When the time comes to upgrade, downsize or move to a new city, you might consider turning your current place into a rental property instead of selling it. A rental property can be a lucrative investment…or it can be a money pit. Know what to look for so that when the time comes, you can part with your current home in the best way for you. Here are five questions to ask yourself before you rent out your house:
Rent out your house: Will it make you money?
Renting out your place might look great upfront when you think about how much a renter will pay you per month. But there’s a lot more that factors into the total cost. First, add up all the expenses you will incur if you hang onto this house as a rental. There is the mortgage, HOA fees, taxes, utilities, repairs and management, for starters.
That total amount is important because it will help you charge enough to make it worth your while. If renting out is not going to make you money, selling might be a better bet.
How much would you net on a sale?
There’s another important number to know before you rent out your house, and that is how much you would make if you sold your house today. Selling has its costs as well, like closing costs, agent fees and home repairs. If you wouldn’t make much, it could be smart to rent it out and make a little extra money on it.
You could also bide your time until the market is favorable and sell it then, but rent it out in the meantime. But if you could sell it and get a healthy profit upfront to invest or use as a down payment on your next home, that could be a smarter choice long term.
Where will your neighborhood be in the future?
What does the future hold for your area? Neighborhoods can change a lot over time. What might be a less than desirable street today could be a hot market a decade from now. Or, people might prefer other neighborhoods. If it seems that your area is becoming less popular, look into selling.
You can make money off the house now instead of risking it losing value over time. Keep an eye on your city and what’s going on within your neighborhood before making a decision.
Can you deal with tenants?
Renting out your property means dealing with tenants. Some will be simple to manage, others could end up being a nightmare. Renting out your property is a gamble. Are you up for that responsibility? With practice, the responsibilities of being a landlord become easier. You learn what to do and what to avoid. But if the idea of managing tenants makes you cringe, it might be better to sell.
There is a third option, which is to hire a property manager. It’ll cost you, but it will allow you to offload that work if you choose to.
Are you aware of the taxes?
Finally, before you jump into owning a rental property, it’s important to know the tax ramifications. If you lived in your primary residence for 2 of the past 5 years and sell, you can avoid paying the capital gains tax. That tax can be as high as 20% depending on your bracket, and it is incurred when you sell real estate. However, that fee is waived for homeowners who meet the 2-year primary residence rule.
Why is this important to know before renting out your home? Because if you crunch the numbers, you might find you net more by selling today and taking the profit instead of renting out and paying taxes over the years.
The upside to renting your property is that it could appreciate in value, making the taxes worth it. But there are no guarantees.
Sell your house or rent it out: Which is right for you?
Many people find that holding onto their home to rent it out brings in a nice profit. It can be a great way to boost your retirement savings or cover other costs. As long as you’re aware of what responsibilities and risks you’ll take on as a landlord, it could be a smart investment for you and your family.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.