Is it better to rent or sell?
There is a strong probability that at some point in the future, you may come to the conclusion that the home you are currently living in is no longer suitable for your needs. If your family is growing and you now live in a starter house or a condominium, you should give some thought to the possibility of moving into a home that is larger at some point in the not too distant future. If you are currently living in a large dwelling and your children have grown up and moved out, you may want to give some thought to moving into a smaller home in the future. In addition, there is always the possibility that you or a member of your family will be obliged to relocate for employment, and this is something that you should prepare for. In the event that this transpires, it is time to say farewell to your existing address and begin the search for a new one.
The most crucial thing to ask yourself while moving is what you will do with the property when you move. Should you keep using the home you formerly lived in as a rental property, or should you consider selling it instead if it would be more financially beneficial to do so? Although renting gives you with the option to either pay off your mortgage or produce a little money each month, it also comes with a good degree of risk and added tax concerns, so you should carefully consider whether or not you want to take advantage of this opportunity. If you want to rent out your house, you need to be informed of both of these possible outcomes before you make the decision.
When you purchased your home, how long did you anticipate staying there before selling it? After five years, owning starts to make financial sense, according to many real estate brokers. But the "golden rule" of real estate, which states that property values can only increase, was invalidated by the housing bubble, which was a period of rising prices that stopped in 2006 and was then followed by a sharp collapse (more than 50 percent in certain areas) and a recession in 2007-2008. There are a lot of homeowners who bought their houses in the last ten years who are still underwater on their mortgages or have very little equity in their homes.
You have the choice to continue in the same location for the amount of time that is required for the market in your area to recover from the effects of the downturn. What happens, though, if you are presented with an opportunity in a new employment or if other big life circumstances force you to relocate, such as getting married or having more children? It is possible that you have been laid off from your job or that your salary has been reduced, and as a consequence, you are unable to continue making mortgage payments on your home.
Is it preferable to sell your property at a loss or to rent it out until the market recovers when you find yourself in a situation like this, where you need or want to move but the market isn't on your side?
Why Do You Want to Rent Your Home?
If you like to do so, you are free to apply a tenant's rent check towards the monthly payment of your mortgage. This option is available to you. By contributing to the monthly payments, your tenant is assisting you in the process of building equity in your house. Any rent that is collected after the mortgage has been paid off is eligible to be counted as income. This includes any rent that is collected before the mortgage was paid off.
Your investments and sources of income can be diversified through renting out your property, which enables you to lessen the risk associated with your finances. If you were to lose your work, for instance, you would still have some income coming in from the rental property. You might also have a piece of real estate that you could sell in the event that your retirement funds do not prove to be sufficient.
Rental Fees and Expenses
Consider the following potential costs when you are determining how much it will cost to rent a house:
- Mortgage Payment. Think about the principal payments in addition to the interest payments.
- Taxes on Real Estate Expect to pay up to two percent of your home's worth each year, however, the exact amount will vary from region to region.
- The monthly payments for mortgage insurance. Expect to pay mortgage insurance payments if your down payment is less than twenty percent of the value of the home you intend to purchase.
- Landlord Insurance. This protects you in the event that someone is hurt on your rental property and covers any damages caused by tenants.
- HOA Fees. If your home or condo is a member of a community association, you are obligated to make these contributions.
- Alterations, as well as Substitutions. It is necessary to either repair or replace the key home appliances, as well as the windows, doors, walls, and carpeting.
- Maintenance. After a tenant vacates a unit, usual charges include cleaning the carpet, painting the interior and exterior of the unit, and repainting. When switching renters, you will almost always be required to clean the carpet, and you may also be required to touch up the inside paint. The painting of the exterior of the house should be done less frequently, approximately once every five years.
- Advertising, as well as background checks on prospective tenants' rental histories. Free advertising is available on websites such as Craigslist; however, if you want to place an ad in a newspaper, you should plan to spend approximately one hundred dollars. According to VeriFirst, the price range for a rental history that includes eviction records and rental payment history is between $5 and $10 respectively.
- Fees associated with accounting and property management. Property management companies will normally charge a fee equal to approximately 10 percent of your annual rental income. You should also budget at least $200 per year to engage a certified public accountant to prepare both your personal and rental tax returns.
