Have you recently started thinking about turning your current house into a rental? It’s a big decision, especially if you’ve been living there for a while and think of it as your home.
However, it isn’t as simple as moving your belongings out and moving someone else’s belongings in. The biggest changes will come when you’re still in the home, and are required if you don’t want to run afoul of the law. There are also significant tax implications for changing the purpose of your primary residence.
Consider These Tips Before Converting Your Property to a Rental
Since we’ve been working as property managers in Windsor for so many years, we’re familiar with what is required to convert your primary residence into a rental. However, many clients come to us for help because they’re unfamiliar with this area, and need some help determining how they can take their home and transform it into a profitable rental unit.
Often, our clients who convert their own homes into rentals are just at the start of their real estate investment journey. Once they’re familiar with the process, they’re more confident in building up a sizeable real estate portfolio.
Here are the things you need to consider before putting your home on the market as a rental.
1. Check your mortgage
If you’re still paying off a mortgage on your property, read the fine print or schedule a meeting with your mortgage lender before taking any concrete steps towards a rental conversion. This is especially important if it’s currently your primary residence.
Many mortgage lenders stipulate that if a home was purchased to be your primary residence, it must remain that way for at least 12 months post-purchase. This doesn’t mean that you can’t convert it eventually, but you will have to wait until the 12 months have elapsed. Otherwise, you’re committing mortgage fraud.
It’s also a good idea to check with your current mortgage lender to make sure that you can afford a second mortgage. Even though a rental property is a great source of regular, predictable monthly income, if your debt-to-income ratio is off or the risk is too high, you may not be approved for a second mortgage.
2. Understand the tax implications
There are serious tax implications that are associated with a change in the use of a property. According to the Canada Revenue Agency, “Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.”
“If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.”
Even if you’re used to doing your own taxes, you may want to get an accountant or tax expert involved during the year you do a rental conversion, to make sure that you’re paying the correct amount and getting the deductions that you’re entitled to claim.
3. Change your insurance
Another critical piece of the puzzle is your insurance. Insurance policies for homes vary, and to make sure you’re fully protected, you need to change the policy from a homeowner policy to a rental policy. This can be done with a quick call to your insurance agent.
If you don’t make this change and end up needing to file a claim, it could be denied if the insurance company finds out that the damage occurred during a period when you were no longer the primary resident. This type of fraud can send up red flags that may result in you being unable to work with that insurance company in the future.
4. Make relevant upgrades
Now that you have all the complex paperwork out of the way, you can move ahead with preparing your home for the rental market. If your home is more than a few years old, you should consider making upgrades, so it can be rented for a competitive price.
Renovating a rental is a lot different than renovating your primary residence. It’s worth consulting a real estate agent or property manager who is familiar with the local market, to make sure that you’re making sensible upgrades that maximize the value of your property. Consider adding popular amenities like a dishwasher, or more storage space, which are often dealbreakers for would-be renters.
5. Decide whether to rent furnished or unfurnished
If you have lots of furniture in your property that’s been purchased with that space in mind, consider renting your home fully furnished. Furnished rentals are great for people who are new to the area, or don’t have furniture of their own, and rent for a higher monthly fee than unfurnished units.
However, it’s worth noting that people who are looking for furnished rentals are often more transitory than those who are looking for a permanent home, and already have their own furniture. If you’d prefer the higher monthly rent and don’t mind frequent turnover, this might be a good option for you.
6. Study up on landlord-tenant law
If you’re going to be managing your property, you’ll need to study up on the latest residential tenancy laws in Ontario. Right now, Ontario is governed by the Residential Tenancies Act of 2006, which is updated frequently as laws change. You’ll need to make sure you know the ins and outs of this act before you put your property on the market. Otherwise, you could accidentally violate the law, putting you at risk for legal action.
Consider Hiring a Property Manager
If you aren’t confident in your ability to manage and oversee your own property, you don’t need to do it alone. For assistance drawn from our years of experience in the Windsor rental market, contact the team at Goldmar Property Management. We can offer much-needed guidance as you convert your primary residence to a rental.
Our property managers are well-versed in every aspect of Ontario’s residential tenancy laws, and know what it takes to make sure your property retains its value throughout the rental process.
Contact us today to hear more about the services we offer both first-time and experienced landlords.