Sometimes it makes financial sense to hang on to your old home when you buy another. Of course, you’ll want to run the numbers in advance. And if the numbers lean in your favor, you may consider renting your home.
In fact, renting your home to someone else may be the perfect way to keep ownership while you home gains value. And, as you’ve no doubt read in the media, rents are at record highs.
Here are a few financial aspect to think about before making the leap to becoming a landlord and renting your home.
Can You Afford It?
If you’re not savvy with the number, consult with your accountant. Once it’s decided you are financially ready… it’s time to visit a lender. A loan officer can give you a definitive answer on how much you can afford to spend on your next home.
Although it’s not likely in the current 2022 housing market, take into account there may be periods of time when the rental sits vacant. I like to allocate 3% as a vacancy factor. Consider as well you may end up with tenants who either don’t pay on time or just quit paying. Renting your home and land-lording is a business. That means rent collection, understanding landlord-tenant rights and potential eviction rules.
If your tenant doesn’t pay or you evict them, you’ll have two mortgage payments on your hands. Can you afford that?
Again, run the figures by your accountant or be certain about your financial strength before making a decision.
Look Into The Costs of Renting Your Home
The easiest course of action for the first-time landlord is to hire a property manager to take care of the business and renting your home. And it may be the most expensive aspect of renting out the home. I’ve never hired a property management company as I spent years learning the business of property ownership.
Property manager fees vary and often depend on what you want them to do. “As a baseline, expect to pay a typical residential property management firm between 8 – 12% of the monthly rent collected, plus expenses,” claim the pros at AllPropertyManagement.com.
Then, there may be an increase in your homeowner insurance, which will raise your total operating expenses.
“… renting your home changes you owner status from primary occupant to investor,” warns Margarette Burnette at Bankrate.com.
“As a result, it costs more money to insure the home with a special landlord insurance policy. According to the Insurance Information Institute, the premium is about 25 percent more than with typical homeowners insurance,” she concludes.
Maintaining your home for tenants may be a bit more expensive than it was when you lived in the home. While we often overlook things in our own homes, tenants expect and typically have a right to certain repairs. But the beauty of this is your tenant’s rent payment will most often cover your annual expenses.
Landlords receive from their tenants, on average, six repair-related calls per year, according to the experts at MoneyGeek.com.
“… a lot of problems that need to be addressed are the same 10 repairs, over and over again,” according to Brandon Turner, real estate investor and podcaster. He goes on to list, at BiggerPockets.com, the most common repairs that landlords are called on to make:
- Major appliance breakdown
- Water leaks
- Faucets dripping
- Lack of hot water
- Insects and rodents
- Inoperable garbage disposal
- Leaky, clogged or running toilet
- Furnace in need of repair
- Inoperable smoke detectors
- HVAC problems
- Electrical problems
- Drywall repair
Finally, consider the legal fees you will incur as a landlord. These may run the gamut, including fees for help with constructing rental applications and leases, deal with evictions and other aspects of owning a rental. All of these costs can add up quickly.
But as I did when I began buying rental property back in the late ’90’s, get involved with your local apartment association. You may just be renting your home, and not own an apartment building, but the advice, paperwork and access to great resources is invaluable. After all, once you are a landlord and see that it’s not so difficult as many make it to be… you’ll buy more.
For the financially sound, renting your home when you purchase another can be a brilliant financial strategy. Pursue professional legal and financial advice to ensure you don’t lose money, ever.
