Rent It or List It

Rent it or list it secure investments edition

The real estate market has been improving over the last couple months.  With a better sales market, property owners are beginning to weigh the options of should they continue renting their property or list it for sale.  Every property and owner’s situation is unique so there is no one size fits all answer to this question.  The real estate market can be unpredictable and there is no guarantee that either option will go exactly as planned.   We always recommend talking to Tanya or another qualified Realtor® before making a final decision.  Make sure to pick a Realtor® with experience in both rentals and sales when asking for advice.  Here are some tools to help you start making your preliminary decision of whether you should…. rent it or list it.

Questions to Ask Before Putting a Property Up for Rent

1.  Will you ever want to move back to the area or will you have kids going to school in the area soon? 

It may be cheaper to rent your house and move back in when you return or your kids move in when it’s time for college, instead of paying commissions to sell your current property and the purchase of another one when you get back. You also won’t be able to predict how much the prices will increase in the area when you are ready to move back. If you have kids going to school in the area, adding their name to the deed will allow you to claim homestead tax exemption and further save money.

2.  Can you rent your home for enough money to cover the mortgage payment and expenses? 

If you can cover the expenses, renting can be a smart way to help fund your retirement. If you have enough expenses to deduct like mortgage interest, property management fees, maintenance expenses, insurance and property taxes, you may not have income on paper that would be taxed. Your savings will be in the form of equity appreciation. Essentially the rent will be paying your mortgage and building equity; thus reducing your debt. When you’re ready you can sell the house and convert your equity into a lump sum, or continue renting it and collecting income during your retirement. Keep in mind you will want to talk to your accountant so they can explain the capital gains taxes you will pay when you sell.

3. What’s your home’s condition?

A common mistake is thinking that renters won’t care much about worn out flooring or fixtures. The homes condition is a direct reflection on the rent income you will get and the type of tenant you will attract. If you’re trying to rent a home that is not in good condition, you will generally not be able to rent it for the optimal price nor will you be able to attract good renters. Landlords often set themselves up for failure by not preparing the property properly to attract a good renter. When tenants see you respect your home, they will in turn respect your home. The opposite is also true.

Our company does not represent properties that are not in good condition. If we did we would spend all of our time handling complaints and maintenance issues. This is the type of situation that will make you regret getting into this business to begin with. If you’re spending all your time fighting problems, no amount of money tends to be worth it. By spending the money upfront getting your property ready and making sure it is in good condition, you will be able to charge the highest possible rent for that property and attract the best possible tenants. Your savings will come in the lack of vacancy time and maintenance needed throughout a tenancy and satisfied tenants who will stay in the property longer and help you pay off the debt. Most of your expenses come when turning the property over and having to find new tenants.  Keeping good tenants happy is always best financial decision.

4.  Are you willing to pay to maintain the home?

One of my general rule of thumb when buying an investment property is: Can I afford to pay four month’s worth of mortgage payments without rent income? You have to be prepared in the event of a vacancy or bad tenant. I’ve never had to go four months without rent on any of my properties but you need to be prepared if you have a tenant that doesn’t pay rent and you need to evict them and get the property ready for a new tenant. I find an average of four month’s rent works in this scenario.

As a landlord, you are required to completely maintain the property. The tenants will usually be responsible for the lawn upkeep but anything that breaks in the property you as the landlord are responsible to pay for the repair. This then becomes a good deduction from the income. With a good management company, they will be able to determine if the repair was needed due to the tenants neglect.  If so, they will in turn charge the tenant to reimburse you for your cost.  Between each tenant you’ll expect to have some cost turning the property over. This usually entails: touchup paint, cleaning, spring cleaning on the exterior  (tree and bush trimming, mulch, power washing, etc.) and minor maintenance. We find inspecting the property every four months tremendously cuts down on the amount of work needed when the tenant vacates. You will be able to charge the tenants for the damages they created and deduct it from their security deposit, but you can’t charge for normal wear and tear.

If you are okay with handling the upkeep of a rental, or can afford to pay a management company to handle the property for you, and it makes sense financially then I feel it’s a no brainier.  If you can’t live with that stress, selling rather than renting your home may be your best move.

Questions to Ask Before Selling a Rental Property

1.  Are you sick of being a landlord?
Not everyone is cut out to be a landlord.  Renting property can be stressful and unpredictable.  As pointed out in last month’s Broker’s Corner (click here to read), being a landlord takes work and the ability to handle the highs and lows.  If you know you don’t have the stomach or patience for it, it may be better to sell and choose a different investment route.

2.  Is the area depreciating or appreciating?

If the neighborhood has been going up in value, it may still have a ways to go before you reach the best point to sell.  If it is depreciating, now may be the best time to sell before your sales price goes down even more.  If you have already broke even or made as much profit as you would like, an appreciating sales market can be the best time to sell if you are tired of being a landlord as well.

3. Do you have a better place to invest?

Calculate the returns you are getting each year with your rental property.  If you can get better returns in other places such as in an IRA or another rental home, then now may be the best time to sell.  You want to make your money work for you. Also if you need the money to retire or make a family move, selling a property can provide you with the immediate capital you need for your next step in life.

4. How much can you sell the property for?

Call a Realtor® in the area and ask to see recently sold homes (comparables) in the area. Once you have enough research to determine a realistic sales price, run the numbers to see whether you can make more money selling the property than renting it.  Be sure to look at it long term as well and take all factors into consideration such as Realtor® fees, renovation needs, and vacancy rates.  Selling a house can give you a lot of cash immediately but you might have made more 15 years down the road by holding and renting for a while before selling.   

This article was featured in this month’s newsletter.  Please subscribe if you want to receive these updates and more each month.

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