Renting Your Home May Be The Smart Choice
Here’s why renting your home may be the best option for you come moving time
There are countless reasons that you may have decided to move out of your home – buying a larger home, downsizing to a smaller home, moving to a new city for a job, tired of the traffic in your area of town, etc.
Regardless of the reason that you are moving, you are now faced with the decision of what to do with your current home.
Why should I rent my home?
Most everyone has at least thought about investing in real estate, but most people don’t know how to get started. If you own a home, you are already halfway there.
When it comes time for you to move on from your current home, consider keeping it as an income-producing asset. When a tenant pays you rent, that money can cover your monthly mortgage. In a sense, your tenant is paying for you to earn equity in your home.
Once the mortgage is paid off and you have covered all other operating expenses, that monthly rent is income to you. As long as you own that property you will always have an alternate income stream, diversifying your income and reducing your financial risk if you lose your job or your ability to work.
Expenses to expect and consider as a landlord
Here is a basic list of the expenses to consider when calculating the cost of renting your house:
- Mortgage payment and mortgage insurance premiums
- Property taxes
- Landlord insurance
- HOA fees
- Repairs and maintenance — industry average is about 10% of revenue
- Property upkeep — When will the house’s exterior need to be painted again? When will the A/C, roof, water heater, etc. need to be replaced?
- Leasing and property management fees — Property management firms typically charge an upfront fee of one month’s rent and 10% of your rental revenue as a management fee.
Determining income from the rental
With sites like Zillow and Realtor.com, you can check out the market yourself and get a fairly reasonable estimate of what you might be able to rent out your property for. However, if you really want to nail down what your home would rent out for, consult a professional property manager. We even offer free market rental analysis reports.
Simply put, profitability is when your revenue exceeds your expenses. The good news is when you own a rental property your operating expenses are tax-deductible. This reduces the amount of income tax you have to pay on your rental income. However, even if you are not immediately profitable, it still might make financial sense to keep your home and rent it.
How to calculate profitability
The formula to calculate your profitability is simple: Profit = Income – Expenses.
There are great free tools available online. Click here for a free online cash flow calculator.
Our property managers will also help you evaluate your property using a cash flow calculator to make sure you don’t miss anything.
Should I rent or sell?
Now that you know what you will make from your rental property it is time to consider the alternative — should you sell? There are many things to consider, but here is a short list of some of the major ones:
- Does the future look bright? – An important factor to consider when deciding whether to rent or sell your house is what is going to happen in your market in the next five, 10, 20 years? Are things improving? Will your neighborhood decline in value? If the future looks dark, consider selling now to avoid problems later on.
- Beware of capital gains when waiting for the market to rise – Renting your home for a few years can help you build more equity in your home as sales prices rise. However, if you rent your home for more than three years, you can no longer claim it as your primary residence. This means you could be liable for capital gains tax on the sale of the residence.
- Tax implications – Like income from your job, you have to pay income tax on any income from your rental property. The good news is you can write off many of the costs associated with renting the house. Another benefit of renting your home is you can also claim a deduction for depreciation expenses. This non-cash expense allows you to slowly deduct the amount you paid to purchase the house. Also, if you have a rental loss, you may be able to use the loss to offset some of your income. If you have questions about any of this, consult a CPA for more details on deducting any losses or depreciation.
- What about my return on investment? Consider how much money you would make if you sold the property today. Factor in about 10% to agent fees, closing costs, and other sales expenses. It might be better to hold the property if you are going to make little or nothing by selling it. If the property will give positive cash flow in the meantime, the former is definitely true. If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and would only achieve $1,000 per year in cash flow, that’s a 1% return on investment. It would make more sense to take that $100,000 profit and invest it in something else that could give me a higher return.
Which is right for you?
Every real estate deal is different, and the math is simple, but it can be intimidating and easy to miss things. The best think you could do is talk to a real estate professional before making any final decisions. Our property managers and Realtors love what they do and are willing to help people navigate the tough decision of what makes more sense, to rent or sell.
Source: “Renting the home you’re leaving may be the smart choice,” Orlando Business Journal