How We Became Accidental Landlords: Turning a Primary Residence into a Rental Property

How We Became Accidental Landlords: Turning a Primary Residence into a Rental Property

By Dr. Margaret Curtis, WCI Columnist

In 2004, my husband and I bought what we thought would be our forever home: a farmhouse on a hillside in Vermont with a barn and a pond on 27 acres. Six years later, we moved to Maine for my work, sure we would be back in Vermont in just a few years. We plan, God laughs, and here we are still in Maine 12 years later.

We love Maine, but we have never considered selling the farmhouse because we are planning to move back sooner or later—when we retire or the kids are in college (more planning, you get it). My husband is happiest when he is tapping maple trees on the hill above the house, and he swears the only way he will leave Vermont again is when he is carried out feet first. In the meantime, the house is rented to a long-term tenant, and we have become Accidental Landlords: homeowners who decide to rent out what was once a primary residence.

This is a common-enough scenario among high-income professionals: you own a home you no longer live in and have to decide what to do with it. Maybe you moved for work, or your family changed and the house no longer suited you, or maybe you inherited a family property (it does happen). You may be reluctant to sell the house because you plan to return to it or because it has sentimental value to you. You might be underwater on the mortgage, although this is much less common now than it was 10 years ago. Or you may be interested in real estate investing and think this may be an entry point for you.

Real estate investing is incredibly popular right now. You only have to read the newspaper headlines to know that real estate has appreciated at extraordinary rates in the past two years, and investors armed with low-rate mortgages have been fighting over available inventory. You may also have heard that real estate offers a tax shelter to high-wage earners like physicians (more on that below). If you wander over to the Bigger Pockets website—or any of the many others like it—you will hear breathless pundits telling tales of financial freedom and bountiful cash flow, all wrapped up in a mindset of personal growth.

These pundits are not wrong: real estate investing can be a powerful tool to build wealth. But real estate is not a get-rich-quick or get-rich-easy tool, and a primary home may not make a sound investment property.

After a previous (terrible) tenant, I decided we had to be more professional in how we handled our rental activity. I read real estate investing books, joined online forums, and asked questions. I would now put myself in the “conscious competence” stage of learning about REI; I’m like a really good intern in April. With the obvious caveat that you should do your due diligence and consult professionals as needed, here is a primer on real estate income and taxes and how they apply to the Accidental Landlord.

More information here:

Should You Turn Your First Home into a Rental Property?


How Rental Real Estate Makes Money


#1 Cash Flow

Cash flow is how much money you get to keep after all expenses (including mortgage, taxes, maintenance, repairs, etc.) are paid. The main source of income is rent, although some properties have ancillary sources of income, such as coin-op laundry or storage units.

Here is a very basic spreadsheet showing our income and expenses from our home in Vermont for 2021. (Note that this is retrospective, not prospective, and does not include every potential expense.)

accidental landlords income and expenses

Sharp-eyed readers will notice something important: we are $914 in the red for 2021. I anticipate we will at least break even in 2022, but even so: this is not a good investment. Our approximately $400,000 in equity in the home is earning us -0.2% cash. If we were early career or trying to pay down expensive debt, this would be a truly terrible investment.

Specific Considerations for the Accidental Landlord: If your home is expensive, be aware that higher-end rentals are the first to experience vacancies in an economic downturn. Our house is a three-bedroom in an area with high rental demand, so . . . easy to rent. In addition, you may have to pay higher homeowner’s insurance and maintenance expenses that you used to DIY, and you will lose the Homestead Exemption on your taxes if you had one.

More information here:

If It Doesn’t Cash Flow, Don’t Buy It


#2 Appreciation

Appreciation is the increase in value over time. Some investors will buy negative cash-flow properties hoping that they appreciate, but most investors agree that cash flow is more important for an investment property. If your rental needs repairs or you have a prolonged vacancy, you could incur a very large expense. You also can’t count on appreciation—just ask anyone who owned property in 2009. Our home has roughly doubled in value since we bought it, but I don’t count this on our balance sheet because this will benefit our heirs, not us.

Specific Considerations for the Accidental Landlord: There are ways to increase the value of a property (this is called “forced appreciation” and is beyond the scope of this article). You may be able to do this with your home-turned-rental, but it may be easier with an inexpensive rental bought with this in mind. You may also lose the “primary residence” exemption when you eventually sell the property depending on how long it was rented out—again, consult a tax professional.