The Profitability of Renting
By looking at the advertisements that are posted in your community, you should be able to generate a rent revenue estimate that is rather realistic. Zillow, an online marketplace for real estate, bases its estimates of the rent prices of specific homes on data from the MLS as well as a formula of its own creation. Rentometer provides a comparable service. You can also search Craigslist or talk to a local real estate agent or property management firm to find out the going fee in your region, or you can look it up online.
You should also take into account the historical trends of rental pricing and demand in the region where you are looking for a property. For instance, if you live in a city that is seeing increases in rental prices, the income you receive from your rental property may quickly surpass the costs of living there. Services such as Rent Jungle may analyse the patterns in rental prices for your neighbourhood and provide you with particular data pertaining to those trends.
At every point in time, the sum of your company's revenues must be greater than the sum of its expenses for it to be considered profitable. You can minimise the amount of income tax that you have to pay on the rents that you receive, which will result in an increase in the amount of cash that you take home on a monthly basis. This is possible because the expenses that you incur to rent the home are deductible on your taxes.
If the money you make from rent right away is more than the money you spend on the rental business, this is a good sign for the future of your rental business. On the other hand, you shouldn't worry too much about the fact that you aren't turning a profit straight immediately, even if this is the case. It's possible that rental rates are low right now, or that you're still making sizable payments on your mortgage. Both of these things could be true.
Calculating the Profitability
By utilising a rental calculator like the one that is provided by All Property Management, you will have the chance to obtain some insight into the long-term profitability of your rental property. Simply enter the information that is requested, which may include the following details: the price of the rent, the interest rates on the mortgage, the balance on the mortgage, the payments, the property taxes, the insurance, and the association fees, as well as the estimated length of time that you will own the property. After that, the calculator presents a detailed chart of the expected cash flows in the subsequent steps. It takes into account all of the seemingly trivial costs and factors, including things like vacancy rates, fees for property management, expenditures related with upkeep, selling prices, and tax rates.
The calculator forecasts not only the profitability of your business but also the future worth of your house or apartment as a rental. Be mindful of the changing worth of money over time as you analyze the results of the calculator. It's possible that the thought of your home being worth millions in 30 years will excite you, but keep in mind that $1 million in 30 years won't be the same as $1 million today. Using an inflation rate of 2 percent as an example, a present value calculator arrives at the conclusion that one million dollars in the year 2045 will be equivalent to only 552,000 dollars in the year 2015.
Are you okay with being a landlord?
The Benefits and Drawbacks of Selling a Home vs Renting One
When you own a rental property, you typically feel a lot of worries because you don't have much influence over what your tenants do in your home. You might find wonderful tenants that are prompt with their rent payments and respect the house they are renting. You also run the risk of getting renters who are chronically late with their rent payments and who are generally a nuisance.
Even if your tenants are good people, you will still have to deal with the burden of having to answer their phone calls, keep up with upkeep, and other things like that.
You always have the option to hire a property manager, who, if they are competent, may make your life a lot easier and more comfortable. However, there is a price to pay (usually about 10 percent of your rental income).
Even if you find the perfect tenants for your property, you should still prepare yourself to repair the carpeting and even undertake some painting when they vacate the premises. It is extremely unlikely that a tenant will keep up with the upkeep of your property in the same manner that you would.v
Are you coming back?
When moving to a new location, renting might provide you a sense of security since you know you will always have a place to go back to. Because the expenditures associated with selling a house and then purchasing another home are incurred, it is possible that renting out your current home and moving back in when you return is the more cost-effective option.
People who are unsure of the direction their life is heading in will frequently cling to the possession of their possessions for as long as they can. They are able to do this since they are renting, but they will always have the option of selling the property in the future. It's not always about the money when deciding whether to sell or rent a home; sometimes it comes down to where you are in life.
Will there be growth in the market in the next years?
It would appear that certain property markets are almost certain to show signs of improvement during the next few years. If you are in such a market and you believe that there is a strong probability that the value of your home will improve dramatically over the next few years, then renting will allow you to keep it, continue paying the mortgage, and earn a larger profit in the long run.
Perhaps there are some upgrades to your property that you are aware will need to be made in the future but that you do not currently have the money to make? If you think this might be the case, then renting might be a smart choice for you. Renters are not like buyers in the sense that they will be open to having particular upgrades made to the property that they are renting. On the other hand, buyers are known to be more selective than sellers.
