Is it beneficial to convert non-investment real estate to rental if I need to make major repairs? (USA/Missouri)
"I think you may have a significant misunderstanding here.  You have been renting your property out for two years, now.  There is no special ""roommate"" clause in the tax code; roommates are renters, and the rent they pay is rental income.  (If they were roommates in a property you both rented from a third party, that would be different.) See publication 527, chapter 4 for more details on the subject (search on ""Renting Part of Property"").  You should be: You may also consider ""Not renting for profit"" section, which may be closer to what you're actually thinking - of changing from ""Renting not for profit"" to ""Renting for profit"".  Not rented for profit means you can report on your 1040 as opposed to filing Schedule E, but it does mean you have to actually not make a profit (and remember, some of the money that goes to paying the mortgage is not deductible on this side of things since it's your property and you'll get that money back, presumably, when you sell it). If that is what you're asking about, it sounds like it's just a matter of money.  Are you going to start making money?  Or, are you going to start making enough significant upgrades/etc. to justify the tax deduction?  You should consider the actual, specific numbers carefully, probably with the help of a CPA who is familiar with this sort of situation, and then make the decision that gives you the best outcome (keeping in mind that there may be long-term impacts of switching from not-for-profit to for-profit rental treatment)." "I don't have a direct answer for you, but here are some other things you might consider to help you decide on a course of action in addition to Joe's note about consulting a CPA...  Get a couple contractors out to look the place over and give you some quotes on the work needed, most will do so for free, or a nominal fee.  Everything about the extent and cost of repairs is complete guess work until you have some firm numbers. You might also consider getting an up-to-date appraisal, particularly if you can find someone willing to give you an ""after improvements"" estimate as well.  The housing market has fluctuated a bunch in the last couple years, your current value may have shifted significantly from where you think it is if you haven't done one recently.  You will definitely have to pay for this service, I would estimate around $500 based on one I got in St Louis a few months ago.   You might also consider reaching out to a local property management company to find out where they think you would fall in the scope of the current rental market and what improvements they would recommend.  You will probably want to be onsite to talk to any of the above people about the work they are proposing, and your intended goals, so figure some travel costs and time into your evaluation. As one of your noted concerns was the state of the roof, I can tell you that in St Louis County, and the spec sheet for most shingle manufacturers, you are limited to two layers of shingles, then the roof is supposed to be stripped and redone from the bare wood.  Personally, I won't even do the second layer, I always go to bare wood and start over, if for no other reason than it gives me an opportunity to inspect the deck and deal with any minor problem areas before they become big problems. I don't know Greene County to know what the local code may be like, but odds are high that the shingle manufacture would not honor any warranty with this installation. Another potential gotcha that may be lurking out there is your ex may still have a lingering claim to the home if you go to sell it.  I don't know the rules in Missouri off hand, but where I grew up (with family in the real estate and title insurance businesses) there was a law regarding homestead rights.  If a spouse spent even one night in a property, they had an interest in it and an explicit waiver had to be signed to release said interest.  Review your divorce settlement and/or contact your attorney to confirm your status in this regard. Also consider the potential of refinancing your mortgage to either reduce the payment, or get funds for the improvements/repairs.   Final note, I understand wanting to help out a friend (I have done similar things more times than I can count), but seriously look at the situation and see if you can't get the rent or other compensation up to the level of the mortgage at least.   You mentioned that you have belongings still on the property, what would a storage unit for said items cost? In terms of juggling the numbers you could potentially use that value as justification to adjust the friends rent as a caretaker fee without any issue.  (Verify with your CPA) Talk to the friend and see if there are other parts of the job they would be willing and able to take on as consideration for the reduced rent (make sure you have at least a simple contract on any such agreement).   Or if none of the above are sufficient to balance the numbers, see if they would be willing to take on an actual room mate to help make up the difference."
