Homeowners often need to move with the concern they’ll take a loss on their current home. Whether it’s a job change or a growing family, the need to move sometimes is a must. If you bought your home at peak prices right before the housing crisis, you might still be waiting to break even nearly a decade later. When faced with a loss or only a small potential profit from selling, you might wonder if you should rent instead of sell.
Renting can make financial sense if conditions are right, but understand that becoming a landlord is not a small endeavor. You’ll want to research what the rental market is for your area. What can you charge? Will the rental income cover all of your expenses? Who will handle maintenance issues? Will you allow pets? How will rent be collected? There are long-term responsibilities you’ll add to your plate. Consider the following points before deciding whether to rent or sell.
Will Rent Cover All Your Monthly Expenses?
The first and obvious consideration is whether the rent you can charge covers your monthly mortgage, insurance, and estimated maintenance costs. If you’re delaying the sale of your house to make more money off of it, then you want to be sure there’s room for profit in the rent your area commands. Realize that just one major repair could eat up several months or more of rental profits. Some homeowners are willing to take a small monthly loss if they believe their home’s value will go up enough within a few years to offset those losses when they sell. Obviously this is a gamble, but some people do it.
Who Will Do the Repairs?
You might have been a renter yourself at some point in your life. Remember what you did when the plumbing failed or the heat was on the fritz? You called maintenance. As a landlord, you will now be the person who gets called first. It’s likely you’ll hire someone to do most repairs, so you’ll need to establish relationships with regular, reliable people to handle standard maintenance issues that come up. If you’ve moved out of town, you’ll need to handle these issues remotely. You can choose to hire a maintenance company who handles all of your tenant and repair needs, but expect to pay 10 to 15 percent of your rental income on their services.
You’ll also want to decide how often you do a physical inspection of your property. Don’t expect a renter to care for a home the same way you do. Scuffed walls, broken shelving, stained carpet, or worse might be some of the things you’ll notice after a tenant has occupied your home for any length of time.
What Happens If the Tenant Doesn’t Pay Rent?
No matter how carefully you screen people, there is always a chance that a tenant isn’t able to pay rent at some point. Tenants have protected rights, so don’t expect to move them out quickly. You’ll need to know eviction laws in your area and probably an eviction attorney as well. On a related note, what if a tenant needs some extra time to pay the rent? This is frequently heard after the holidays. You need to be prepared for how you handle such a situation.
What Expenses Are Deductible If I Rent My Home?
It’s important to note that all the income you acquire from rent is taxable, although there’s a good chance you’ll incur enough deductible expenses to offset that tax. Property taxes, repairs, and community fees are all tax deductible when you rent out your home. You can also calculate the depreciation of rental property and deduct it from your taxes as well.
Do I Pay Capital Gains Taxes When I Sell a Home Used as Rental Property?
You can pay up to 20 percent on the profit of the sale of your rental home unless you’ve lived in it for two of the previous five years. Owners who have lived in their homes for two of the previous five years can exempt up to $250,000 ($500,000 for couples filing jointly) from that tax. That means if you’ve decided to rent out your home, you may want to consider selling it by the end of three years so that you can keep that tax break.
The Bottom Line
Owning rental property can be a great investment under the right circumstances. The cautions mentioned in this article are intended to serve people who aren’t sure they’re up for the challenge of landlord responsibilities and the decision making needed for a second property. The decision to rent or sell needs to be made with one’s own financial circumstances and personal interests in mind. If you’re prepared to be a true investor with long-term responsibilities and ongoing expenses, then renting it may be a great option for you. If you simply intend to save yourself from a small financial loss or want to attempt making a bit more money off of your home, then don’t underestimate the new responsibilities and time you’ll be spending as a landlord. Selling it might make more sense for the long-term.