BiggerPockets Real Estate Podcast - 872: How to Turn Your Primary Residence into a Rental Property

Starting point is 00:00:00 This is the Bigger Pockets podcast show 872. What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast. Join today by two seeds and professionals in the real estate space and good friends of mine, Rob Obasolo and Henry Washington. What's going on, gentlemen? Very happy to be here. And if I were a seasoning, I would be paprika. How are you doing, Henry?

Starting point is 00:00:22 I am doing great. And if I were a seasoning, I would be salty because David Green's beard is longer than mine now. That's good. That's good. And what spice would you be, David? I would, I would be flour. I'm very boring. No, no, no, no. You are my pepper, sir. And on that note, we have a spicy show for everybody today called How to Turn Your Primary Home into a rental property. And I think our friend Henry Washington here has done this now a few times. Yeah, absolutely I have. I have lived in three, maybe four houses now that are in my portfolio. So yes, I have, I have, I have, turned many of my primary homes into rental properties. Well, you've got me topped. I've done it two times now. And yeah, it's always a scramble every time, but it's always a fun adventure. The reason we're making the show is because Americans have over $30 trillion trapped in equity in

Starting point is 00:01:14 their homes right now. And so if we put that into perspective, that's about $274,000 per American who owns a home. For many people, it doesn't make sense to sell this property due to the low interest rates that they've locked in on these properties. Also, investment properties are difficult or harder to get into. And so it makes sense for a lot of our listeners to think about turning their primary home into an investment property. Today we're going to be talking about the logistics of this process, as well as what investors need to be aware of if this is what they choose.

Starting point is 00:01:43 All right, boys, let's get into it. Bring on the spice. Henry, my favorite spice girl, before someone turns their primary home into a rental property, what are the things that they should consider? Oh, man, absolutely. Well, first and foremost, you want to make sure that you actually can. turn your home into a rental property. So for instance, the home I live in now, I would not be allowed to do that. They do not allow rental properties in my neighborhood due to the POA rules. So you need

Starting point is 00:02:11 to find out, A, are you legally allowed to do it? And then you need to find out, okay, if I am legally allowed to do it, would it make financial sense to do it? So will you be able to rent that property out for enough to cover your mortgage and expenses associated with that home. Those are probably the two most important factors. And then if you figure you can do that, then you want to start diving into some of the things of like what kind of tenants am I going to be getting. Is there a demand for rental property in that area? You know, you can want to rent a property out all you want to and you can think you're

Starting point is 00:02:51 going to get a certain amount of money a month. but if people don't want to rent in that neighborhood, or is it oversaturated? Is it going to be sitting on the market for so long because there's so much competition out there? So you want to start diving into the demographics once you find out if it's A, even possible, and B, is it going to make financial sense? Yeah, yeah. Well, okay, so you said P-O-A. Is that, I'm going to assume is property owners association, which is like the equivalent of an HOA? Yes, exactly. Okay, so that's a great one, can you even rent it from a, from a POA standpoint? I would say the first question to ask is, do you want to rent it? Because when you live in the property, you know the weird quirks and the weird

Starting point is 00:03:30 nuances of that house and, hey, the water heater breaks on the third Friday of every month at 2 p.m. And you have to shake it around and jiggle it. And then it works like, if you know your house, like the back of your hand, you have to ask yourself as a landlord, is this a house? that I want to manage. For me, both times the answer is yes, but there are some really interesting quirks and nuances with both of the houses that I've then turned into a short-term rental where I'm like, okay, you know, I'm definitely going to get consistent questions about this really random oddity in the house, so I just got to be ready for it. Have you ever thought through that side of things where it's like, or have you ever had a really weird house that just broken very odd ways

Starting point is 00:04:10 whenever you listed it as a long-term rental? Yes, I had a house that had issues with the HVAC every time a season would change. And so in those instances, we just went ahead and replaced those units before we rented it out. Yeah, that makes sense. And interestingly, you said your POA just doesn't allow any kind of long-term rentals? Correct. I didn't even know that that was a thing. I mean, I've seen that with short-term rentals, but yeah, that's, I would never even think to check that because I had no idea that that would never be allowed. Yeah, yeah. This is the first neighborhood I've lived in where that was an actual thing.

