I turned my home into a rental that earns passive income each month: Now the rent covers the mortgage

Kevin Ha is the founder of Financial Panther.
Courtesy Kevin Ha
Key Points
  • "One of the main reasons I decided to turn my house into a rental property was that it gave me a relatively low-risk way to get started as a real estate investor," writes Financial Panther founder Kevin Ha. 
  • "Every mortgage payment I make on the old house is now covered by the rental income."
  • "Rental income is nice because it can often be fairly passive income."

When my wife and I decided to purchase a new house last year, we were left with a decision about what to do with our old home. We asked ourselves if we should sell it and cash in on our equity now, or if we should play the long game and turn it into a rental property. 

After weighing our options, we decided to keep the house. Selling it might have simplified our lives and put some cash in our pocket. But what we really wanted was to create another income source and hold onto an asset that could continue to increase in value.

Turning our old house into a rental property allowed us to do just that.

We bought our new house in July 2021. So far, things have gone smoothly with the rental property. My tenants have been paying their rent on time. I've been lucky enough that I haven't had to deal with any major repair issues yet. And I'm using the rent to pay off my mortgage and build equity in my home. 

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I started small and listened to my gut 

One of the main reasons I decided to turn my house into a rental property was that it gave me a relatively low-risk way to get started as a real estate investor. 

I come from a family of real estate investors, so I always knew that I wanted to get into rental properties at some point. But I'm also fairly risk-averse. The idea of saving a bunch of money to buy an investment property felt scary to me. If something went wrong or I made a big mistake, it could be costly.

With this in mind, turning the house I was already living in into a rental property made a lot of sense. After all, I already owned it and knew everything about it. There wouldn't be any major surprises with it.

And turning my house into a rental saved me a lot of time since it meant I didn't have to research properties, come up with the money for a down payment, and get a mortgage on a new property. 

Turning my old house into a rental comes with another benefit in that it gives me a way to do a sort of test run before going all-in on real estate investing. I can try renting my house out for a few years to see what the experience is like. If I find I'd rather do something else, we can always sell it.

I created an additional source of income

A rental property in many ways works just like any other business. The rent I collect each month is my revenue. My expenses are the mortgage, taxes, insurance, and any maintenance I need to do. Whatever is left is the profit that I get to keep. 

Rental income is nice because it can often be fairly passive income. The money I earn each month from my rental isn't tied to the number of hours I put into it. I get the same rent each month, regardless of how many hours I have to work on the property. 

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I'm currently self-managing my rental property. Some months I might have to do more work than others, such as when there are maintenance issues that I need to address — a few months ago, I had to change out a toilet seat and I've had to hire people to fix smaller issues around the house. Other months, I might not have to do any work at all.

Either way, the rental cash flow is about $1,000 each month, which are funds I can set aside for future investments, use to pay down debt, or whatever else I need or want to do with it.

I found a way to build equity through the money I earn

As a first-time real estate investor, getting that first rent check was an amazing feeling. Even better, in my opinion, is knowing that every mortgage payment I make on the old house is now covered by the rental income.

At the same time, each time I pay my mortgage, I pay down more of the principal of the loan and gain more equity in my current home. 

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This is why I am a fan of real estate as an asset class. You earn income not just from the cash flow that your rental generates, but also from the equity you gain in your property as you pay down the mortgage. 

Houses also tend to appreciate over time, which means the value of your home generally increases over the years. If I hold onto my rental property long enough, I'll have an asset that's fully paid off and is likely worth more than what it's worth now.

I worked to minimize potential regrets

When I was deciding what to do with my old house, one important consideration was that I didn't want to make a decision that I might regret later. The way I saw it, if I sold my house, that was it. The house would be gone and if I wanted to get a rental property, I'd have to save money, research properties, and ultimately buy one.

In contrast, if I kept my house, I could at least try my hand at renting it out to see what that was like. If it turned out to be a terrible experience, I could still sell it and at least know that I gave it a shot.

Because of how the tax code works in my state — we're based in Minneapolis — if you live in your primary residence for two of the previous five years, you can sell your home without paying capital gains taxes.

With this unexpected grace period, it means I can rent my house out for three years before I have to think about the tax implications of selling it. I think in that timeframe, I'll have a good idea if real estate investing is something I want to do, long-term.

 Kevin Ha is a former attorney-turned writer, blogger, and side hustler. He has been featured in the Los Angeles Times, Wall Street Journal, Star Tribune, CNBC, Marketwatch, and other media publications. In 2019, Kevin quit his job to pursue self-employment and side hustle full-time. You can read his work at www.financialpanther.com, where he writes about personal finance, financial independence, and side hustling in the gig economy.

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