If you intend to flip this property, you might consider either a construction loan or private money. A construction loan allows you to borrow from a bank against the value of the finished house a little at a time. As each stage of the construction/repairs are completed, the bank releases more funds to you. Interest accrues during the construction, but no payments need to be made until the construction/repairs are complete.  Private money works in a similar manner, but the full amount can be released to you at once so you can get the repairs done more quickly. The interest rate will be higher. If you are flipping, then this higher interest rate is simply a cost of doing business. Since it's a private loan, you ca structure the deal any way you want. Perhaps accruing interest until the property is sold and then paying it back as a single balloon payment on sale of the property. To find private money, contact a mortgage broker and tell them what you have in mind.  If you're intending to keep the property for yourself, private money is still an option. Once the repairs are complete, have the bank reassess the property value and refinance based on the new amount. Pay back the private loan with equity pulled from the house and all the shiny new repairs. "Frequently selling and buying properties is generally not advisable in Germany due to the high cost for property purchase tax (""Grunderwerbssteuer"") and land registration fees (""Grundbucheintrag""). You can generally assume that ever time you trade homes, you pay about 10% extra. So it is likely a good idea to keep your property and rent it out while you don't need it so you can use the rent to pay for your new room. That's especially true if you expect the property to increase in value. Also, due to the low interest rate right now, real estate is practically the only good capital investment. A 85k asset which makes you 4.8k each year is a return of investment of 5.6%*. Any financial asset promising you that kind of dividend at the moment is likely equivalent to gambling. * yes, I ignored maintenance costs, but it's still a really good deal. If you want to rent out your flat as stress-free as possible, give it to a property management company (""Hausverwalter""). In exchange for a percentage of the monthly rent they will take care of all the small stuff (like hiring handymen to fix broken toilets). You might still have to pay for really expensive investments, though (like replacing a leaking roof). But when something like that happens, you should have no issue to finance it with a loan because you have a real estate as a security.  However, keep in mind that the German tenancy law might make it difficult (but not impossible) to get rid of the tenant in case you want to move back into the apartment. Google ""Mietrecht Eigenbedarf"" for more details. Should you decide after your study that you don't want to move back, you can always sell the flat with the tenant. But rented properties usually get far lower prices on the real estate market than empty ones. Regarding covering your cost of living besides rent during your studies: If you are eligible for BAföG (state-sponsored student loan), you should take it, because it's an offer simply too good to refuse. It's literally free money. But unfortunately you are not, because you own too much real estate wealth you are not living in. But you should ask your bank for a loan backed by said property. That way you will likely pay far less interest than with a regular private student loan which isn't backed by anything except the hope for a relevant degree." "Realtor.com gives the following list of ""best renovations for the money"" and they include ROI numbers: You can see that people generally get ~80-85% of their money back on home improvement projects.  If the housing market is just red hot in your area, and you bought a house with some severe issues that caused the sale price to be significantly undervalued per square foot, then you're more likely to get more than average returns on your investment.  If you manage to save a lot of money on the renovations (ie, inexpensive materials or you DIY and save on labor) then your costs will be lower and your ROI higher.   You can see from the list above that the most profitable improvements tend to be kitchen, bath, windows, and adding additional living space. However, it only takes a few hours of watching HGTV to conclude that renovations often cost more than homeowners expect.  This is often due to unexpected issues or costs that were not apparent before the work started." A lot of people do this. For example, in my area nice townhouses go for about $400K, so if you have $80,000 you can buy one and rent it. Here are the typical numbers: So you would make $350 per month or $4,200 per year on $80,000 in capital or about 5% profit. What can go wrong: (1) The property does not rent and sits vacant. You must come up with $2100 in mortgage payments, taxes, and insurance every month without fail or default. (2) Unexpected expenses. A new furnaces costs over $5,000. A new roof costs $7,000. A new appliance costs $600 to $2000 depending on how upscale your property is. I just had a toilet fixed for a leaky plunger. It cost me $200. As you can see maintenance expenses can quickly get a lot higher than the $50 shown above... and not only that, if you fix things as cheaply as possible (as most landlords do), not only does that decrease the rentability of the property, but it causes stuff to break sooner. (3) Deadbeats. Some people will rent your property and then not pay you. Now you have a property with no income, you are spending $2100 per month to pay for it, AND you are facing steep attorney fees to get the deadbeats evicted. They can fight you in court for months. (4) Damage, wear and tear. Whenever a tenant turns over there is always a lot of broken or worn stuff that has to be fixed. Holes in the wall need to be patched. Busted locks, broken windows, non-working toilets, stains on the carpet, stuck doors, ripped screens, leaky showers, broken tiles, painting exterior trim, painting walls, painting fences, etc. You can spend thousands every time a tenant changes. Other caveats: Banks are much more strict about loaning to non home owners. You usually have to have reserve income. So, if you have little or no income, or you are stretched already, it will be difficult to get commercial loans. For example, lets say your take-home pay is $7,000 and you have no mortgage at all (you rent), then it is fine, the bank will loan you the money. But lets say you only have $5,000 in take home pay and you have an $1,800 mortgage on your own home. In that case it is very unlikely a bank will allow you to assume a 2nd mortgage on a rental property. The more you try to borrow, the more reserve income the bank will require. This tends to set a limit on how much you can leverage. You should absolutely go for it, and I encourage you to look for multi-unit (up to 4) properties if there are any in your area.  