Imagine this: You just purchased a new home and decided to rent out your old one. You’re excited about the potential income, but also wondering, how soon can I rent out my home after buying owner occupied?
In short, to avoid capital gains tax, you have to live in the property for a year before renting it out.
Need more guidance on how to rent out a property? We’ll cover everything from financing differences, tax implications, legal considerations, and much more.
When Can You Rent Out Your Owner Occupied Property?
To avoid capital gains tax, you have to live in the property for a year before renting it out.
There are several things to know before renting out your home.
One crucial question you might have is, “Do you have to live in a house for a year before renting it out?” The answer is yes, unless you are ok with paying capital gains tax.
It’s essential to consider other factors, including lender restrictions and legal considerations. It’s also advised that you with financial experts to ensure a smooth transition from owner-occupier to landlord.
They can help with researching the local rental market, understanding the legal requirements for landlords, and finding the right rental.
Tips on Lender Restrictions
Inform your lender about your intentions
Lender restrictions are a big part of renting out your property. If you do not tell your lender about your intentions to rent out the property or if you don’t alter your loan type, the consequences can be severe. Your lender may be forced to take action, like doing a loan recall and forced property sale.
To avoid such consequences, you should explore refinancing options, either by negotiating a competitive interest rate with your current lender or switching to another lender with more favorable terms. You can speak to a knowledgable mortgage broker like Soho Home Loans to have your questions answered.
Speak to a professional if you are still making mortgage repayments
It’s also essential to understand that certain circumstances may prevent you from renting out your owner-occupied property, such as if you’re still making mortgage repayments on it. In these situations, it’s best to consult with a mortgage broker and obtain guidance from financial experts.
Legal Considerations
Be mindful of legal implications when renting out an owner-occupied property in addition to lender constraints. To prevent potential penalties and offer a safe living environment for your tenants, ensure compliance with local rules and regulations.
As a landlord, you are responsible for following safety rules and keeping your home habitable for your tenants. It’s also critical to understand the tax implications of renting out your property, such as the principle residence exemption for capital gains tax (up to six years) and the ineligibility to claim this exemption for any other property owned during this time.
If you prefer to take care of the whole renting procedure on your own, you may be wondering how to rent out a house without an agent. While employing a professional property management business or real estate agent is convenient and extremely helpful, it is possible to manage the entire leasing process on your own. It just takes more time and effort.
To ensure a smooth transition to being a landlord, familiarise yourself with local landlord-tenant legislation, conduct thorough tenant screening, understand lease agreement writing, and conduct continuous property maintenance.
Owner Occupied and Investment Properties Explained
Firstly, it is very important to understand the differences between owner-occupied and investment properties. An owner-occupied property is your primary residence, however, an investment property is bought with the intention to generate rental income or for capital appreciation.
As any investment property owner will tell you, turning your home into an investment can be a smart financial move, but you need to be aware of the legalities before you start.
These two types of properties have different financing options and tax implications, which can significantly impact your financial future.
Financing Options For New Properties
When it comes to financing, there are key differences between owner occupied home loans and investment property loans, such as interest rates, loan-to-value ratios, and repayment options. If you decide to rent out your primary residence while you still have an outstanding mortgage, your existing loan type will be affected.
In most cases, you’ll need to refinance your loan, which may result in a higher interest rate and consequently impact your loan repayments.
In case you choose to rent out your first home and buy a second property, you’ll probably need a new home loan. An investment property loan, also known as an investment loan, usually has a slightly lower maximum Loan-to-Value Ratio (LVR) compared to owner-occupier loans. However, this means you’ll need a larger deposit to secure the loan.
On top of that, interest rates for investor loans are usually higher than those for owner-occupied loans. When you assess your financial situation, seek professional advice to understand your choices.
Home Guarantee Schemes
The Home Guarantee Scheme allows you to buy a home with a much smaller deposit and without the need to pay Lenders Mortgage Insurance (LMI). This government scheme was implemented to avoid another financial crisis by helping people with the deposit to enter the property market.
If you manage to get a place in the scheme, you can save on LMI costs but also have the benefit of a government guarantee that allows you to buy a home with a very low deposit.
Just remember, you will still be taking on a bigger loan because the deposit can be as low as 2%. But overall, it is an attractive option for those looking to enter the property market with a smaller upfront investment.
Tax Implications
The tax implications for owner-occupied and investment properties are significantly differently. For investment properties, landlords may be subject to rental income tax, capital gains tax, and stamp duty on the purchase price of the property.
On the other hand, investment property owners can also benefit from various tax deductions, such as property management fees, interest payments, depreciation, and more.
Additionally, when converting your primary residence into a rental, you can reap tax advantages like:
- Deductions for the interest component of the loan
- Agent and property management fees
- Advertising
- A variety of other costs
Your main residential property is generally exempt from capital gains tax, providing a potential tax benefit when disposing of your primary residence.
Preparing Your Home for Rental
After you’ve figured out the financial and legal requirements of renting out your owner-occupied home, it’s time to get your house ready to rent.
This means maintaining your property and assuring compliance with safety regulations, with the goal of improving your rental appeal and getting potential renters.
To make your property more appealing to tenants, consider performing any essential repairs, such as repairing your roof.
Upkeep of Real Estate
It is your job as a landlord to keep your rental property in good shape, taking into account its age and following local rules and regulations. This includes routine cleaning, repairs, and maintenance, as well as any necessary modifications to update the property and increase its appeal to future renters.
You can achieve the following benefits by actively maintaining your property:
- Protect your investment
- Ensure a safe and comfortable living environment for your tenants
- Build a positive relationship with your renters
- Increase the likelihood of long-term tenancy.