Starting point is 00:04:43 But no, you absolutely cannot in my neighborhood. I think that there's a good chance, maybe not in the near future, but in the future that we'll see more of that. I think that there's kind of like a growing hostility towards real estate investors in a lot of ways. So when you're choosing your location, it would definitely be wise to think about are the demographics of that area, are the politics of that area, something that would lean towards favoring real estate investment? Or is it more of the ilk that we think that real estate investment? are taking housing out of the supply, making housing more expensive, and so we don't want them because we want more affordable housing. Not a thing we've really had to ever consider in the past,

Starting point is 00:05:16 but it would be a good thing to think about when buying your primary residence if your intention would be to turn this into a rental. Okay, so if you can turn your primary into a rental, should you? Will it be profitable? And what should you look at to find out? We're going to break all that down and more right after this quick break. You've upgraded how to buy properties, But did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership,

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Starting point is 00:08:13 And we're back. David Green, Henry Washington, and I are here walking you through how to turn your primary home into a rental property. We're about to cover how to tell if your property is viable as a rental, and then we'll get into some tips for how to make the most money possible from it. Next question. How should someone go about judging if their home is a good rental property based on comps in the area.

Starting point is 00:08:33 Rob, we'll start with you this time. I've only ever done it in the short-term sense, right? So first and foremost, what I'm going to do is I'm going to go to different short-term rental platforms. Obviously, Airbnb is like the main one there. And I'm going to see if there are any Airbnbs in the neighborhood. I'm going to see how many there are. And then I'm going to hop into each of their calendars.

Starting point is 00:08:51 And I'm going to actually look at how booked they are as well. And I just want to see that there's activity. I'm also going to go to those different listings and look at their reviews and see how frequent those reviews are. If all the reviews from all the Airbnbs in the neighborhood were, you know, from like October 2019, then I know it's probably not super active. So first and foremost, I'm just doing a gut check to see, hey, is there healthy competition in the neighborhood? And if so, that kind of checks my initial box. Anything that you do on your end, Henry, because you've usually, you transition into long-term rentals most of the time, right? Yeah, absolutely.

Starting point is 00:09:23 So the first thing I'm going to do is very similarly to you is I'm going to hop on Zillow and see what other properties within a mile to two mile radius or within your current neighborhood are actually listed as rentals and see what they're asking, see what the finishes look like to see if like, hey, do I need to do anything to this property? If I want to get the rents, I think I want, you know, I may look at the competition and see, oh, my house isn't nearly as nice as these. And so maybe I'm thinking, maybe the rent I'm thinking about getting isn't actually going to be possible unless I make some updates. And so the initial gut check is just going to be hop on Zillow, see what's out there. Once I get a little more serious about doing the research,

Starting point is 00:10:03 then I would consider calling property managers who are managing rental properties in the area to see what their professional opinion is. Right. And so you can call them up and say, hey, I'm thinking about listing my house on 1, 2, 3, Main Street as a rental property. Here's some pictures. What do you think it would go for from a rent perspective? Or what do you think I might need to do to this property to have it garner the type of rent I'm looking for. So that way you're going to get feedback from a professional who's going to be able to tell you, hey, yeah, if you want to get $1,800 to $2,000 a month, then I would suggest you do these things rather than just you as a new investor, you know, a brand new landlord, just going

Starting point is 00:10:44 and spending 10 grand update a part of your house that maybe wouldn't bring the return that you think it might. So what about the area in the neighborhood? A lot of people will look for a city that they like. They look at the demographics of that physical city. But they're a city. But they're then neighborhoods within cities can make a difference too. What are some things that you think people should look for when buying a primary residence that they have a feeling they're going to turn into a rental later? Yeah, everybody understands, you know, desirability of an area. And so, you want to look for places that are going to have access to amenities. And those amenities could be fun amenities or those amenities could be things that are going to help you make it to work easier, right? So,

Starting point is 00:11:23 is it close to transportation if you're in a place where public transit is important? Is it close to entertainment? Some areas, walkability is important. Some parts of the country and where I live, that's not nearly as important. But bikeability is important where I live. So if I was looking here, I would want to be someplace close to the trails where people could bike to locations they want to get to. So you really have to have some level of understanding of your market and then what people think is desirable. And then you want to shop in or around those areas. Think about. you know, where ideally do you want to live for the reasons that you want to live there? And potentially other people might feel the same way. It's pretty similar in the short-term rental side. Most of the time, there's kind of two really big components to like the success of the revenue that you're going to make on a property. One is going to be the location. Two is going to be the amenities. And so first I just talked about looking at the activity of your neighborhood and see if it's even a viable option. Next, I'm going to just click in. You mentioned amenities. And I know you were

Starting point is 00:12:24 talking about amenities like, what are the nearby things? Like, are there kid-friendly parks and all that stuff? I think amenities within the property as well, is there something that you have that's really important? Like, do you have a pool? Do you have a hot tub? These are really high price. You know, they add a lot of money to your ADR, your average daily rate as a short-term rental.

