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What to do when you have to move?
What do you do if your professional, educational or personal life changes, and you have to change your address may as well? If you own your residence, should you maybe think about selling your house or rent it out?
Consider the following:
- Will your house provide income or cost you money as a rental?
- What are the tax consequences of selling?
- How are property values trending in your neighborhood?
A lot of the reasons for selling or keeping your house revolve around finances. You should run the numbers to see if you’re comfortable with the math, or turn the decision over to a neutral accounting or financial professional
It’s about the money.
This “sell your house or rent it out” dilemma rarely comes with a long list of pros in one column and a similar number of cons in the other. Of course, there will be secondary factors to take into account. But, bottom line, your focus will be on … well, the bottom line.
If you have a horror of math, don’t panic. We’re not talking advanced calculus or algebra here. Providing you (or your calculator or spreadsheet application) can add up, subtract, multiply and divide simple sums, you’ll likely be fine.
Be like a zombie — pick brains
You’ll have to make realistic assumptions about trends in the property market in your area. If it’s hot, you stand to get a good rent and have short periods when the home’s empty. And you might expect to watch the property appreciate in value quickly. If it’s cool or cooling, you may have the opposite experiences.
You’ll also need to know about the tax implications of renting out. You may be able to find what you need on the IRS website and online real estate sources. But you might feel more confident if you consult a tax professional and chat with a knowledgeable, local real estate agent and some landlords who already own rental property nearby.
Those simple sums
What you can’t do is deduct your mortgage payments from your rental income and think you’ve identified your profit. The following is a long (but not necessarily comprehensive) list of other expenses you may or may not have to deduct:
- Mortgage payments
- Vacancy rate — tenants come and go and periods when the property is empty (and generating zero income) are close to inevitable. At a minimum, expect a 5 percent vacancy rate. But mortgage lenders hit you with a 25 percent vacancy factor when determining potential property income
- Property taxes
- Home insurance — rates for rental properties are usually higher (often 15-to-20 percent higher) than those for owner-occupied homes. So get a quote
- Garbage collection
- Homeowners’ association fees — where payable
- Preventative maintenance — clearing the gutters, getting the HVAC and furnace serviced, periodic painting … Occasionally, you may be faced with a big bill for a whole new roof, replacement windows or something similarly expensive
- Repairs — When a pipe bursts, the hot water fails or the roof springs a leak. Some of those may involve emergency call-out fees
- Yard work and lawn care
- Snow removal
Depending on your lease, you may be able to make your tenant responsible for some of those. However, expect that to be reflected in the rent you can charge.
ROI is king
If you’ve owned your home a long time, selling it could release a big chunk of money. Ask yourself if you could earn more investing it elsewhere (maybe in the stock market or a business) than you could renting out your home and letting its value increase.
In other words, you should calculate the different return on investment (ROI) each opportunity potentially provides.
Of course, there are risks whatever you do. You could pick the wrong stocks, the whole market could collapse or your business plan flawed. And property prices and rents can go down as well as up.
Risk and reward are closely associated in all investments. All you can do is think through your choices and make the best judgment call you can at the time.
How far from your rental home you’ll be living can have a big effect on the viability of being a landlord. It’s one thing if you’re still within a reasonable drive of the property. You can pop back periodically to:
- Keep an eye on the place and make sure it’s being treated well
- Ensure your tenant isn’t causing a nuisance or even dealing drugs out of the property
- Find and screen a new tenant when an existing one gives notice
- Manage the paperwork and processes associated with your lease/rental agreement — including, perhaps, evictions
- Chase late rental payments
- Keep down costs by doing yard work and routine maintenance yourself
- Be the single point of contact for tenants — And call in plumbers, electricians and contractors, when required
If you’re living hundreds or thousands of miles from the property, you’ll have to get other people to fulfill all those roles. Typically, that’s a property manager. And those can be expensive.
Your personality type
Not everyone can delegate such responsibilities well. You can end up feeling very helpless when you’re far from a property you own and are entirely in other people’s hands. If you’re going to lose sleep worrying about what’s happening to your old home, you might prefer to offload responsibility now by selling it.
Having the right personality traits to be a landlord is even more important if you live nearby and want to be a hands-on owner. Ask yourself whether you will:
- Stand up to troublesome and perhaps intimidating tenants who are regularly late with the rent or are damaging the home or are attracting nuisance complaints from neighbors
- Be too empathetic to rid yourself of tenants (perhaps with young children or sick and elderly parents) with spiraling financial problems
- Tire of maintaining two homes and yards: your new one and the rental property
- Remain happy to take calls at 2:00 a.m., complaining about a burst pipe or blown fuse/trip switch
- Be ready to devote the time and energy necessary to find new tenants and screen them effectively
- Enjoy managing the legal and financial paperwork associated with being a landlord
There were 43 million rental units in the U.S. during 2017. So a lot of people are very happy being landlords.
You just need to be sure you’ll be one of them.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Seattle Mortgage Brokers, LLC NMLS: LO# 305371 MB# 761615*