If you are looking to purchase a new home, you might be torn between selling or renting out your current home. If you’ve never been a landlord before, you need to be sure you know what you’re getting into. The thought of simply having someone else pay your mortgage while you continue to own it might have you all googly-eyed.
However, before you get too excited, there are certainly drawbacks. Let’s start with the positives of renting your home out.
You maintain ownership of the home -- A lot of people like the idea of possibly one day moving back. Perhaps you are moving away for work, and you plan to move back in the future. Or maybe you’ve simply outgrown the home, but expect to downsize again once the kids move out. There are any number of reasons why one may not be willing to let go of their home.
You can later cash in on the equity -- Historically, real estate has always been a solid investment. Not only is the property likely to appreciate in value during the time you are renting it out, but the fact that with each rent payment you receive and in turn use it to pay down the mortgage, you are paying down the principal as well. So your equity continues to build while someone else makes the payment.
Create a stream of income -- The fact is, you should be building into what you charge for rent enough to not only cover your mortgage payment, insurance, taxes, homeowner’s dues, etc., but you should also be building in potential maintenance costs, property management costs, and a little extra so you can create a positive cash flow.
There may be tax advantages -- Tax advantages come in the form of tax deductions. You can likely deduct any home repairs, insurance and mortgage points paid, and homeowner’s insurance.
Now consider some of the disadvantages:
You’ll have to cover maintenance costs -- Whether it is as small as a broken door handle, or something big like a broken furnace, you’re on the hook for it.
You’ll have two mortgage payments in between tenants -- It can be a challenge to find good tenants. You may need to contract with a realtor to help find you tenants. Then, once you find them, you’ll need to do background checks, credit checks, maybe even ask for referrals. During this whole process, you are potentially paying a broker like a realtor, AND you are paying your mortgage on the home while you are trying to fill it. If you aren’t prepared for this, it can be financially devastating!
There may be negative tax impact -- Due to the increase in income, there is also an increase in taxes. While we already discussed some of the tax advantages, keep in mind the additional income also presents an increase in taxable income.
Tenants can be a pain -- If you haven’t been a landlord before, you might benefit from talking to other landlords about their experience. Let’s just face it, some tenants can be a pain. The property isn’t their own, therefore many don’t treat it as such. The property can be abused, there might be noise complaints, or other shenanigans going on.
A lot of people use a property manager for this purpose. They simply don’t want to deal with it. While this is certainly an option, keep in mind paying a property manager falls on your shoulders as well.
Finally, when deciding whether to rent or sell your home, there’s a number of things to consider if you are thinking of selling your home. Some things you might think about are:
- What is the current state of the housing market? Is it a “seller’s market”?
- What is your current interest rate?
- Do you need the equity in the home to purchase a new home?
- What is your desired lifestyle with this move?
- Do you ever anticipate moving back?
Obviously, there’s a lot to consider. Selling your home certainly has it’s advantages as well. You can access the equity, you can walk away from the home worry-free. If the housing market drops, you can jump back in while it is lower. All of these can be advantages to simply selling over renting.
Renting out your home could certainly be advantageous to you, but go into it fully aware of the risk you are taking on for that potential reward.