Starting point is 00:12:42 And then going into the location side, some of the stuff you talked about really rings true even for short-term rentals. Like location is so, so important. So I'm always looking at things like, how far am I from an airport? How far am I from like the draw of a sales? city? Like, is there a huge museum that people go to? Is there like an art street or is there like a little fun street with farmers markets and like art and local art and local things? I look for those types of things because when you're thinking about what an Airbnb guest or a short-term

Starting point is 00:13:10 guest in general is thinking about when they're booking their place, they're going to ask themselves, what am I going to do while I'm there? You hit on the walking, which I've assumed would actually be a little less important on a long-term rental because the walkability on a short-term rental is also really, really big. And if you can't walk, then you want to be pretty close driving. distance to a lot of the attractions that make that city iconic. You can also employ the Chick-fil-A rule here, right? So we know that Chick-fil-A always builds in the path of progress. So you can hop on their website and potentially look or hop on your city council's website and see if there's a plan for any new chick-fil-aes or new trendy restaurants that typically are in areas of growth. And that's

Starting point is 00:13:56 where you can look for potential new property. All right, good stuff there. Make sure you pick the right city. Make sure you pick the right area in that city and know what tenants are looking for. All really fundamentals of being a landlord. And you can learn more about that process in my book long distance real estate investing. I cover it pretty thoroughly there. Now, next question. You've been living in the house. You're moving out and you plan on making it a rental. What sort of finishes and amenities do potential landlords need to add or change ahead of renting out their properties? Rob. That's a pretty good question. Well, for one thing, well, I don't know. I don't know. I think long-term rental investors do like carpet or they're okay with carpet more than a short-term rental host. Short-term rental hosts, we hate

Starting point is 00:14:34 carpets. We really, really do not like them. They stain. They smell bad. They retain odor if someone smokes in your property, which is a rare occasion, but it does happen. So for me, I'm always in favor of some kind of laminate LVP tile. Just from the standpoint of cleaning, I think of a property as How much maintenance and how much coordination am I going to have to do with my cleaning crew and with my maintenance crew? And so I try to think of every property as like, is this a heavy lift on a turn? A turn is basically the time after someone checks out from your Airbnb to the time someone checks in, that whole period in between of getting the property ready.

Starting point is 00:15:13 That's a turn, right? And that is really the biggest aspect of getting an Airbnb ready. And that really is for me the biggest time suck, especially when something goes wrong. So I always think about the turn factor and how hard it is going to be to get the property ready. And I just most of the time feel like carpet kind of is the biggest, is the biggest like, you never know. It's like a 50-50 on if it's going to be okay or not. For me, I look at this from two perspectives.

Starting point is 00:15:38 So the first perspective is tenant proofing the place, right? So the whole purpose of tenant proofing is so that you reduce maintenance costs and that you reduce your capital expense. that you're not replacing things every year as a tenant does move out. And so from the lens of tenant proofing, you're right. I would get rid of carpet and I would put in some sort of LBP as long as it's waterproof or tile because that's going to last longer or should last longer. Now, this doesn't have to be done right away. What I would say is if you've got new carpet in your place or if you've got decent carpet in your place, I wouldn't just replace it because then you're just taking on that cost now and you don't need to. I'd go ahead and have your tenant move in. And then after that

Starting point is 00:16:30 carpet is beyond its useful life, then you go ahead and replace it with something more, you know, tenant friendly. Yeah. So I'm looking at flooring, tenant proofing that. I also tenant proof my countertops. I do. I put two centimeter granite in. And so again, I wouldn't do it right away if what was in there looks good. But once that wear and tear happens, then I'm replacing it with the more tenant-proof material. So those are some of the things that I'm thinking about wearing tear items like your countertops and your floor. Yeah, that's a good one. And then you want to think about paint, right? If you're living in a place, your paint choices may not be what the general public wants to live in. And so once you stop thinking from the tenant's perspective and start thinking about desirability, because you do have to rent this

