You’ve got some equity in your home and the itch to move up to something bigger, so it’s just a matter of time until your house goes on the market, right?
But are you sure that’s the best option? What if you could get that bigger, better house without getting rid of your existing house and make some passive income at the same time?
“When your current home no longer suits you, selling it is a popular option. But in some cases, turning it into a rental home might make more sense,” said House Logic.
Among the “factors to consider:
Your financial situation
Local market conditions for rental homes
Your future housing plans
Your tolerance for being a landlord
State and federal income taxes
Current and projected home prices”
Determining if your financial situation can support hanging onto your home is the first key step. You’ll want to talk to a financial professional to go over your savings, your credit, and your equity in your existing home. If you have the money for a down payment on the new home you want without using the equity in your home – great!
If you don’t need all the equity in your home for your down payment, you might be able to take out a home equity loan or refinance into an investor loan and use the loan proceeds as your down payment, and still make your home a rental,” said House Logic.
Of course, if you go this route, make sure the new house payment on the old house is still low enough that it can be covered by your renter, and then some.
“With mortgage payments to contend with and a tough competition, you may be able to profit $200 to $400 per month on a property,” said Forbes. “That’s $4,800 a year. With volume, you may be able to increase that per-property profit.
Added Invest Four More: “Obviously the more cash flow the better, but awesome cash flowing properties don’t exactly grow on trees. It really is a personal decision on how high of returns are needed to justify spending a lot of cash on a rental property. Some people would be happy with 15 percent, 10 percent or even five percent returns on their cash. Much of this determination will depend on your financial stability. Do you have an emergency fund? Do you have cash reserves for each rental property? Is $100 a month enough or do you need $200 or $500 to build up your cash?”
If your main goal is to hold onto the home as a family legacy or to help pay for retirement, lower monthly cash flow might be OK – as long as you can cover your mortgage and monthly expenses. This might also be true if you are in an area where projected growth over the next several years is expected to positively impact home prices.
Another advantage to renting instead of selling is that you may be able to get out of doing expensive renovations. Chances are renters won’t jump at the chance to live with crumbling floors, peeling walls, or moldy wet areas. But if you were considering expensive updates like a new kitchen to get your house ready to sell, you may be able to put them off and do only what is necessary to make the place clean and livable. ”
Renters, more so than buyers, can be willing to overlook outdated home fixtures because renters know they’re just passing through your home, not owning it,” said House Logic. “If you don’t have the money to invest in improvements and your home’s fixtures scream 1970s (and not in a good, retro chic way), renting may be the better choice.”
If you are considering renting your home, here are a few more things you may need to know or do, courtesy of Bob Vila:
Research your local laws. “For some areas, you may have to have a business license if you want to rent your home.”
Look into equal housing opportunity laws.
Do your research “on what similar houses are renting for, much like you’d look at comparative properties when figuring out an asking price for sales.”
Consider the insurance. “You will pay more for insurance on a home you’re renting out, despite the fact that you’re not insuring the contents, only the structure.”
Perform “due diligence in checking out the person or people you’ll be entrusting your home to.”
Consider “outsourcing some of the rental screening process…to a rental management company. A management company can also be useful once the renter is in place. “Management companies will usually take a portion of each month’s rent in exchange for handling the screening, rent collection, repairs and other day-to-day landlord management aspects.”
Think about a home warranty program. “A home warranty program prevents a huge out-of-pocket expense when it happens.”
Never “do business based on a handshake and a spoken agreement. Getting a good lease is very, very important for both novice and experienced landlords.”
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