Maybe you’re moving out of your primary residence into something larger or smaller, depending on where your life is heading. Or, you might be moving in with a loved one. Maybe you’re moving out of the area, but you don’t want to sell.

Whatever your reasons for converting your primary residence into a rental property, you’re making a good choice. It’s a valuable piece of property. Why not hold onto it and earn as much as you can now and in the future? Demand for high quality rental homes is high. You can earn some consistent and recurring rental income while gathering equity and watching the asset increase in value.

Let’s do it.

But let’s also remember that the decision to rent out your home involves more than just handing over the keys to a tenant who will presumably pay rent and take good care of your home. There are legal, financial, and practical implications that can significantly affect your bottom line and your peace of mind.

We are professional property managers who help people with this all the time. If you’re considering this transition, here’s what every California homeowner should know before converting their home into an attractive, profitable rental.

Understand the Shift in Property Use

This can be an emotional transition for a lot of homeowners, especially if you really love this home and especially if it’s attached to special memories.

It’s not your home anymore.

When you convert your primary residence into a rental, you’re changing how the property is treated from both a legal and tax perspective. This shift has implications that are more than emotional. For starters, there are tax considerations. Your mortgage interest and property taxes are no longer just personal expenses—they become deductible rental expenses. At the same time, you’ll also be responsible for reporting rental income on your tax return.

There’s a capital gains exclusion to consider, too. If you sell a home that’s been your primary residence for at least two of the last five years, you may qualify for up to $250,000 ($500,000 for married couples) in capital gains tax exclusion. Renting out the home could impact this eligibility if you wait too long to sell. We always recommend that you speak with a CPA before making the change to plan for these tax implications.

Secure the Right Insurance Coverage

Your standard homeowner’s insurance policy won’t cover your rental property. You’ll need to switch to a landlord insurance policy, which is very similar to the policy you’ve always carried, but has a few nuances. The right coverage for your rental will typically include:

- Property damage (including fixtures and appliances)
- Liability coverage in case a tenant or a tenant’s guest is injured
- Loss of rental income due to a covered event

Depending on your specific property, location, and risks, you may also want to consider buying earthquake or flood insurance. We know the market for good insurance is complicated, but you want to have as much coverage for your asset as possible. It’s also a good idea to require tenants to carry renter’s insurance to cover their personal property and liability. Your landlord policy will not cover their personal belongings.

Protecting your property starts with a strong insurance policy. Talk to us if you need help finding a good insurance agent, and we can make a referral.

Is Your Home Rent-Ready?

Living in a property is much different than renting it out. That stubborn closet door that you never bothered to fix? You have to fix it now. Those window screens you never bothered replacing because you don’t open those windows, anyway? You have to replace them now.

Even if your home has been lovingly maintained, preparing it for tenants may require updates and safety upgrades. Here’s what we always look for when we’re helping homeowners convert their space into a rental:

- Inspect Major Systems: Ensure HVAC, plumbing, and electrical systems are in good working order. You don’t want to have repair requests coming in soon after a tenant moves in. Make sure everything is in good shape and updated.
- Check Out All Safety Features: California law requires functional smoke alarms in every bedroom, hallway, and level of the home, as well as carbon monoxide detectors. Make sure the windows and doors all open, close, and lock. Are the handrails sturdy?
- Consider Wear-and-Tear. You might be surprised at how quickly a property can deteriorate once you start renting it out. Replace delicate surfaces or high-maintenance finishes that may not hold up to tenant use.
- Remove Personal Items. Pack up family photos, heirlooms, and any personal belongings before showing the home. Don’t leave anything behind, even if you think it’s something a tenant might appreciate. That only invites liability.

We recommend conducting a professional move-out inspection and take dated photos before tenants move in.

Set the Right Rent Price

Determining how much to charge can be frustrating and overwhelming, especially if you’ve never rented out a home before. While you want to maximize income, overpricing could lead to longer vacancies. Consider what similar homes are renting for in the neighborhood. You can look at listings online, but it’s a better idea to talk to property managers. We are constantly evaluating the market, gathering data, and analyzing the insights we collect.

Once you have an idea of what other homes are renting for, consider how yours compares to those properties. Consider amenities and location. Proximity to schools, transportation, and popular neighborhoods can justify a higher rent. Property condition has an impact on what you charge, too. Freshly updated homes with new appliances and modern finishes can often command higher rent.

Screen Tenants Thoroughly

California law protects tenants from discrimination and there are strict protocols in place for how you can and cannot screen a tenant. If you accept an application fee, you must screen each application in the order in which it was received, and accept the first applicant who meets your criteria.

Set that criteria, and screen consistently. You want to run background and credit checks (make sure you get consent from your applicants). You want to verify income and rental history. Check the national eviction database.

There’s a lot of technology out there that can help, but again – you’re safest using the systems that a property manager already has in place. We use a standardized rental application and screening process to avoid potential fair housing complaints and ensure a qualified tenant is placed.

You’ll Need a Strong Lease Agreement

Creating a lease agreement is essential but not always easy. Your lease is your primary protection as a landlord. A well-drafted lease must comply with California laws and include terms such as:

- Monthly rent and due date
- Security deposit amount
- Maintenance responsibilities (who handles yard care, etc.)
- Pet policies
- Rules for guests, noise, smoking, etc.
- Regular inspections (with 24-hour notice)
- Early termination terms
- Rent increase notifications (as required under AB 1482)

Avoid generic leases downloaded from the internet. Instead, use California-specific lease forms or consult a property manager.

Do You Understand Your Landlord Responsibilities?

California has some of the most tenant-friendly laws in the country. You’re required to maintain a habitable property, provide timely repairs when issues are reported, give proper notice before entering (usually 24 hours), and return security deposits within 21 days of move-out, with an itemized list of deductions.

Violating tenant rights can result in fines, lawsuits, or regulatory action, so know your obligations well.

Partnering with a professional property manager can help you with the responsibilities that you may not understand or feel prepared to take on. We can handle tenant screening, rent collection, and maintenance. We can enforce the lease and provide a high standard of tenant service even while holding those renters accountable. We’ll stay updated on ever-changing landlord-tenant laws and offer you all the peace of mind you need, especially if you’re moving far away.

Plan for Taxes and Record-Keeping

Once your home becomes a rental, you’ll need to be intentional and organized with your finances. Track income and expenses for tax reporting purposes. Common deductible expenses include:

- Mortgage interest
- Property taxes
- Repairs and maintenance
- Depreciation
- Insurance premiums
- Management fees

Maintain detailed records and document everything.

Even after you’ve converted your home into a rental, your strategy will likely evolve over time. You’ll want to periodically review whether the rent still reflects market conditions, if the property continues to cash-flow positively, and if tax laws or personal circumstances make it time to sell.

Making the transition from homeowner to landlord is likely to require a mindset shift as well as professional help. You’re no longer just caring for a home; you’re managing an income-producing asset governed by contracts, compliance, and customer service.

California offers unique opportunities and challenges for landlords. We know that with thorough preparation, good legal and financial advice, and the right systems in place, converting your primary residence into a long-term rental can provide financial stability and wealth-building potential for years to come.

Let’s talk about how this process needs to work for you. Contact our team at Redwood Residential Property Management, and we’ll set you up for success.

Converting Your Primary Residence into a Rental Property