Many homeowners struggle to decide between selling their home and renting it out. Though it's easy to feel emotional about this decision, it's important to always look hard at realistic numbers. Will you be financially better off selling the property?
This question differs greatly depending on the property. If the property can be rented for far less than the monthly costs, renting it out can be an attractive option. The number one mistake, however, is neglecting to consider the real costs. Maintenance, reconditioning, vacancies, and other factors can play havoc on a landlord's budget. Can you cover incidental expenses?
Often, when keeping a property is too much cost and trouble, selling it off makes more sense. Unless you live in an area that has high rents and accelerating property values, you have to ask yourself: what do I gain by keeping it? These are the factors that need to be considered when making the decision:
1. Property management fees
When you are a landlord, managing a property is no longer a weekend chore you take care of between taking the kids to soccer practice and catching up on the latest football or baseball games. It is a business that comes with professional responsibilities. This includes showing the property, reconditioning it for new tenants, collecting rent, refunding security deposits, making legal considerations, and,the bane of landlords, maintenance.
When a tenant’s heat stops working at 3am, someone has to take their calls. As a landlord, you have two choices: handling management personally or hiring a management company. If being a landlord is your primary occupation and you are close by and regularly available, you can save a lot of money by self-managing. However, if you are too busy, not available, or frequently traveling, a property management firm can take care of all the little headaches that you can't. When you can enjoy your hard earned family vacation without calls from your tenants, you'll think of that management fee as a bargain.
2. Do you live in a renter-desirable neighborhood?
Before putting the time into getting your home ready for a tenant, consider how rentable it really is. In large cities, this often comes down to the neighborhood. When you live in popular neighborhoods in booming cities like San Francisco or Portland, this question really answers itself. However, if you live in a sleepy Midwestern hamlet, some research on rental demand may be needed.
3. Consult a real estate agent
If you are teetering on the edge of putting your home on the real estate market or selling it, finding a trusted real estate agent who knows the area provides the local knowledge you need. A good real estate agent understands pricing and the realistic feasibility of renting the home. Real estate is a very local business, so you need to know the demand for rentals and home sales in your neighborhood.
You can use a real estate agent to either sell your home or find a tenant. Be sure to get a good estimate on both a realistic sales price and a rental price. Based on this, you can crunch the numbers and get an idea of which option makes the most sense.
4. Crunch the numbers before you put your rental ad on Craigslist
If you are considering renting your home, you have to be realistic about cash flow. Many people rent homes and lose money every month or during vacancies. If a realistic rent amount leads to a positive cash flow, the decision to rent it out may be obvious. After all, if you can get a good rental price, then your local real estate market is probably doing well. This could mean a positive cash flow and continued appreciation.
If monthly cash flow is negative or not enough to cover all the costs and time involved in being a landlord, you have to ask yourself, why keep the property? If you plan to live somewhere else for awhile and move back into it, or if the market is appreciating, you may want to rent it out even if you don't make money or see some negative cash flow, but be realistic. A property that is sucking out of your monthly budget can keep you cash poor. Is it worth it?
5. Consider maintenance expenses
It's easy to think about renting out a property and forget about things like the HVAC system, the plumbing, and the appliances. If you have an old HVAC system, you may be on the hook for repairs. Ditto with plumbing and appliances. It doesn't take much for you to be running in the red if any of these problems surface. First off, ask yourself if you have the resources and wherewithal to handle these maintenance issues.
If not, you might be better of selling the property. Remember that new plumbing and HVAC systems do little to increase property value. If they are old, you might be better off just selling the property and letting the new owner take care of those old systems. If you get stuck with a big repair bill while a landlord, you probably won't get that money back through a later property sale.
6. Watch out for HOAs
Homeowner associations are notorious for restricting rentals or passing funny rules. If you live in an association-controlled community, make sure to read the bylaws carefully. If your community allows rentals, there still may be other restrictions, such as limits on the percentage of units that can be rented at one time. Associations can also change the rules, so beware. Many landlords have had to sell properties at a loss after HOAs forced them out.
When you rent a unit in an HOA community, always take extra care to screen tenants. Any complaints from other owners, such as noise complaints, may fall on you, and that can include fines. Sometimes the problem is that your have an unruly tenant, but sometimes property owners complain about renters because they dislike having rental units in their community. If there is little profit in renting the unit, and especially if the association fees are high, it might be better to sell the property.