With nulti-unit properties it is far more common than not that the other units pay the mortgage. To comment on your point about slowly building an asset if the renter covers the payment; that's true, but you're also missing the fact that you get to write off the interest on your income taxes, that's another great benefit. If you intend to make a habit out of being a landlord, I highly encourage you to use a property management company.  Most charge less than 10% and will handle all of the tough stuff for you, like:  fielding sob stories from tenants, evicting tenants, finding new tenants, checking to make sure the property is maintained...  It's worth it. There fees are also tax-deductible... It makes a boat load of sense.  Just look at the world around you.  How many wealthy people rent???  I've met one, but they own investment properties though... BLUF:  Continue renting, and work toward financial independence, you can always buy later if your situation changes. Owning the house you live in can be a poor investment.  It is totally dependent on the housing market where you live.  Do the math.  The rumors may have depressed the market to the point where the houses are cheaper to buy.  When you do the estimate, don't forget any homeowners association fees and periodic replacement of the roof, HVAC system and fencing, and money for repairs of plumbing and electrical systems.  Calculate all the replacements as cost over the average lifespan of each system.  And the repairs as an average yearly cost.  Additionally, consider that remodeling will be needful every 20 years or so. There are also intangibles between owning and renting that can tip the scales no matter what the numbers alone say.  Ownership comes with significant opportunity and maintenance costs and is by definition not liquid, but provides stability.  As long as you make your payments, and the government doesn't use imminent domain, you cannot be forced to move.  Renting gives you freedom from paying for maintenance and repairs on the house and the freedom to move with only a lease to break. Investing in property hoping that it will gain value is usually foolish; real estate increases about 3% a year in the long run.  Investing in property to rent is labor-intensive; you have to deal with tenants, and also have to take care of repairs.  It's essentially getting a second job. I don't know what the word pension implies in Europe; in America, it's an employer-funded retirement plan separate from personally funded retirement.  I'd invest in personally funded retirement well before buying real estate to rent, and diversify my money in that retirement plan widely if I was within 10-20 years of retirement. When it comes to Real Estate, there are 2 school of thoughts:  1. People who swear that it's the one and best way to make lots of money with RE: flipping, fixer upper, leveraging, whatnot  2. People who don't believe people in #1 above.  I belong to #2 with some addendum(s):  * you can make a lot of money in Real Estate by becoming a RE Broker (but it's not for everyone) even better if you own a RE agency employing brokers (but it's not for everyone); it's like collecting tolls on the highway, no matter what, you collect a fee.  * every portfolio should have a portion allocated to Real Estate, either directly or by means of a REIT. Alas most people who own a home are over-allocated in Real Estate  * in some, and very few, parts of the USA one can make a lot of money by buying and managing directly small apartment complex to rent out; these are remote small urban settings, low prices for both buying and renting, but the ratio of price/rent is favorable.  Run your own numbers and see if it's profitable *enough* ***for you***. Think carefully about the added expenses.  It may still make sense, but it probably won't be as cheap as you are thinking.  In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically.  Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer.  When tenants change, there is usually some cleaning and painting that needs to be done. You can deduct the mortgage interest and property taxes on your part of the building.  You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense.  You can also deduct building maintenance and repairs on the rental portion of the building.  Some improvements need to be depreciated over time (5-27 years).  You also need to depreciate the cost of the rental portion of the building.  This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell. If you do this, I would get a professional to do your taxes at least the first year.  Its not hard once you see it done, but there are a lot of details and complications that you want to get right. A short sale will be pretty bad for your credit report. It will linger for 7 years.  This may ruin your opportunity to buy in the new area. On the other hand you need to run the numbers, the last I looked into this, the bank will look at rent and discount it by 25%. So the shortfall of $800/mo (after adjustment) will reduce your borrowing power if you rent it out.  In general this is the idea. You rent for a year, and buy into the new area. If you short sell after this, while your credit is trashed, you still have your new home, and $50K less debt.  (Disclaimer - There are those who question the ethics of this, a willing short sale. I am offering a purely business answer and making no judgment either way. I owed $90K on a condo where others were selling for $20K. I paid until it came up enough that a lump sum got me out upon sale. The bank got its money in full)  An article on the differences between foreclosure and short sale. Your question is best asked of a tax expert, not random people on the internet. Such an expert will help you ask the right questions.  For example you did not point out the country or state in which you live.  