Can You Turn Your Home Into An Investment Property?

Owning a home is a significant step toward financial stability. However, it can also be the cornerstone for wealth creation if turned into an investment property. 

Whether you’re relocating, downsizing, or simply ready to explore new opportunities, transforming your home into an investment can be a worthwhile endeavor. But what steps should you follow, and what pitfalls should you avoid?

Converting a Home to an Investment: Understanding the Basics

Transferring your home into an investment isn’t just about renting out the property. There are a series of legal and financial decisions involved. Here’s what you should know before getting started:

Check Lending Terms and Conditions

Before anything else, check the terms of your existing home loan. Some loans, particularly fixed-rate home loans, have restrictions on rental properties. If your home loan has such conditions, you may need to negotiate new terms with your lender or consider refinancing.

Inform the Lender and Insurance Provider

Once you’ve ensured your loan allows for rental properties, it’s crucial to inform both your lender and insurance provider of your intentions. This is because your current home insurance may not cover tenants, which could leave you vulnerable. By informing your insurance company, you can make necessary adjustments to your coverage.

Assess Tax Implications

Converting your home into an investment property also brings about changes in your tax obligations. For instance, homeowners may need to pay capital gains tax if they sell their former homes after converting them into investment properties. It’s recommended to consult with a tax advisor to understand these implications fully. Our sister company, Odin Tax, can help you with your taxes.

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Income Tax Implications: Converting Your Home to an Investment Property

When turning your home into an investment property, it’s important to consider the income tax implications. Rental income is generally taxable and should be reported on your tax return. However, you can also deduct expenses related to the rental property, such as mortgage interest, property taxes, repairs, and management fees. 

Depreciation can be claimed over time to offset rental income. If you sell the property, capital gains tax may apply. 

Capital Gains Tax Implications

There are important capital gains tax implications to consider when converting your home into an investment property. If you eventually sell the property, the profit from the sale, known as capital gains, may be subject to taxation.

The capital gains tax is calculated based on the difference between the property’s selling price and its adjusted cost basis. However, certain exemptions or exclusions, such as the primary residence exclusion, may apply in certain cases.

Maximize your Investment Property's Profitability

To get the most out of your investment property, here are some tips:

Set a Competitive Rent Price

A key part of making a profitable investment property is setting the right rent price. Your rent should be competitive enough to attract tenants but also high enough to cover your costs and yield profit. Conducting market research to find out what other similar properties in the area are charging can help you set a competitive rent.

Maintain the Property Well

Well-maintained properties attract and retain tenants, reducing vacancy rates and maintaining a steady income. Regular inspections and proactive maintenance can help ensure your property stays in good condition.

Consider Property Management Services

Managing a rental property can be time-consuming. Professional property management services can relieve you of this burden, helping you to deal with tenant issues, rent collection, maintenance requests, and more.

What Happens When You Rent Out Your Home?

Renting out your home involves entering into an agreement with a tenant, allowing them to occupy and utilize your property in exchange for regular rental payments. This arrangement can provide a steady stream of income to cover expenses or generate profit. However, it also entails legal obligations, such as ensuring the property meets safety standards, conducting tenant screenings, and adhering to local laws. 

Creating a comprehensive lease agreement that outlines the terms and conditions is crucial. Property management, including rent collection and maintenance, may be required, either personally or through a property management company. 

While there are benefits, challenges such as vacancies, late payments, and liability issues should be considered. 

Tax implications and the possibility of ending the tenancy also come into play.

Ready To Convert Your Home Into An Investment Property?

Converting your home into an investment property can be a great way to create an additional income stream. It requires careful planning and understanding of the financial and legal implications, but with the right approach, it can be a financially rewarding decision. By adhering to the above guidelines and seeking professional advice where necessary, you can set yourself up for success in this venture.

Property investment is a long-term commitment, so patience and resilience are key to reaping the benefits. By strategically transforming your home into an investment property, you can create a lasting legacy of wealth creation.

Odin Mortgage is here to help you make the most of this opportunity. Our experts can guide you through the process, from understanding the financial and legal implications to creating a solid investment strategy. With our support, you can maximize your rental income and build a successful portfolio. 

Contact Odin Mortgage today and unlock the potential of your home as an investment property. 

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.
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