The decision to turn my home into a rental property was one that happened years ago, during the housing crisis of 2008.
Doing so was a no-brainer for me because in the California market I was in, house values plummeted a whopping 50%, which was among the biggest decline in the nation. The decision to hold onto the home, which I made reluctantly, turned out for the best, as it was the catalyst for my investment business.
The accidental landlord
I became what's known as an "accidental landlord," meaning I didn't plan to ever be one, and I knew nothing about the business. As such, I made just about every mistake possible. But as soon as home prices started to rise again, I sold the home. I then added my savings to the sale proceeds and bought my first intentional rental property in a place more favorable to real estate investing: Atlanta, Georgia. (Houses are more affordable here. The typical home value in Los Angeles is $913,754 compared with Atlanta's typical home value of $349,162, according to Zillow.)
Can't sell the property
As the housing crisis taught us -- homes don't always appreciate. If you bought a home at the top of the market, for example, and now can't sell it for what you paid, you might want to rent the property. The market usually changes eventually, and when it does, if owning rental property isn't for you, you can sell at that time and come out ahead of the game. Or you might find that you don't want to sell after all, particularly if the rental income you're earning has been steady.
House hacking
Some people can live for free by turning their home into a rental property. Doing so is called "house hacking," which has financial benefits in and of itself, and it can kick start a career in real estate investing.
Image Source: Getty Images.
House hacking involves buying a home as your primary home, which can get you a more favorable mortgage interest rate than if you were to buy a house as an investment property. Once you buy the home, you must understand the terms of your mortgage, as you generally need to live in the home yourself for a certain amount of time before you can turn it into rental property. The standard is typically a year, but this can vary. Some homeowners rent a room during this first year of ownership, or they use the property as an Airbnb, leaving the property when someone wants to rent it.
If allowed in your jurisdiction, you could add an accessory dwelling unit (ADU) -- a small, independent residential dwelling, to your property and rent that out. You would need to check your town's ordinance to determine whether an ADU is legal.
Another popular way to house hack is to buy a multifamily property, such as a duplex, triplex, or quadplex. You would live in one unit and rent out the other or others. This is a great way to get into the rental property business, but there are a few downsides:
- It's more difficult to find these types of multifamily properties.
- A multifamily property is usually more expensive than a single-family house.
- You'd be living alongside your tenant, meaning they can more easily and more often request your services.
A renter society
I started as an accidental landlord. But I now understand the huge market for rental properties. I firmly believe homeownership is the best way for people to gain financial security, but not everyone is ready to buy a home or even desires to. So a rental market will always exist. And from my experience, many people prefer renting from mom-and-pop landlords like myself over large and impersonal institutional ones.