Starting point is 00:17:18 place to actual people, right? And vacancy costs money. So you want to be able to rent it as quickly as possible. And so the second bucket I look into is desirability. So now I'm looking at what paint colors, what neutral paint colors are trendy. And then the finishes that you need. So for me, I always, we always look at the competition. So we'll go and we'll look at the listed rentals in the area and see what the general finishes are and all of them. And then I try to make my place a little bit nicer. Maybe it's adding a feature wall. That's typically very inexpensive. Sometimes it's just a different color paint on a wall. And so maybe it's a feature wall. Backsplashes in kitchens. That stuff, you can get a back splash done in the kitchen for somewhere between 500 and 1,500 bucks,

Starting point is 00:18:02 depending on how big that backslash is in the kitchen. But it can make your property more desirable when someone walks in there. You know, it's that perceived value. When people walk in and they kind of ooh and awe, they're going to remember your place. If they're looking at five or six rental properties that day, you want them to remember yours. right? Sure. And so then I start looking at the competition and then what can I do that's inexpensive, but is a step above what my competition is and then I start prioritizing those things. That's a great point. When you're getting a short-term rental ready, you're definitely looking for a couple of memorable moments within that short-term rental. And if you're going to update the

Starting point is 00:18:36 place, you don't need to remodel everything. Like if you're on a budget, there are very cost-effective ways to get a place up and ready. Just like you talked about, a feature wall is great. Like wallpaper actually more expensive in the labor than the wallpaper itself most of the time. Switching out light fixtures, pretty cheap if you're going to Amazon, switching out water fixtures on all of your faucets, having like a nice kitchen faucet. You can get that from Amazon. And they've actually lasted me over the years, but they're usually like 80 to 100 bucks. And the other thing I would say is the contractor grade vanities is something that I'm always trying to get into my Airbnb's as well. But for me, I'm trying to think of like the cover set

Starting point is 00:19:14 in my Airbnb listing, there's always the five main photos that people see. And so I'm trying to curate those specific moments a very particular way, but you don't have to really over remodel the entire house if it's not within your budget. So I think it's going in and sprucing it up, or as we like to say, spice it up, you know, add a little flour, that's right, a little paprika. Are you making sausage gravy right now? Because that sounds delicious. It is surprisingly easy to make sausage and gravy. Okay, so far, we have covered what you can do to, decrease your expenses during a turn. What about decreasing liabilities? What are some things that people need to think about removing from the house or making sure the house has to decrease exposure to lawsuits

Starting point is 00:19:54 or people being hurt? Well, you never want to give benefit of the doubt to your tenants or your guests. I'll give you a really good example. I just built a brand new $45,000 deck at my property in Gatlinburg and someone lit a bonfire under it next to the pier that holds up the structural support of the deck. So you definitely want to think through every possible scenario that could happen on your property and address it before it becomes an issue. That's not one I'm not really sure. I guess I could have roped it off. So that would be an example of removing liabilities. There's a property right down the road that I just bought.

Starting point is 00:20:28 And it's got a giant French sliding door in like a in the upstairs. It used to be an attic and they converted it into a room and it has a giant sliding door that opens right onto a slanted, roof that like you could literally just walk off and fall into the ground. And I think there used to be a deck on there, but the previous owner had it removed. So you can open that door and just literally fall off the house kind of thing. So for me, I'm going to have to go in and I just don't trust short-term rental guests to not go on that roof. So I'm going to go in and actually have that door removed, which kind of sucks because all of the trades to get involved with that, to remove that door and add a new window and the siding and the drywall, it's about $4,400 to get it done,

Starting point is 00:21:14 which I think is a little on the high side, but it just goes to show, for me, I'm more than willing to spend $4,000 to keep people from falling off the roof because that could really ruin a lot of things for me. So you definitely want to think about a guest that doesn't take care of your place or doesn't have any regard for rules, like what are they going to do? And you want to pad yourself against those opportunities as often as possible. That's a great point. I think you can get real nitpicky with with kind of this thing. But you want to think about, because you live there. And so you know, what are the things that are like, ah, I should probably fix that. That's kind of dangerous, but you haven't done it yet. Right. Like maybe you've got a back deck that has stairs going

