Trying to decide if becoming a landlord is in your future? With the house prices continuing to sag and the rental market heating up, many homeowners are considering taking the plunge.
Whether you need to move for a job, have inherited a house, are contemplating rental-house ownership as an investment strategy, or simply want to move without losing money in the sale of your current home, renting your home may be the right option for you.
While the pros and cons surrounding the “sell or rent” decision are somewhat unique to each homeowner, here are some factors to consider:
Do some research, or check with a local rental agent, to assess the demand for rentals in your area. In many markets, factors such as a major slow-down in new multifamily housing construction, high foreclosure rates (and displaced homeowners) and home price instability (which discourages new buyers from taking the plunge) have combine with factors such as continued job availability and population growth to produce a high demand for rental properties and low vacancy rates. This in turn has produced a health spike in rental prices, which can be good news for your bottom line.
In addition to gathering rental market data, assess your personal numbers. If you’re considering renting your house as a long-term investment strategy, evaluate the return-on-investment (ROI) as you would any other investment. For example, let’s say you have a $50,000 equity stake in a house worth $200,000, and a monthly payment, including property taxes, of $1100.00. If you can rent the house for $1450 per month, that’s a monthly profit of $350 per month, or $4,200 for the first year. Let’s also assume the house appreciates in value by 2% during the first year, for an additional $4,000 in profit, bringing your total profit to $8,200. Now add the the $13,200 you made in mortgage payments for the year to your original $50,000 investment, for a total of $63, 200. When you divide $8,200 by $63,200, you see that the ROI based on your gross profit is about 13%. Even factoring in budget for maintenance and vacancies, you’re likely looking at a return 8-10% per year. Not bad.
Depending on your situation, renting out your house can be a rock-solid financial investment. It can also, however, tie up a great deal of your cash, while requiring significant management overhead relative to other investments. Most successful rental property owners are in the business for the long haul. While it’s uncertain whether house prices will increase over three-to-five years, they will almost certainly increase substantially over the next ten-to-twenty years.
If your rental property is profitable enough to allow you to hire a property management company, which generally costs between 8-15% of your monthly rent (or $116 to $217 per month for the above example), you’re all set. Property management companies can handle all aspects of your rental management—from marketing your property and screening tenants, to managing the ongoing day-to-day responsibilities, such as collecting rent and handling maintenance. If you’re not able/unwilling to hire a rental management company, be prepared to spend 10-15 hours a month taking care of various chores related to your rental property. Even if you have dream tenants, you’ll still have basic home maintenance to take care of, as well as all the bookkeeping that goes along with running your income property business.
If you’re living in an area that was hit hard by the recent economic downturn, and where it seems like the road to recovery is a long one, you may not be well-served by hanging onto your real estate. On the flip-side, there are many markets where the near future looks hopeful, if not downright rosy.
In conclusion, the decision to rent your house out is a personal one that depends on many individual factors. In order to accurately assess the likely profitability of the venture, your best bet is to contact a local real estate agent and a local property manager. Each of these professionals will be able to give you housing market insight that will give you a much clearer picture of whether or not renting your house is right for you.
Category: Renting My House FAQ