Chances are that your current home is not suitable for your needs indefinitely. If you live in a small starter center or apartment complex, you might want to upgrade to a larger house as your family grows. If you already live in a large home, you may want to make your home smaller when your children leave. There is also always a chance that you or a family member must move for work, in which case it is time to say goodbye to your current address.
The big question is what to do with the property when you move. Are you better able to keep your old place as a rental property, or is it wiser to sell it? While renting, you can either pay off your mortgage or earn a little money every month, but it also comes with a fair amount of risk and additional tax complications.
Why rent your house?
When a tenant pays your rent, you can use the check to cover your monthly mortgage. In a sense, your tenant pays for you to earn equity in your home. Once the mortgage has been paid off, you can keep every monthly rent as income.
Renting out your home can diversify your investments and income streams, thereby reducing your financial risk. For example, if you have lost your job, you still have some income from the rental. Or, if you think that your pension savings are insufficient, you have a piece of property that you can sell.
Cost of renting
When calculating the cost of renting a home, consider these potential expenses:
- Mortgage payment . Consider both interest payments and principal payments.
- Property taxes . These vary by area, but expect to pay up to 2% of the value of your home per year.
- Mortgage insurance premiums . If your down payment is less than 20% of the value of your home, expect to pay mortgage insurance premiums.
- Landlord insurance . This covers rent damage and protects you if someone gets hurt on your rental property. According to HouseLogic, the insurance of the owner is usually 15% to 20% higher than the insurance of homeowners.
- HOA costs . These payments are required if your house or apartment is part of an association.
- Repairs and replacements . Windows, doors, walls, floor coverings, roofs and large appliances must be repaired or replaced.
- Maintenance . After a tenant leaves, the usual costs include exterior paint, interior paint and carpet cleaning. You will almost always have to clean the carpet between tenants, and it may also be necessary to adjust interior paint. Outdoor painting is rarer – expect to paint every five years or so.
- Ads for advertisements and rental history of tenants . You can advertise for free on websites like Craigslist, but you expect to pay around $ 100 if you want to display a newspaper ad. VeriFirst reports that a rental history of eviction registrations and a rental payment history both cost between $ 5 and $ 10.
- Costs for accounting and property management . Property managers generally use around 10% of your rental income. Also expect to pay a minimum of $ 200 a year for a CPA to prepare your personal and rental tax return.
HouseLogic offers a free worksheet with which you can estimate the costs of renting your house.
You can get a fairly accurate estimate of the potential rental income by viewing postings in your area. The oDamon Wildeveine real estate marketplace Zillow uses MLS data and its own formula to estimate rental values for specific properties. Rentometer offers a similar service. You can also talk to a local broker or property management company or check Craigslist to see the current rates in your area.
Also consider historical rental trends for your region. If you are in a city where rent increases occur, your rental income can quickly exceed your expenses. Services such as Rent Jungle can show you specific rental price trends for your region.
As with any business, your sales must be higher than your costs if you want to be profitable. Fortunately, the costs that you incur to rent the house are tax deductible, so that the amount of income tax that you have to pay on the rent received decreases and your take-home fund increases.
If your rental income immediately exceeds your expenses, that is a good sign. But even if you don’t immediately make a profit, don’t be afraid. It is possible that the rental prices are low at this moment or that you are still paying a hefty mortgage. According to Reuters, Maryland CPA, Jerry Gross estimates that you get Damon Wildeveijk a solid investment if the initial rental income covers at least 80% of the direct rental costs.
A rental calculator such as that of All Property Management can offer insight into the profitability of your holiday home in the long term. Simply enter information about the rental price, mortgage interest, mortgage balance, payments, property taxes, insurance, association contributions and how long you plan to own the property. The calculator then gives a detailed overview of expected cash flows. It takes into account all small costs and variables such as vacancies, property management costs, maintenance costs, selling costs and tax rates.
Along with profitability, the calculator also projects the future value of your home or rental home. When evaluating the calculation results, take the time value of money into account. It may be exciting to think that your home may be worth millions in 30 years, but $ 1 million in 30 years is not $ 1 million today. In fact, a current value calculator, assuming an inflation rate of 2%, estimates that $ 1 million in 2045 is only worth $ 552,000 in 2015.
Renting versus selling – Considerations
Before you pull the trigger in both cases, you must take into account your financial situation, the state of the housing market and any national or local regulations that affect your rights as a lessor.