Starting point is 00:21:53 down to the ground level. And a couple of those stairs are a little, a little bouncy, right? A little soft. Little, uh, little sketch, right? Those are things you want to think about taking care of. Replace those boards. Make sure everything's all sure and safe. Pools. If you haven't got that gate around the pool yet, then maybe it's time to put that gate up, make sure you get the right pool cover. Maybe it's time to fill that pool in if that's not the liability that you want to have, right? So just think about what's, what are all the things that, you know, you've thought to yourself while living there that, hey, this, this is a little dangerous. I should take care of this and you haven't gotten to it yet. Those might be the things you want to address. I would add

Starting point is 00:22:29 single pain windows to that in my career as a law enforcement officer. You'd be surprised the amount of times that I saw horrible injuries from single pain windows. The glass becomes like a sword when it's broken and can cut somebody. Also, if you have a cabin, the decks can be very, very dangerous. I actually had on a cabin that I bought that I never saw, a person stepped on the deck and went through it. Now, luckily, the deck was like there was dirt right underneath it, but that could have been much worse. So the person that I bought the property from painted over a whole bunch of dry rot, and the home inspector didn't catch that. So it's what we call the landlord special right there. Be careful with those type of situations. Now, speaking of variety, there's many

Starting point is 00:23:13 different kinds of rental property insurance that investors can choose from. So there's primary residence insurance, there's rental insurance, there's different premiums, there's different things that you can be covered for. Short-term rentals require different insurance than traditional ones. So what do people need to know about choosing the insurance on their property, Rob? Yeah, insurance is something that is very particular, especially if like long-term rentals versus short-term rentals, if you are a short-term rental host, landlord insurance is not going to really cover short-term rentals traditionally, unless you go in and get some kind of umbrella coverage or an addendum added to your landlord's insurance. So you definitely want to make sure that your insurance is specifically tailored

Starting point is 00:23:51 to short-term rentals because if something happens on your property, that's not covered by your landlord's insurance because you weren't within the scope of it, you may not get covered. Yeah, you absolutely want to make sure that you go and you change your insurance policy over to a rental property or landlord insurance policy. And then you want to make sure you review the coverages and make sure you're comfortable with the coverages. If you've never, if you don't know what to be comfortable with or not, then talk to your insurance agent. Ask them what other landlords are doing. Ask them if they think the coverage is adequate for the type of risk that you will be taking on by having tenants living in your home. Be prepared for that landlord insurance most likely costs more than your homeowners insurance.

Starting point is 00:24:35 That's always the case with me. Is that pretty across the board, do you think? Oh, yeah. Yeah, 100%. Yeah. Also consider taking out an umbrella policy for that additional coverage above and beyond what your rental property policy covers because in the chance that you are sued and you lose and your policy doesn't have enough money to cover the.

Starting point is 00:25:00 pay out, you want to make sure that you have an umbrella policy that's going to jump in where that leaves off. So you just want, like for the cost of umbrella policies and the amount of coverage that you get, I just think it's beneficial to go ahead and grab that umbrella policy. And as an aside, don't forget to include insurance in your analysis of properties. When I first started investing, insurance was almost an afterthought. It was such a small expense. You didn't really have to be that worried about it. And if the insurance was going to mess up the deal, the margins were way too thin to be doing anyways. Not the case now. Insurance has double, tripled, quadrupled, in some cases. I am glad you said that because there's homeowners insurance where you live in it,

Starting point is 00:25:38 which is the most cost effective. Then you have long term like landlord insurance and that's more expensive. And then you have short term rental insurance, which is basically the cost of the house. So yeah, I would definitely make short term rental insurance a big part of your underwriting because nine times out of 10, it is a lot more money than you think it is. All right. So you've considered your costs, you've run your numbers, you've updated your home. So it's the most attractive rental it can be, but how do you make sure it attracts the right tenant? Our secrets on how we do just that, plus how to lower your tax bill and some pitfalls to avoid after the break. There are two kinds of real estate investors, those who have reviewed their insurance and those who think that they have. Most don't

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Starting point is 00:26:59 As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr-builder's risk policy, or mid-term holiday guests.

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Starting point is 00:30:27 Moving on, you've lived in the house. You know that you loved it. How do you find the right tenant to trust with your property? Henry, I know this is something you have a lot of experience with. So let's start with you. What are some things that people need to know when looking for the right tenant? Yeah, well, first of all, make sure that you at least understand what fair housing laws are so that you're not violating any of them when selecting a tenant. You want to make sure that you're doing this legally and on the up and up. Once you understand those things, then you do need to have a tenant selection process, which means you need to have criteria that you are evaluating everyone who applies with. Everyone gets evaluated through the same lens. And then for me, it's I evaluate everybody through the same lens.

