Many people are turning their former residences into rental properties instead of selling and it’s no surprise why: with the housing market still recovering, the demand for rental homes is increasing, and with it the cost of rent. Could keeping your former home to rent out be a smart financial move for you? Read on to find out more about income property.
Turning Your House into Income Property
Consider the following questions when deciding whether or not to turn your house into income property:
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Do you know your market?
At Carlyle Financial, we are connected with real estate professionals who will provide a detailed analysis of your neighborhood. While rents in a majority of markets are rising, a comparative market analysis will give the standard for your area, both in rent and amenities. Rising property values can make it a good time for homeowners to build equity, but declining values can also make it a smart time to sell.
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How much will you have to invest in order to attain the market standard?
Your income property will definitely need to compete with others in the area. Estimate the cost of upgrades to see if you will see a return on your investment anytime soon. If you decide it’s worth it, consider using a refinance or mortgage loan, which typically have lower interest rates than a credit card.
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What are the additional costs of renting?
Be sure to calculate any monthly expenses (known as carrying costs) associated with the income property. This includes things like your mortgage payment, insurance, taxes, homeowners or condo fees and any other special assessments. Refinancing a property is one strategy for potentially lowering monthly carrying costs.
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How is your cash flow?
Once you know your monthly expenses and obtain an estimate of rental prices from a market analysis, it’s time to decide on your course of action. Even if you can’t break even or make a profit, a shortfall may be worth it if the property can be sold for a higher profit later. Additionally, if the income property covers 80% of its carrying costs, the other 20% can often be taken as a tax loss. This can provide you with a deduction against other income, according to Neil Stempleman of Reuters.
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Are you ready to be a landlord?
Finally, decide on how much time you’re willing to devote to the property. Landlords receive calls at all hours of the day and night, for emergencies and routine maintenance. If you would prefer to hire a management company, factor the management fee into your carrying costs. Property management can cost between 10 and 15 percent, according to Stempleman. You’ll also want to have a plan for tenants who don’t pay their rent on time or not at all. Legal expenses are incurred for eviction notices and pursuit of unpaid rent or damages. Additionally, check into laws and regulations governing rental properties, both on the state and federal level.
If you decide to rent, talk with our mortgage bankers today about options available for market analysis. Carlyle Financial offers refinance options that can lower your initial expenses, as well as carrying costs, adding value to your investment property.