Taxes should not be neglected in any way
The benefits and drawbacks of selling versus renting a home If you are in the enviable position of having a strong income flow from your rental property, it is imperative that you not forget about the tax implications! Your rental income, like the income produced by any other asset you own, will be subject to taxation at the same rate as applies to the rest of your income.
Keep in mind, on the other hand, that you are able to deduct all of the costs that are related to renting out your house. For the purpose of illustration, assume that your annual gross rental revenue is $45,000, but that your annual rental expenses total $30,000; in this case, you will only be taxed on $15,000 of your income.
You are eligible to make a claim for a deduction for depreciation on the property, in addition to claiming deductions for the property's regular expenses. In addition, if you suffer a loss from renting out a property, you may be able to use that loss to offset some of your income if your adjusted gross income is less than $150 000. This is only possible if your total income is less than this amount.
If you want further information on how to deduct any losses or depreciation, you should always talk to a tax specialist.
Have you ever considered purchasing a house that you could rent out?
Have you always dreamed of being the owner of a home that you could rent out? If this describes you in any way, renting out your own house can be an excellent method to dip your toe into the real estate market. Perhaps you will find that you really enjoy doing it. In that case, you might feel secure enough to invest in additional real estate in the years to come.
On the other hand, you might come to the conclusion that owning rental property is not something you enjoy at all. Finding out with your own home already gives you the opportunity for trial and error.
Rent vs. Sell: Some Things to Consider
Before making a decision, it is important to take into account your present financial situation, the current state of the housing market, and any state or municipal legislation that may have an impact on your rights as a landlord.
Capital Gains and Sales Price
If the current value of your home does not meet your expectations, renting it out may be an option for you to generate income in the interim while you wait for the value of your home to rise. If the price of homes in your neighbourhood is rising at a rapid pace, it could be in your best interest to put off making a purchase for a little while longer.
If you wait too long to sell, you run the risk of having your strategy backfire on you. If you rent out the property for more than three years, you can no longer consider the home to be your principal residence for tax purposes. This indicates that you are responsible for paying tax on the profit made from the sale of the residence. When you sell a home that is not your primary residence, you are required to pay capital gains taxes on any profit you make. The rate of these taxes can range anywhere from 0% to 20%, depending on the tax bracket you fall into. When you sell your primary house, however, you may be eligible to exclude up to $250,000 in capital gains from your taxable income (or up to $500,000 if you and your spouse file jointly).
It is essential that you have lived in the home in question for a minimum of two out of the preceding five years for it to be regarded as your primary residence. If you do not meet this requirement, your home will not be regarded as your primary residence. If you do not time the sale of your rental property right, you could end up having to pay capital gains taxes up to tens of thousands of dollars after you have sold the property.
Rental Income Tax
Your income from your rental property is subject to income tax at the same rate as applies to your other sources of income, such as your salary from a job or dividends from stock. This means that any income that you earn from your rental property is taxable.
In addition to the cash expenses that you have already deducted, you may submit a claim for a deduction for the depreciation charges that you have incurred. Due to the fact that this expense does not include cash, you are able to deduct the whole amount that you have spent for the home over the course of time. In addition, if you have a loss from renting out a property and your adjusted gross income is less than $150,000, you may be eligible to deduct some of that loss from your income by using it as a tax write-off. This is only possible if your adjusted gross income is less than the threshold of $150 000. Talk to a certified public accountant (CPA) about the particulars of deducting any losses or depreciation that may occur in your business.
Equity
The only method for many current homeowners to acquire the funds necessary for a down payment on their next property is to take a loan against the equity they have built up in their current residence. Is it possible for your family to save up enough money for a 20% down payment on your future home without having to sell the one you now own? Before you make the decision to rent, give this some serious thought.
Expenses
It is my earnest hope that you will be able to rent out the majority of the time and, as a result, be able to meet the majority of all of the mortgage payments. I wish you the best of luck in this endeavour. However, you should make sure that you are prepared for the worst-case scenario, which would include paying for two different mortgages (one for your personal dwelling and one for your rental property). Even in the unlikely case that you do not have a renter, you will still be responsible for paying a portion of the monthly costs. These costs include premiums for insurance and maintenance, advertising and legal representation, as well as accounting services.
