Should You Rent Your Home?
The thought has probably crossed your mind: if you found the job of a lifetime in another state or your current company transferred you, should you sell or rent your home? Naturally there are many factors to weigh before making such an important decision.
First, you need to think about your reasons for keeping ownership of the home. Do you like the home so much that you want to hold on to it in case you ever move back? Are you looking for an extra tax break through property depreciation? Do you want to use the home as a basis for retirement investment?
These are all fine reasons for retaining ownership, but there are factors to consider that may outweigh the perceived benefits. For instance, are you prepared to be a long-distance landlord, hiring someone to maintain and manage the property for you? There are many other costs involved as well, such as advertising costs, turning costs (cleaning and painting between tenants), wear and tear or damage, property taxes and insurance, utilities paid when your property is between tenants, and accounting costs. In order to assess these costs, you should research the numbers in your market. Expenses often run 30 to 40 percent of income before the monthly mortgage cost.
You will also need to consult your tax professional to determine your potential for capital gains taxes if you decide to sell the property in the future. Make sure that you are informed about the timing and investment.
The ABCs of Property Rental
If you’ve decided to rent out your home, where do you start? First, get the house in shape in order to get the highest reasonable rent. This includes interior and exterior patching and painting, carpet cleaning or replacement, appliance tune-up and cleaning, adequate insulation to cut down on utility bills, and fixing whatever needs fixing.
Then, set the the proper rent. Location rules when setting prices. You can contact a property management company like Property Frameworks to research prices in your area, or you can look in the real estate section of your Sunday paper. If you set your price too high, it’s unlikely that you’ll find a tenant. If you ask for too low a rent, prospective tenants will wonder what’s wrong with the place.
Should You Hire a Property Management Company?
It’s not absolutely essential to hire a property manager, but it can make your life a little easier, especially if you are moving out of the area. Interview at least three different companies, and be sure to ask about accreditation, experience, customer service, references, tenant screening, vacancy rates, maintenance, monthly reporting, eviction handling, insurance, fee structure, property inspection, and any special services they offer.
Is it a Good Investment?
One of the most important considerations is whether it is worth the cost and expense of renting your former home. What is the return on investment? If the rents do not cover the mortgage payment that you have on the property, perhaps it's not the best decision to rent. However, if the rent is sufficient but the return is low, there may be other options. Our real estate professionals can talk to you about your options, including a 1031 exchange, a program in the tax code that allows you to buy a different property in what's called a "like kind exchange", even a commercial property, that may have a better return on investment. Take the hypothetical case of owner A who had a townhouse and rented if for a 3% return and turnover every year with new tenants and all the property management responsibilities. Owner A was able to sell that property and purchase a lease on a fast food chain store that had a 15 year lease, no property management responsibilities for an 8% return. While this is a hypothetical situation, our agents have brought very similar transactions to our clients who were interested in exploring 1031 exchanges.