Whether you’re upgrading, downsizing or heading to a new city, if the time has come to move on from the home you currently own, you’ll need to decide whether to sell your home or rent it out to tenants. If you’re thinking about renting out your house, ask yourself these five questions to determine if it’s the best choice for your financial future.
1. Am I Willing and Able to Be a Landlord?
It’s no secret that being a landlord comes with a lot of added responsibility, even if you’re managing just one property. Sure, you may luck out and have low-maintenance tenants — but even that requires you to be diligent, organized and ready to take action whenever they call. You’re also on the hook to make sure any necessary repairs are made in a timely manner. And, of course, you’re in charge of collecting the rent when it’s due.
Then there’s the legal side of the equation. If you don’t fulfill your landlord duties, you may find yourself in the middle of a lawsuit — and that can become costly. It's important to talk with a real estate attorney and accountant to ensure you are abiding by tax laws, zoning ordinances and local property rules for renting out your home.
If being a landlord sounds like a daunting undertaking, you can hire a professional property management company to keep tabs on your house and its tenants. The downside, however, is that it comes with a fee, which takes away from the extra cash that could be in your pocket.
2. Do I Have Time to Manage a Rental?
If you opt to forgo hiring a property management company, be sure to understand the time commitment involved with managing a rental property.
You'll need to screen tenants, stay on top of repairs and maintenance, write leases, collect rent and secure additional homeowner's insurance. Depending on how handy you are, you’ll need to compile a roster of go-to plumbers, electricians, and carpenters that you can call on when repairs are needed.
3. Will Renting Out My House Generate a Monthly Profit?
Speaking of extra cash, it’s important to crunch the numbers before renting out your house. First, take a look at comparable rental properties in your area to get an idea of your home’s value and see what the average monthly rent is. Then calculate the total monthly expenses for the house that you’re responsible for paying. This includes the monthly mortgage payment, insurance, property taxes, utilities, repairs, homeowners’ association fees, etc. And don’t overlook upfront costs like bringing everything up to code and marketing the home—you’ll likely need to invest in professional photography to attract potential tenants. If the expenses turn out to be more than you can charge in rent, think twice about renting out your home.
4. Do I Need Cash for a Down Payment on a New House?
Experts say that your down payment should be 20% of the total cost of the house. Putting down less than 20% results in a higher monthly mortgage payment, and you’ll be stuck paying for private mortgage insurance as well.
For instance, let’s say you’re looking to buy a house that costs $200,000. You should shoot for a down payment of $40,000. If you don’t have that much saved up, consider selling your home (if you can make a profit) instead of renting it out.
5. Will My Return on Investment Be Too Good to Pass Up?
Unlike a new car — which depreciates in value as soon as you drive it off the dealership’s lot — houses often go up in value over time. Sure, there are a number of factors that play into a potential increase in value, which is why it’s important to do your due diligence on how much you might get if you sold your house now rather than renting it out. But depending on your goals, the amount of money you make renting out your home could be more beneficial to you and provide extra income for years.
Develop a Solid Plan
These questions are a great place to start if you’re thinking about renting out your house. As you think about whether or not you’re ready to rent your home, don’t forget to secure the proper coverage. Talk with your Farm Bureau agent to help ensure you have the proper coverage in place before you rent your home.