In many parts of the country, the process of evicting a renter who is behind on their rent can be difficult and time consuming. Evicting a tenant who is behind on their rent can be a challenge. If you have a renter who won't pay or who causes significant damage to the home, it's likely that your rental property won't produce a profit for several months. This could be the case if you have trouble evicting them. This could take place if you have a renter who refuses to pay rent or who causes considerable damage to the property they are renting. The costs associated with evicting a tenant are estimated to total somewhere in the neighbourhood of $3,000 on average, according to figures provided by Star Point Tenant Screening. These costs consist of things like court fees, attorney fees, repair charges, cleaning expenses, and rent that will not be received.
This risk will be taken into consideration by the lender for your current property when determining the interest rate that will be charged to you for a mortgage on your new house. According to the findings of a study that was carried out by Lending Tree, financial institutions only take into consideration 75% of the anticipated earnings from rental properties when determining debt-to-income ratios. If the income from renting out the property causes your ratio of debt to income to rise, you may not be qualified for a loan on your new house that is as large as you had hoped for. This is because lenders look at a borrower's entire financial picture when determining a loan amount.
Time and Stress
It is possible that being a landlord is a difficult occupation, both in terms of the amount of time required and the emotional energy required. It is up to you to perform tenant screenings, advertise the house, and show it to those who might be interested in renting it so that you can get it rented. You are the one who is responsible for answering calls from tenants, maintaining and repairing the property, and providing a solution to any unforeseen problems that may occur. Even though you have the option of employing a property management company to handle this for you, you should still plan on paying them a fee equal to at least ten percent of the total income generated from your rentals.
Distance Issues
If you reside in the same city or county as the rental property, you may be able to manage it on your own; however, if you don't live nearby, managing the property on your own will be a lot more difficult task. Although travel expenses to visit your rentals, such as mileage charges, plane tickets, taxi fare, hotel and food expenditures, are tax-deductible, they quickly cut into the revenue you generate from renting out your property. Examples of travel expenses include: mileage expenses; plane tickets; taxi fare; hotel expenditures; and food expenditures. Some examples of travel-related costs are as follows: Working with a property management firm to address day-to-day concerns as well as any potential emergencies that may develop is in your best advantage. Working with such a company is in your best interest. In addition, you are compelled to hire employees to undertake repairs and upkeep on your property. Even for relatively easy activities like painting and carpet cleaning, which you might have been able to handle on your own, you are required to hire individuals to assist you with these responsibilities.
Rights of Tenants and Limitations Placed on Renting
In addition to the landlord-tenant rules that are specific to each state, several municipalities also have their own legislation. These laws can dictate how and when you can evict tenants, when you can access the rental property, how much you can increase rents, and when you are required to restore deposits. In addition, these rules can govern when and how much you can increase rents. You can search for municipal city ordinances using Municode, and you can locate state regulations on the website of your state's consumer affairs agency.
Because of these rules, the amount of money that may be made from your rental business may be significantly limited. In some parts of the country, tenants have relatively little protections, whilst landlords hold a strong position in others. For example, rent control in San Francisco prohibits landlords from increasing rent by more than 1% or 2% annually. This applies to both residential and commercial properties.
Whether you are thinking about renting out your condo, you should first check with your homeowner's association to see if there are any limitations regarding rentals that are currently in effect. Many boards of directors decide to limit the number of units that can be rented at any given time in order to protect the value of the condo association. This is due to the possibility that a low percentage of owner-occupied units will have this effect.
Should You Sell Your House or Put It Up for Rent?
You don't have to make the difficult decision of picking between your old girlfriend and a new one as you did when it came to choosing your girlfriends in high school when it comes to real estate. However, after thinking about all of your options, the choice of whether to sell or rent out your property is one that can only be made by you. You have no one else to answer to except yourself.
If you are now trying to decide what action to take, you should think about the five factors that have been discussed in the preceding paragraphs and select the alternative that will be most advantageous for you, your family, and the path that your financial future will take.
The process of renting a house is loaded with the possibility of incurring a loss, much like many other approaches to the management of one's finances. Your property may yield an outstanding return on investment if its value continues to increase over time, rentals continue to go up with time, and you are able to keep the home rented out. On the other side, if rents in your community are going down, the value of your property isn't improving as quickly as you anticipated, or you have renters who don't pay, then it is possible that it is not a suitable investment for you. Before making a decision, you should first check to see that you have an enough amount of cash on hand to cover any unanticipated bills and then talk to a financial advisor about the different choices that are available to you.