Starting point is 00:31:16 And if they don't check every single box, then we don't rent to them. Right. The idea is as a landlord, it doesn't matter what the property is, what the price point of the property is. You know, it's a myth to think that the more expensive the rent is, that the better the tenant class will be. That is not the truth. It can be, you can find great tenants at a low price point and great tenants at a high price point. What matters is, are you going to be good at tenant selection? And so the main criteria for me is they need to make.

Starting point is 00:31:46 at least two and a half times the monthly rent. So their gross income, their gross monthly income needs to be two and a half times the monthly rent at a minimum. The other thing I'm looking for is I'm going to do a credit check and a background check on every single applicant. What I'm looking for on the background check and the credit check is if the background check comes back with any red flags on it, that doesn't necessarily mean I won't rent to them. It just means I need to dive into it a little more. For example, if they have a recent violent crime, probably not going to rent to them. But if they have a crime that was a long time ago and it wasn't violent, then that could be somebody that we rent to. One of my best tenants right now is a convicted felon who served 15 years in prison.

Starting point is 00:32:29 And he is a phenomenal tenant. Right. And so just because they have something come up on their background report doesn't mean I'm not going to rent to them. It's just a sign to me that I need to dive into what's on that and make a determination on if I think that that's going to play in. to them being a good or a bad tenant. I'm looking at the credit report. Now, some, some people do or have a minimum credit score requirement for tenants that they're going to rent to. I do not. What I'm looking for is what is causing that credit score to be low if it is low, right? If they've got medical debt that's causing their credit score to be low, I'm going to be a little more lenient because

Starting point is 00:33:06 medical expenses are crazy high in this country. Like, it's hard for somebody to pay a $50,000 medical bill because they had an accident, right? And nobody budgets for that. No one's like, I just choose not to pay my medical bills because I'd rather go buy a fraud. Right. It's an unexpected expense that hits people, which is very different than if they didn't make mortgage payments or rent payments or something that they consciously went out and purchased and of their own volition shows and then defaulted on the payment.

Starting point is 00:33:33 That's a great point. Yeah. I'll let you said that. Divorces also destroy people's credits. Like, I wouldn't make a decision to not rent to somebody because a divorce is what's causing their credit to be low. Now, if I'm looking at that credit report and they have red marks because they aren't paying their utilities, your electric bill, your cell phone bill, right? If somebody's not paying their cell phone bill, their electric bill, they're probably not going

Starting point is 00:33:55 to pay you rent, right? So it's what's causing the credit score to be low and then making a determination. And so those are some of the, like the detailed things that I look at. But for the most part, it's doing a credit in the background check. And I'm calling references and calling previous landlords. I am in shock all the time at how many landlords don't do this. I always call their employer and their previous employers. And I always call their last landlord and the landlord before the last landlord to make sure that I ask. And I typically only ask about three or four questions, right? It's really, I want to know, were they a good employee or were they a good tenant? Did they leave the place in good shape? Were they a headache to deal with? And would you

Starting point is 00:34:38 rent to them again? Right. Those are the questions I'm typically asking. And you can get a pretty good sense for if that's somebody you want to rent to just based on those questions and doing that amount of due diligence. That makes a lot of sense. Yeah. Why not call people that have been through the experience? I think there's just a lot of people are, they just, they don't do enough due diligence. Picking up a phone call for five minutes could really save you some real heartache and heartbreak, you know, along the journey of the 10 and 12 month lease. So yeah, I think on the short-term rental side, luckily there is a little bit more vetting. We can see. If they have an established Airbnb profile or short-term rental profile, you can read past reviews. And usually I'm looking for someone with a five-star review history. If it's not a five-star, oftentimes it's a four-point-five. And if it's a four-point-five, that means that they didn't get a five-star every time. So I always go in and read reviews and see what the other short-term rental hosts were saying about the person.

Starting point is 00:35:32 And yeah, if I don't like what they have to say, then, you know, I may decline that reservation. Or if they have a bad review from two years ago, but all the reviews have been really great over the past two years, then I'll often just go for it. So everything you just said makes complete sense and feels like you need a lot more due diligence on that side oftentimes. I want to make sure I reiterate, call the last two landlords because the current landlord may want this bad tenant out of their hair and may not give you an honest opinion of that tenant. So call two landlords back. Yes, he's great. David, are you kidding me? He's great. Love that. So sad to lose him.