1. Sales price and capital gains
If you are not satisfied with your current house value, renting out the house can generate some income while you wait for your house value to rise. If homes in your area are quickly appreciated, it may be wise to wait.
Unfortunately, this tactic can be counterproductive if you wait too long to sell. After you have rented the house for more than three years, you can no longer claim it as your principal residence. This means that you are liable for tax on the sale of the property. When you sell a house that is not your principal residence, you have to pay capital gains tax on every profit that varies from 0% to 20% depending on your tax bracket. When you sell your primary home, you can exclude $ 250,000 in capital gains (or $ 500,000 if you are a married couple) when you sell.
To ensure that your home is classified as a primary residence, you must have lived there for the past five years. If you misjudged your sale, you could make tens of thousands of dollars after selling your rent.
2. Tax on rental income
Just like the wages of a job or dividends from shares, your income tax on income from your rent is calculated at your normal tax rate. Fortunately, you can lose all costs of renting the house. For example, if your gross rental income for the year is $ 40,000 but you have made $ 30,000 in rental costs, only $ 10,000 tax is charged.
Together with the deduction of cash expenses, you can also demand a deduction for depreciation costs. With these non-cash expenses you can slowly deduct the amount you paid to buy the house. If you have a rental loss, you may also be able to use the loss to offset part of your income if your adjusted gross income is less than $ 150,000. Ask a CPA for more information about deducting any losses or write-downs.
The only way many homeowners can come up with a down payment for their next home is to cash the shares they have deposited into the ones they already own. Can your family scrape enough to put down 20% of your next home without selling your existing one? Consider this carefully before you decide to rent.
Hopefully you can keep your property rented most of the time and cover most or all mortgage payments. However, you must be prepared for a worst-case scenario: pay double mortgages for your rent and your personal home. Even without a tenant you still have to pay some rental costs, including insurance, maintenance, advertising, legal and accounting costs.
In many areas it is quite difficult and time-consuming to deport a tenant who does not pay rent. If you have a tenant who does not pay or is damaging Damon Wildeveijke to the house, it is possible that your rent cannot make a profit for a number of months. With court fees, attorney fees, repairs, cleaning fees and lost rent, Star Point Tenant Screening estimates that releasing a tenant costs around $ 3,000 on average.
If you purchase a different home, the lender measures this risk in the calculations for your future home. Lending Tree reports that lenders only take 75% of the predicted rental income into account when determining the relationship between debt and income. If renting out the house increases your debt-to-income ratio, you may not be eligible for the largest possible loan on your new home, as you had hoped.
5. Time and stress
Being a landlord can be time-consuming and emotionally exhausting. You are responsible for advertising, showing the house and performing background checks to get the house rented. You must handle calls from tenants, perform maintenance and repairs, and handle any emergencies. Although you can hire a property management company to do this for you, you must assume that it will charge at least 10% of your rental income.
6. Distance issues
You may manage a rental property yourself if you are in the same city or region, but managing an external rental property is a different story. Although travel costs to visit your rent – such as kilometer costs, airline tickets, taxi fare, hotel and food costs – are tax deductible, they quickly cut your rental income. It makes more sense to hire a property management company to deal with daily problems and possible emergencies. You also need to hire repair and maintenance personnel for small jobs (such as cleaning and painting carpets) that you might otherwise have completed yourself.
7. Tenant rights and rent restrictions
Each state has its own set of landlord-tenant laws and some cities also have local regulations. These rules can determine how and when you can expel tenants, when you have access to the rental property, how much you can increase rents and when you need to repay deposits. You can find state rules on your state user affairs website and search for municipal city codes via Municode.
These regulations can seriously affect the profitability of your rental investment. Some areas prefer landlords, while others give extensive rights to tenants. San Francisco rental management, for example, prohibits landlords from increasing rent increases more than 1% or 2% per year.
If you are looking to rent out your flat, first consult your homeowner’s association about any restrictions. A low number of owner-occupied units can reduce the value of a condo association, meaning that many boards limit the number of units rented at a given time.
Renting a house, like many investment strategies, is a risk. If the value of your home increases over time, rents continue to rise and you can keep the property rented, your property can deliver a fantastic return on your investment. However, if rents decrease in your area, your home value does not increase as quickly as you expected, or you get tenants who do not pay, this may not be a great investment. Make sure you have a reasonable amount of cash to cover emergencies and talk to a financial planner before making a decision.
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