Chances are, your current home won’t suit your needs indefinitely. If you’re living in a small starter home or a condominium, you may want to upgrade to a larger house as your family grows. If you’re already in a large residence, you may want to downsize your home when your children move out. Also, there’s always a chance you or a family member may need to relocate for work, in which case it’s time to say goodbye to your current address.
The big question is what to do with the property when you move. Are you better off keeping your old place as a rental, or does selling it make more sense? While renting allows you to either pay off your mortgage or make a little money every month, it also comes with a fair amount of risk and added tax complications.
Why Rent Your Home?
When a tenant pays you rent, you can use the check to 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, you can keep any monthly rent as income.
Renting out your home can diversify your investments and income streams, enabling you to reduce your financial risk. For example, if you lost your job, you would still have some income from the rental. Or, if you find your retirement savings are insufficient, you’ve got a piece of real estate you can sell.
Costs of Renting
When calculating the cost of renting a house, consider these potential expenses:
• Mortgage Payment. Consider both interest payments and principle payments.
• Property Taxes. These vary by area, but expect to pay up to 2% of your home’s value per year.
• Mortgage Insurance Premiums. If your down payment is less than 20% of your home’s value, expect to pay mortgage insurance premiums.
• Landlord Insurance. This covers tenant damages and protects you if someone is injured on your rental property. According to HouseLogic, landlord’s insurance is typically 15% to 20% more than homeowners insurance.
• HOA Fees. These payments are required if your house or condo belongs to an association.
• Repairs and Replacements. Windows, doors, walls, carpeting, roofs, and major appliances must be repaired or replaced.
• Maintenance. After a tenant leaves, common costs include exterior paint, interior paint, and carpet cleaning. You’ll almost always need to clean the carpet between tenants, and you may need to touch up interior paint as well. Exterior painting is more infrequent – expect to paint every five years or so.
• Advertising and Rental History Checks on Tenants. You can advertise on websites like Craigslist for free, but expect to pay around $100 if you want to run a newspaper ad. VeriFirst reports that a rental history of eviction records and a rental payment history both cost between $5 and $10.
• Accounting and Property Management Fees. Property management firms typically charge around 10% of your rental revenue. Also, expect to pay a minimum of $200 annually for a CPA to prepare your personal and rental tax return.
HouseLogic provides a free worksheet to help you estimate the cost of renting your home.
You can get a fairly accurate estimate of potential rent revenues by checking out postings in your neighborhood. The online real estate marketplace Zillow uses MLS data and a proprietary formula to estimate rent values on specific homes. Rentometer provides a similar service. You can also talk to a local real estate agent or property management company, or check Craigslist to see the going rate in your area.
Also, consider historical rental trends for your region – if you’re in a city that’s experiencing rental price increases, your rental revenue may soon outpace your expenses. Services like Rent Jungle can show you specific rental price trends for your area.
As with any business, your revenue must exceed your costs if you are to be profitable. Thankfully, the costs you incur to rent the home are tax-deductible, which decreases the amount of income tax you have to pay on rents received and increases your take-home cash.
If your rental revenues immediately exceed your expenses, that’s a good sign. However, even if you’re not immediately turning a profit, don’t fret. It may be that rental rates are low at the moment or you’re still paying a hefty mortgage. According to Reuters, Maryland CPA Jerry Gross estimates that you usually have a solid investment if initial rent revenue covers at least 80% of immediate rental costs.