Starting point is 00:36:11 But he did leave flour everywhere. It was weird. But other than that, it was... There was one thing. I think he might have been a baker because there was flour just all over the floor. I can't get it out the carpet. That's how you know I've been somewhere. I'm telling you. Tinkerbell sprinkles fairy dust. David Green sprinkles flour. All right. What about when it comes to collecting rent? Yeah. Rob, do you have a preferred method of payment collection? Oh, no. I let the merchant or sorry, like the third party. platforms in between do all that. So nothing too crazy on my end. What about you, Henry? Yeah. So as a new landlord, I remember the first time I rented out my very first rental property. And they asked, how do we pay rent? And I said, however you want. Like I just, you're going to pay me. This works. Right.

Starting point is 00:37:00 And so like, however they were going to give me money, I was in for it. And then I got more than one property and realized if I didn't have a streamlined way to collect rent, then I was just giving myself multiple tasks and chores every single month because you have to document when they paid the rent and put it in some sort of system to be able to track it. And then you've got to take it to the bank. And so it just became this hassle. And so once I got to three properties, we started to streamline. And so the free tools that are out there, apartments.com, rent ready is very inexpensive. And I believe as a Bigger Pockets Pro member, you get a free rent ready account. So all that stuff works just fine.

Starting point is 00:37:41 And then just make sure it's in your lease that the tenants have to pay through your online system. But make sure you use some sort of online system where people can pay because then it does a few jobs for you. It takes the money to the bank for you automatically. So you don't have to go do that. It automatically documents when the payment came in, how much was made. And so it takes all those tasks off your plate. Trust me, just start that way. Okay, let's talk taxes.

Starting point is 00:38:09 Rob, what are some of the tax benefits of turning your primary residence into a rental? Oh, man, this could be its own Bigger Pockets podcast. And we've done a few of these. But if you turn any residence into a short-term rental and you manage that full-time, you're materially participating in the management of your short-term rental, then you get not just depreciation, but you get bonus depreciation. and you're able to take a much larger loss in year one of operating it as a short-term rental. That's as much as I'm comfortable saying for my knowledge in it on air.

Starting point is 00:38:43 But it is a beautiful, beautiful, beautiful thing that can help lower your tax bill. So I guess it goes without saying that we are not tax professionals and are not giving you tax advice here. But yes. Yeah, I should have led with that. Depreciation is the benefit, even with long-term rentals depreciation. and your expense write-offs, right? So because it is a property that you now are essentially operating a business, you have expenses that you can write off as a part of your business.

Starting point is 00:39:14 So, you know, the cost of the repairs and the cost of the insurance and the cost of all these things we've been talking about now become tax write-offs for you. And so you want to make sure that you are documenting all of those and keeping the receipts for them and filing them with your taxes. make sure that your accountant knows that you're that you're tracking these things and ask them what other expenses you're allowed to write off because there's all kinds of cool stuff that you can do. You can write off part of your, you know, part of your houses, you know, using a home office since you're now writing a business out of your house.

Starting point is 00:39:48 There's all kinds of cool stuff that you can do. So I would definitely tell you that you need to not just talk to an accountant, but hire an accountant. If you're doing your taxes by yourself, once you start running your primary home as a rental property, operating a business. And so I would suggest that you get a professional to help you both make sure that you are filing your taxes appropriately, but that you are getting all of the benefits that are now afforded to you. Now, what if you want tax advice, but you don't want to pay for that tax advice? Do you have any recommendation of how you get free tax advice from a CPA

Starting point is 00:40:19 who doesn't realize that they're just being milked for their information? Yeah, so you just have them on the Bigger Pockets podcast and you can just ask them anything you want. That's great. Yeah, that's what I do. Great point. It's kind of like that. Remember that old commercial where the guy calls collect, but he doesn't want to pay. So he says, Bob had a baby. It's boy. And who was that? It was Bob. Apparently it's a boy. They're having a baby. Apparently it's a boy. All right. Next question. What should new landlords be careful of if they're going to turn their primary into a rental property? Rob. Well, I think the biggest thing, honestly, one of the things I was going to say at the beginning of this, the biggest thing is that it's no longer your home. and if you live in the property, you are going to make a lot of memories and you're going to cry in that house, you're going to celebrate in that house, maybe you'll have kids in the house,