That matters.   First point is that you will not pay tax on 60K, its expensive to transact real estate, so your net proceeds will be closer to 40K.  Also you can probably the deduct the costs of improvements. You implied that you really like this rental property.  If that is the case, why would you sell...ever?  This home could be a central part of your financial independence plan.  So keep it until you die.  IIRC when it passes to your heirs, a new cost basis is formed thereby not passing the tax burden onto them. (Assuming the property is located in the US.) To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk. "The best answer for you is going to depend completely on your financial goals.  Do you want to be debt free?  Are you comfortable with the risks of long-distance rentals?  Do you have good resources to take care of any issues where the properties are at?   You can't directly compare the returns of risky investments versus the risk-free ""return"" of paying off debt. The expected return of the property might be higher that the interest on the loan, but when you incorporate risk, there's a decent chance that you'll make less money on the property than you pay on the loan. Other things to consider: Another way to think about it is:  If you did not have the debt or the houses, Would you borrow money at 4% (or whatever your student loan is at) to buy a rent house in Arizona?" "You are suggesting that a 1% return per month is huge. There are those who suggest that one should assume (a rule of thumb here) that you should assume expenses of half the rent. 6% per year in this case. With a mortgage cost of 4.5% on a rental, you have a forecast profit of 1.5%/yr. that's $4500 on a $300K house. If you buy 20 of these, you'll have a decent income, and a frequently ringing phone. There's no free lunch, rental property can be a full time business. And very lucrative, but it's rarely a slam dunk.  In response to OP's comment - First, while I do claim to know finance fairly well, I don't consider myself at 'expert' level when it comes to real estate.  In the US, the ratio varies quite a bit from area to area. The 1% (rent) you observe may turn out to be great. Actual repair costs low, long term tenants, rising home prices, etc. Improve the 1.5%/yr to 2% on the 20% down, and you have a 10% return, ignoring appreciation and principal paydown. And this example of leverage is how investors seem to get such high returns. The flip side is bad luck with tenants. An eviction can mean no rent for a few months, and damage that needs fixing. A house has a number of long term replacement costs that good numbers often ignore. Roof, exterior painting, all appliances, heat, AC, etc. That's how that ""50% of rent to costs"" rule comes into play." "I have been a landlord in Texas for just over 3 years now. I still feel like a novice, but I will give you the benefit of my experience. If you are relying on rental properties for current income versus a long term return you are going to have to do a good job at shopping for bargains to get monthly cash flow versus equity growth that is locked up in the property until you sell it.  If you want to pull a lot of cash out of a property on a regular basis you probably are going to have to get into flipping them, which is decidedly not passive investing. Also, it is easy to underestimate the expenses associated with rental properties. Texas is pretty landlord friendly legally, however it does have higher than usual property taxes, which will eat into your return. Also, you need to factor in maintenance, vacancy, tenant turnover costs, etc. It can add up to a lot more than you would expect. If you are handy and can do a lot of repairs yourself you can increase your return, but that makes it less of a passive investment. The two most common rules I have heard for initially evaluating whether an investment property is likely to be cash flow positive are the 1% and 50% rules. The 1% rule says the expected monthly rent needs to be 1% or greater of the purchase price of the house. So your hypothetical $150K/$10K scenario doesn't pass that test. Some people say this rule is 2% for new landlords, but in my experience you'd have to get lucky in Texas to find a house priced that competitively that didn't need a lot of work to get rents that high. The 50% rule says that the rent needs to be double your mortgage payment to account for expenses. You also have to factor in the hassle of dealing with tenants, the following are not going to happen when you own a mutual fund, but are almost inevitable if you are a landlord long enough: For whatever reason you have to go to court and evict a tenant. A tenant that probably lost their job, or had major medical issues. The nicest tenant you ever met with the cutest kids in the world that you are threatening to make homeless. Every fiber of your being wants to cut them some slack, but you have a mortgage to pay and can't set an expectation that paying the rent on time is a suggestion not a rule. or the tenant, who seemed nice at first, but now considers you ""the man"" decides to fight the eviction and won't move out. You have to go through a court process, then eventually get the Sheriff to come out and forcibly remove them from the property, which they are treating like crap because they are mad at you. All the while not paying rent or letting you re-let the place. The tenant isn't maintaining the lawn and the HOA is getting on your butt about it. Do you pay someone to mow the grass for them and then try to squeeze the money out of the tenant who ""never agreed to pay for that""?  You rent to a college kid who has never lived on their own and has adopted you as their new parent figure. ""The light in the closet went out, can you come replace the bulb?"" Tenants flat out lying to your face. ""Of course I don't have any pets that I didn't pay the deposit for!"" (Pics all over facebook of their kids playing with a dog in the ""pet-free"" house)"