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How Real Estate Tax Write-Offs Work

Rental expenses can be deducted from rental income, bringing the tax on your rental income down to zero. We don’t pay any tax on the $21,000 of rent we collect, and that is before we calculate the biggest write-off in real estate: depreciation. Depreciation is the annual decrease in value of a property. Of course, in reality, properties that are maintained tend to increase in value over time (see #2 above), but according to the IRS, the value of a residential property goes to zero over time. Determining the annual depreciation amount is a process itself. Depreciation is a “paper loss,” meaning there is no money actually coming out of your pocket. This is not exactly “free money” because the IRS will “recapture” the depreciation when you sell the property, but can save you on your present-day taxes.

I haven’t included depreciation on my income and expense analysis above because our actual expenses already exceed our rental income. If I did, it would look like this:

accidental landlords income expenses depreciation

With depreciation, we could potentially write off $22,732, but we already brought our rental income taxes to zero and these deductions can’t be applied to our physician (W2 and 1099) income. So, where are the huge tax advantages that real estate investors talk about? This is another area that creates a lot of confusion. Here is the internist version (too long) and the surgeon version (too short):

Internist version: Investors with Real Estate Professional Status (REPS) can deduct rental property losses—including depreciation—from other kinds of income, including W2 and 1099.

REPS is not a license or certification you can apply for. REPS is an IRS designation for taxpayers whose primary occupation is real estate and, specifically, their own rental investments. If you want to learn more, the Tax Smart Real Estate Investors podcast did an excellent series on REPS. The criteria for qualifying for REPS are complex, and I highly recommend learning more about this topic and consulting a tax professional.

If you work 0.5 FTE or more as a physician, by definition, you do not qualify for REPS. If you or your spouse has REPS, you could then use real estate deductions to shelter your physician income. In our case, we could deduct a total of $22,732 from our W2 income and save $6,819.60 on our taxes at a 30% tax rate (that’s been our effective tax rate in the past. I haven’t calculated it yet this year because I don’t want the agita).

Surgeon version: The biggest tax benefits of real estate investing are not available to a full-time physician.

Now that you understand how rental properties make money, you have to run the numbers and ask yourself: would I accept this rate of return on another investment? If the answer is yes, then keeping your property as a rental might make sense. If the answer is no, then you should sell the house—or keep it and recognize that this is an emotional decision, not a financial one. We kept our home in Vermont as a home—not because the numbers work (they don’t, see above)—and we rent it out to keep it at least cash-flow neutral. We have revisited this many times and are happy with our decision.


How to Be a Landlord

If you decide to become an Accidental Landlord, be professional. Even if your property is a beloved family home, it becomes a business as soon as you find a tenant.

You may love your home’s quirky charms, but not every potential renter will. You may need to repaint with neutral colors or replace wonky appliances. You will definitely need to bring the house up to code according to local laws. My in-laws once rented their house to a family who moved in and then refused to pay rent because a lead paint assessment had not been done. Since the house hadn’t changed hands in 50 years, the issue had never come up (there was no lead paint, and the tenants eventually left).

Once you have the house ready, screen your tenants. I once made the mistake of agreeing to rent to the first people who showed interest. They then left graffiti in the basement, started a chimney fire, and moved out before the lease was up. Get first and last months’ rent and a security deposit. I also failed to get last month’s rent from these same tenants. If I had, cleaning up the mess they made would have been a little less frustrating.

Also, you need to keep the books correctly. Rental real estate (and REPS in particular) is one of the most heavily audited areas of personal tax returns. We keep a separate bank account for the rental property, and our tenant deposits rent directly into it. This helps with record-keeping, and it has allowed us to build a cushion for larger expenses. I still do our taxes because our rental expenses and income are still straightforward enough for TurboTax. But if I add another rental property, I will hand this off to a CPA with expertise in high earners and real estate investing.

We live three hours away from our house in Vermont, which is doable in an emergency but not close enough to actually do the work ourselves. When the house needs something, we call the same plumber, electrician, etc., that we used when we lived there. One of our neighbors plows the driveway and mows the lawn (and bills the tenant). At this point, with a wonderful tenant in place, we spend, at most, a few hours a month coordinating the management of the property.

For us, keeping our home as a rental has had many benefits. The biggest is that we can look forward to living in our beloved home again (when all goes according to plan, which of course it will. Go ahead and laugh). We have a photo of the barn and a double rainbow hanging in our living room for inspiration.

rental home vermont

Another benefit is that, by learning how to manage our single rental, I have learned enough about real estate investing to be looking for our first, honest-to-goodness rental property. Watch this space for my next article on real estate: “How We Became Intentional Landlords.”


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Have you become an accidental landlord? Is it making you money? Is there anything you would do differently? Comment below!

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