Do You Have to Live in a House Before Renting It Out?

Individuals considering real estate investment often wonder if they must live in a house before renting it. Generally, no universal legal mandate requires prior occupancy for most residential rental properties. The ability to rent out a property is primarily determined by ownership, compliance with landlord-tenant laws, and ensuring the property is habitable for tenants.

General Rule for Rental Properties

Standard landlord-tenant laws do not require a property owner to have lived in a house before renting it. Renting criteria revolve around the owner’s legal right and adherence to safety and habitability standards. A property intended for rental is viewed as an investment or business asset from the outset.

Owners must ensure the property meets all applicable housing codes and local regulations for rental units. This includes providing essential services and maintaining the property in a safe condition.

Mortgage-Related Occupancy Requirements

While general rental laws do not impose a prior occupancy rule, specific mortgage types often include occupancy clauses. These clauses ensure properties financed with certain loans are used as primary residences, benefiting from favorable terms like lower interest rates or reduced down payments. Common examples include FHA, VA, USDA, and many conventional loans.

FHA loans require one borrower to occupy the home as a primary residence within 60 days of closing. VA loans have a 12-month occupancy requirement, while USDA loans require occupancy for at least 12 months, up to 36 months. Conventional loans stipulate a 12-month occupancy period. These clauses prevent loan fraud, where a borrower secures a primary residence loan and converts it to a rental.

Violating an occupancy clause is considered mortgage fraud and can lead to serious consequences. Lenders may impose penalties, adjust loan terms to a higher interest rate, or demand immediate repayment of the entire loan balance. Failure to repay could result in foreclosure and negatively impact future financing opportunities. However, if life circumstances, such as a job relocation or family emergency, require a move, lenders are understanding, provided the initial intent to occupy was genuine.

Insurance and Tax Status Considerations

Property classification as primary residence or rental carries implications for insurance and tax. Homeowner’s insurance policies are designed for owner-occupied properties, covering the structure, personal belongings, and liability for incidents occurring on the property.

Conversely, landlord or rental property insurance is designed for properties occupied by tenants. This policy covers risks like loss of rental income if the property becomes uninhabitable due to a covered event, and provides liability protection for tenant-related issues. Landlord insurance is more expensive than homeowner’s insurance due to increased risks associated with rental operations.

From a tax perspective, the property’s use dictates its treatment. A primary residence may qualify for a capital gains exclusion upon sale, allowing single filers to exclude up to $250,000 and married couples filing jointly up to $500,000 of profit, provided they owned and used the home as their principal residence for two of the five years before the sale. For rental properties, owners can deduct various expenses, including mortgage interest, property taxes, and operating costs. A tax benefit for rental properties is depreciation, allowing owners to deduct a portion of the property’s cost over its 27.5-year useful life for residential rentals. This depreciation must be reported to the IRS on Schedule E.

Local Regulations and Specific Property Types

Local ordinances introduce rules affecting occupancy, particularly for certain property types. Municipalities have zoning laws that dictate how properties can be used, including specific requirements for rental units. These regulations can vary widely by city and county.

Short-term rentals, such as those facilitated by platforms like Airbnb, are subject to local regulations. Many cities impose specific permitting and licensing requirements, which can include owner-occupancy mandates. These rules might limit rental days per year or require the owner to reside on the property for a portion of the year. Property owners must research and comply with all local city and county regulations before converting a property to a rental, as non-compliance can lead to fines or legal issues.