You’ve been diligent and finally paid off your mortgage. Now the question you are asking yourself: Should I rent out my house or sell it?
Renting out your house is a big decision.
Your home is probably filled with loving memories of your family and all of the times you shared together there. However, time changes all things. You probably find yourself in a position where you are debating if you should make an extra income by renting out your home.
Should I rent out my house?
Well that depends on you. There are a number of decisions to weigh. This article is meant to show you the pros and cons of renting out your house in 2020. In my opinion, the pro’s outweigh the con’s. However, some find that they would rather sell instead of leasing it to someone and becoming a landlord.
First let’s look at the Pro’s of renting out your house.
Extra monthly income-
This is by far the most obvious reason. It does not make sense to allow a property to go unused. The fact is that everyone needs a place to live. More monthly income is a nice thing to have. Pretty much everyone can benefit from more money every month.
Many property owners pay off their first mortgage and find a second place to live while renting out the first home that they own. Some families downsize when their children move out. Whatever the reason, it makes a lot of fiscal sense to rent out a house that is not being used.
Long term profits-
Many homeowners are attracted to selling their home because of the quick lump sum profits they can make. It’s very likely that your property has increased in value from your original purchase price. Many believe that it’s a smart financial decision to cash out and reinvest the profits in some other financial vehicle.
What many people do not tend to realize is you can make exponentially more in the long run by renting out your property instead of selling. Yes, money is comes in slower this way. But once you have sold the property that is the end of your profits from owning it. All of your value is realized instantly when you sell the home. You are leaving a lot of long term income on the table when you sell. By holding onto the property and getting paid every month, in the long term you can end up making more.
Here is some basic math for renting out your home versus selling-
Let’s say that the purchase price of your home was originally $100,000. After market inflation, now you can sell it for $150,000.
After the standard real estate agent fees of 3.5% for the buying agent, and 3.5% to the seller agent, you roughly will profit $39,500. This does not include any taxes you will need to pay. This lump sum can be attractive to many home owners, and some decide this is the best option for them in their current situation.
But lets take a look at what you could make renting out the property.
Assuming you have already paid off your home, for a $100,000 home your total cost for property maintenance will be $167 per month based off of the nationwide average. At a very conservative estimate of charging $800 per month to your renter, that’s a profit of $633 per month. In 63 months, or just over 5 years, not only will you have made your $39,500 in profit, you will still own the property! (Keep in mind these figures are pre-tax.)
This is the reason many decide that it makes financial sense to hold onto their investment and end up renting out their house. Retirees have a few more factors to consider, but overall renting out your home can be one of the best financial decisions you can make.
Now that you have seen the income possibilities that come with renting out your house, let’s look at all of the downsides.
Downsides to Renting Out Your Home
Since you are someone’s landlord, you will be expected to be reachable on a daily basis should any issues in the home arise. You will need to answer phone calls from your tenants and will be expected to take care of any problems in the home beyond the tenants control. While this can be a rare circumstance, some property owners do not enjoy being held accountable even on the off chance that a problem arises. Many property owners work a full time job and do not have much free time available.
To solve this, many property owners decide to hire a property management company. A property management company handles most issues and is the middle man between the tenant and the owner.
If you are just considering renting out say 1 to 5 properties, this is probably not the best option for you.
Property management companies can charge as much as 15%-20% of your rental revenue each month for their services. If you just have just one or a few places to rent out, the cost will more than likely outweigh the benefit. In my opinion, the chances that something can go wrong when you are renting out a single home or few apartments is not worth the cost of hiring a management company. 99% of the time any issues that arise are easily fixed by either showing up and doing the work yourself, or hiring an independent contractor to come fix the issue the tenant is having.
If you rent out your house, you will become someone’s landlord. This is a responsibility some do not wish to bear. You will be responsible for repairing damages, electrical and heating issues, issues with plumbing, and in some cases replacing appliances.
On a positive note, many if not all issues with tenant damage can be avoided with a solid lease contract. If you have thoughtful and detailed lease contract the tenant will be responsible for most issues that arise. You can even stipulate in your lease agreement that the tenant is responsible for general maintenance. Make them take care of things like lawn care and snow removal.
Protecting your investment-
Make sure you have detailed documentation of the condition of the home before a tenant moves in. It’s a great idea to go through with your camera phone and record a video of touring the unit. The tenant will be responsible for any damages they incur during their residency there. Generally, a deposit is equal to one month’s rent. Just make sure you have a solid lease in place. You will be able to charge the tenant the cost of any repairs that go beyond the initial security deposit.
As a landlord, you can (and should) require a security deposit upon moving in. This will cover the cost of fixing the little things in the home when the tenants finally move out. This ensures your property maintains it’s value and is rent ready to the next tenant that will move in. A maintenance deposit can be used to cover the cost of small things. Examples include a fresh coat of paint, replacing light bulbs, or even busted window screens. A security deposit will also help cover the cost of bigger problems like replacing flooring, doors, and windows.
Bigger problems that cost more than the deposit can be charged to the renter after move out. Make sure to keep accurate receipts for the cost of these bigger repairs. If your renter disputes the charges, there is a small chance you will have to go to court. This is where a Property Management Company comes in handy. They often have lawyers on retainer to litigate for you.
Many property owners get their start by renting out their first home they have paid off. You should consider if you will be able to let someone else move in to the place where you and your family grew up together. This does not affect everyone, but it can be hard for some owners to get over sentimental value on occasions. This can definitely be something to consider when asking yourself if you should rent out your house.
Taxes on rental income-
When you become a landlord, you will end up having to file taxes for your rental revenue. Some homeowners decide that they do not wish to deal with the headache. The standard amount of tax you have to pay on rental revenue is 22% which can seem high. But like all things in the tax world there are many ways that you can lower that tax amount. With a good understanding of the tax laws, you can bring this amount down considerably.
So we have now looked over the pro’s and con’s of renting out your house. Maybe you decided that owning a rental property is not for you and that’s just fine. Cashing out by selling is an option. But if you are like me, you’d like to remain patient and make the maximum profits off of your investment.