Safety Requirements
When getting your rental property in order, safety should be your priority. As a landlord, you are responsible for the minimum security standards in the rental, like installing proper door and window locks.
Also, electricity checks, gas safety, smoke alarms and carbon monoxide detectors should be installed in your rental property to ensure the safety and well-being of your tenants.
By following safety regulations, you can protect your renters and reduce the risk of legal conflicts and penalties resulting from noncompliance.
3 Key Financial Considerations When Renting Out Your Home
Renting out your owner-occupied property can help you earn passive income, but it’s still necessary to consider the other financial aspects, such as rental income projections, expenses and costs, and tax benefits.
1. Rental Income Projections
Rental income projections are estimates are based on several factors, including location, size, demand in the area, property value, and affordability. To ensure accurate projections, you should research the rental market, assess the rental appeal of your property, and consult with a real estate agent for guidance.
By understanding the different factors influencing rental income, you can set realistic expectations for your investment and make updates or changes to improve your rental.
This may involve:
- Making necessary repairs or upgrades
- Adjusting rental rates
- Seeking professional property management assistance to optimize your property’s performance.
2. Expenses and Costs
Renting out a home comes involves expenses and costs, such as mortgage repayments, property management fees, insurance, and maintenance costs. To make sure renting out a home is the right thing to do, you need to factor these into your overall costs, including your own living expenses.
You should consider the costs of
- Finding a tenant
- Advertising
- Tenant screening
To potentially lower costs, do you research on budgeting methods like finding deals on various expenses, installing energy-efficient appliances or buying solar panels. If expenses are managed properly, you can ensure a positive cash flow and be confident about your financial future.
3. Tax Benefits
Renting out your home also comes with various tax benefits, including deductions for:
- interest charges on the loan
- property management and cleaning costs
- repairs and maintenance
- depreciation
These tax breaks can help you offset the costs of renting out your property and enhance your overall financial status. Getting tax advice can help you maximise your tax deductions.
Rental income must be reported on your tax return as required by law. By knowing and utilizing the various tax benefits, you may further enhance the financial performance of your rental property and lay a solid basis for your financial future while managing your taxable income.
The Rental Process Step-by-Step
It’s time to negotiate the rental market now that your house is ready for rent and you understand the financial factors. This includes finding the correct tenants and drafting a solid lease agreement to protect both you and your tenants.
Finding the proper tenants is critical to a positive rental experience. You should look for respectable tenants.
Tenant Screening
The tenant screening is an important step in ensuring that you discover trustworthy and responsible renters for your home. This procedure entails assessing potential renters based on the following criteria:
- Their credit history
- Criminal background
- Rental history
- Proof of income
- ID
- References
You can reduce the danger of late rent payments, property damage, and legal conflicts by properly screening tenants.
In addition to reviewing a tenant’s background, ask for their income and employment history to ensure they have the means to pay the rent on time each month. You can do this by requesting papers like pay stubs. All of these steps will assist you in finding the ideal tenant and maintaining a positive landlord-tenant relationship.
Lease Agreements
A lease agreement is a legally binding contract between you and your tenant that outlines the rights and obligations of both parties regarding the rental arrangement.
This agreement should include:
- The names of all tenants
- Occupancy limits
- Duration of the tenancy
- Rent amount
- Deposits and fees
- A description of the rental property
- Any rules or restrictions for the tenant.
Both landlords and tenants are required to comply with all applicable laws and regulations, including those related to tenant rights, health and safety, and fair housing.
By putting together a solid lease agreement and following its terms, you can protect your investment, ensure a safe and comfortable living environment for your tenants, and minimise the risk of legal disputes.
Frequently Asked Questions
Should I sell my house or rent it out?
The decision of whether to sell your house or rent it out in Australia is a personal one, and there is no right or wrong answer. There are many factors to think about, such as the current market conditions, your financial situation, and your long-term goals.
If you sell your house, you will receive a lump sum of cash that you can use for whatever you want. This could be a great way to pay off debt, invest in other properties, or simply have more financial freedom. However, you will also lose the potential rental income that you could earn from your property.
If you rent out your house, you will continue to receive income from your property, even if you are not living in it. This can be a great way to build equity in your home and generate passive income. However, you will also be responsible for the costs of maintenance and repairs, and you may have to deal with difficult tenants.
For a more detailed answer to the question of whether should I sell my house or rent it out, you can visit our article on this topic.
Can I turn my owner-occupied into an investment property?
With the potential for rental income to cover mortgage payments and other expenses, it can be a great option to convert an owner-occupied property into an investment property.
When can you turn your home into an investment property?
You can turn your home into an investment property for up to six years, after which capital gains tax may have to be paid.
This gives you a window to sell your house without incurring any additional taxes.
What is owner-occupied but not living there?
An owner-occupied property is one where the occupant also holds the title, whereas an absentee owner does not live in the property but has title to it – such as a landlord.
What are the main differences between owner-occupied and investment properties?
Owner-occupied properties have access to more favorable financing options, lower interest rates, higher loan-to-value ratios, and tax advantages compared to investment properties.
These benefits make it easier for homeowners to purchase and maintain their properties, and can help them build equity over time.
What maintenance and safety requirements should I consider when preparing my home for rental?
Property maintenance, safety regulations compliance and a secure living environment should be ensured when preparing a home for rental to ensure the wellbeing of tenants.
This includes ensuring that all necessary repairs are completed, that the property is up to code, and that the home is secure from potential intruders. Additionally, landlords should ensure that all safety features, such as smoke detectors, are in place.