Starting point is 00:41:06 maybe you'll get dogs, cats, right? You need to learn pretty quickly to cut emotional ties with that house because it will get everything but destroyed, right? You will see everything happened in that house that is going to break your heart. So the sooner you can kind of accept that it's just a piece of rental property, it's a piece of real estate. I think the, the less you're going to get stressed out because I'll tell you a couple of times the houses, when I saw some of the pictures that my cleaner sent, I was like, how could they do this to my home? Yeah. But over the years, I've just learned to sort of disconnect. That would be one. And then two, you should also know pretty early on that the house that you list for rent will be the nicest

Starting point is 00:41:47 version of the house that ever exists. And you'll be really bummed that it was as nice as it, as nice as that whenever you live there. Every time I've left my houses, I'm always like, dang, because you spend so much time fixing them up, getting them ready. painting them, landscaping them, doing that crazy project you said you never do. Yeah. And then you're like, man, I can't believe it never looked like this when I lived here for 10 years, which leads to point one in getting emotionally connected. You become your grandma who has that one room in the home that no one is supposed to go in that has the same vacuum lines on it every day. And if there's a footprint on the carpet, she freaks out, no one should ever sit there. That sort of syndrome takes over and you start to fill that way about the entire house.

Starting point is 00:42:26 and it can ruin your entire mood towards real estate investing if you're not careful. Henry, have you had to overcome such emotional obstacles yourself? No, I haven't gotten too emotionally tied to any property I've lived in. Maybe the one I'm in now because I've had both my kids really have spent the majority of their life there now. And so what you're saying is you don't let at homes. Okay. That was that was pretty spicy for a guy who's a pretty low-key, like, flower. I thought you said you were flour, bro.

Starting point is 00:42:56 that was straight pepper you guys are rubbing off on me here it's exactly right sorry hold on i don't want to no it's too late 100% do not cut rob saying pepper out of this show do you hear me editor do not cut that oh i'm toast um so back on topic here i think the the most important thing to think about when you're turning your primary into a rental property is something that I've recently talked to a couple of dear, dear friends of mine about as they were and are considering turning their primary internal rental property. And that is if you've got equity in that property and you want to eventually sell that property, if you have not lived in it two out of the last five years, you will not get

Starting point is 00:43:50 to capture that paycheck without having to pay capital gains taxes. Right. So if you bought a house, let's say you bought a house for $100,000 and you've lived in it, you know, for five years now. And that house is now worth $400,000. Well, you've got $300,000 in equity in that home. And if you were to go and sell that home, you would be able to take that $300,000 and put it in your pocket tax free because you've lived in it two out of the last five years. Well, once you turn that property into a rental property and you have not lived in it for two out of the last five years, then you've lived in it. you will be subject to having to pay capital gains taxes when you do go and decide to sell that home down the road. And so if the plan is for you to sell that home, in your analysis, you need to figure out, well, what am I going to make on this property over the next five years while I keep it as a rental property versus what I would make on it if I sold it? And then is it a smart decision to rent it out or is it a smarter decision to sell it? Now, if the goal is you're going to keep this thing as a rental property forever and ever amen, well, then you can do a 1031 exchange when you decide to sell it and you can defer the taxes that way.

Starting point is 00:45:03 So there are some options to you when you do decide to sell, but you just need to know that if you don't live in it for two out of the last five years and you sell it down the road, you're going to have to pay long-term capital gains taxes on the money you put in your pocket. Unless you move back into it. Unless you move back into it. And stay there for two years out of five. What an emotional journey that would be. Yeah, right.

Starting point is 00:45:25 Go back to the house where it all started. Wow, you really brought me there. And I hope that we brought all of you there as well because you can be a real estate investor. And one of the easiest ways to get into it is by buying a primary residence, putting a low down payment on that property, getting a better interest rate, living in it for a bit and then moving out and turning into rental property and repeating that process. Just think about that. For anywhere between three and a half to five percent down every year, you can get a new home every year. 12 months and in 10 years have 10 rental properties that you put 25% of the down payment of the other people that all put 20% down on just with a little more thinking and a little more ingenuity

Starting point is 00:46:03 and we hope that we've given you the blueprint or as I like to say the green print for how to do that today. This is David Green for Rob spicy like Tapatio Ava Solo. I'm coming in hot. Signing off. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. On the host, an executive producer of the show, Dave Meyer, the show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com.com. The content of this podcast is for informational purposes only.

Starting point is 00:47:05 All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 872: How to Turn Your Primary Residence into a Rental Property

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