances are you’ve already been scouring the property market for a potential new abode. For homeowners looking to upgrade, it can be a bit daunting to consider selling your existing property. Thankfully, with a little financial planning amongst other preparatory steps, you can convert your existing family home into a rental investment property.
We’ll be outlining 5 key considerations that must be made by all property owners who seek to convert their primary place of residence (or PPoR) into an investment property.
1. Revisit your home’s insurance policy
If you’ve purchased the property that will become your new family home already, then chances are the wheels are already in motion with regards to securing your new home insurance policy. But just because you won’t be living at your previous address anymore, doesn’t mean it won’t still require some insurance of its own.
You can secure landlord insurance in the leadup to placing your old family home on the rental market. Landlord insurance can generally either provide cover for landlord buildings, content, or buildings and content, if your rental property will be fully furnished for prospective tenants.
Securing landlord insurance will ultimately help make sure that your much-loved family-home-turned-investment-property stays in good nick during its time as a rental property. In the event that any damage is caused by tenants or their pets, having a suitable landlord insurance policy in place can help cover any expenses required in order to prepare the home for new tenants or to be placed on the property market.
2. Get a rental appraisal
Getting a rental appraisal can help property owners better ascertain whether readying their former family home for the rental market will result in a fair return on their investment. Knowing what kind of rental income you can expect your property to generate may also help guide property owners through the additional measures required to convert their PPoR into an investment property, from renovating and redesigning the property, to outlining a budget for property advertising.
One of the most straightforward components of this entire process, securing yourself a rental appraisal can easily be done by enlisting the services of a reputable local real estate or property management agency. It’s always best to seek local market specialists, to ensure that their suburb profiles are as in-depth and accurate as possible. The more accurate their research, the more reliable your rental appraisal is likely to be.
3. Assess tax implications
The way you handle your tax return is likely to change once you own multiple properties, and especially so if one of your properties begins to generate rental income. Thankfully, even if your tax time does grow more complicated, there are a number of deductions that you may be eligible to make as a landlord. These deductions include:
- building depreciation,
- property advertising costs,
- insurance costs,
- interest accrued on the property’s mortgage,
- body corporate fees,
- council rates,
- property maintenance costs (i.e. gardening, repairs, pest control, etc.),
- property management administrative and agent fees.
With these potential deductions available for landlords, you’ll find that converting your PPoR into a rental property has the potential to be a highly lucrative investment, so long as you’re ready to do the work. We recommend developing a property depreciation schedule with your personal accountant in order to simplify your tax returns as a property investor and ensure that you’re making the most of your investment property as possible.
4. Invest in home improvement
Once you’ve secured your investment loan and have the go-ahead to convert your PPoR into a rental property, all that’s really left to do (other than secure yourself a property manager) is to prepare your home for the rental market. Naturally, homes that were designed and decorated to suit your specific tastes as the owner-occupier, aren’t likely to be universally appreciated. Because of this, it’s highly recommended that owner-occupiers paint over any feature walls, and remove decorative wallpaper, decals, or any other decor that may not be well-received by prospective tenants.
Preparing your old family home for the rental market will also likely involve investing in a little property repairs and improvements. These fixes could be as simple as updating outdated light fixtures, ceiling fans, or windows with broken latches, as well as cleaning out or even replacing split system air conditioners, amongst other amenities.
You should also take measures to ensure that your home adheres to minimum acceptable standards for rental properties in your state. This means making sure that all locks, latches and bolts are in good working condition, that windows and doors can be fully closed, and that there are no signs of mould in all interiors throughout the home. Going over tiles and grout in your kitchen, bathroom, and laundry spaces is always a good place to start, but you should also check the walls of bedrooms and living areas for any signs of moisture or mould prior to organising property inspections.
5. Consider the ‘6 year CGT rule’
Arguably the worst part of being a property investor is having to navigate tax time. Although we did outline earlier just how many deductions investors are entitled to make if their home is placed on the rental market, there are still additional tax considerations that you’ll have to keep in mind when making the switch from owner-occupier to investor.
One tax consideration that will come into effect when it comes time to eventually sell your PPoR-turned-investment-property is capital gains tax (or CGT). Although PPoRs are exempt from CGT, investment properties can be a different story, and the second your old family home starts generating a rental income, it becomes an investment property.
Thankfully, there is a method that property investors can use to maintain a CGT exemption on their investment property, this being the 6 year CGT rule. In a nutshell, this rule allows for property owners to continue treating a property as their primary place of residence even if it’s used to generate a rental income, but only for a period of up to 6 years. These 6 years can be separated by periods of vacancy, meaning that a property that’s rented out for three years with a vacancy of two years only to be rented out for three years once more, will not be eligible to receive a CGT exemption.
If property owners are looking to take advantage of the 6 year CGT rule, they are advised to keep track of their property’s lease agreements in order to prepare the property for sale once it approaches that maximum 6 year mark.
Converting your PPoR into an investment property can provide you and your wider household with an additional stream of rental income, alongside some attractive tax benefits. You can enjoy this income for up to a period of six years without having to pay CGT upon the sale of your old family home. Otherwise, you can use these same methods to continue to upgrade your home as your family continues to grow, alongside adding to your family’s investment portfolio.
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