Now that I have a new job, my wife and I will be moving to Texas soon. We own the house where we live now, so we had to make a decision: do we try to sell or rent our home?
Ultimately, we’re deciding to rent our current house. We live in an area of the Midwest that has not yet seen crashing and burning home prices, but we still did not want to throw away any fledgling equity that we have built in our three years of home ownership. Plus, we live in a major university town, our home is in a decent neighborhood, and is within easy walking distance of a grocery store. It’s also right on the bus route for the university.
With these combined factors, it seems foolish NOT to at least try our hand at renting our little abode. I’ve never owned any rental property before, so this will be a valuable learning experience for me. Every potential rental home is different, so in no way does one person’s set of choices fit all situations, but here are a few issues to consider if you are thinking about renting your home or acquiring an investment property.
This is perhaps the most important factor and also the hardest to discuss because of the individual and unique aspects involved. Ultimately, you need to ask yourself, does the location of my home make it an ideal (or even suitable) rental property?
The location of the property has a major influence not only in how fast it will take to rent the house, but also in the stability of the tenants it might attract. For instance, a single-family residence in an affluent suburb will likely have a lower turnover rate than a duplex in a condensed neighborhood near a university. That said, there are good and bad tenants no matter the location.
In our case, we’re in a great location for a rental: university town, near a grocery store, and on the bus route. We may find a single family who wants to rent from us for years to come, or we may find groups of students who live there for a year and then move on. Though we’d prefer the first, we’re okay with either situation.
The next issue to consider is whether or not you want to hire a property manager or deal with the tenants and the upkeep of the property yourself. Opting to handle it yourself entails:
- Finding and screening tenants
- Chasing the rent each month
- Dealing with landscaping and repairs
- Handling unexpected complaints and emergency issues
If you’d rather let someone else deal with these issues, then hiring a property manager is for you. For a monthly fee (usually 6-10% of the rent), a property manager will deal with all the potential headaches and send you a check each month. If your property requires lawn care, this is something else that a property manager can set up for you.
For us, the decision was easy. Since we’ll be nearly a thousand miles away from our investment property, we’re opting to find a good property manager. If we were planning to live in the near vicinity, the decision would be much more difficult.
Another decision to consider is whether or not to purchase a home warranty for your investment property. The purpose of a home warranty is to save you dealing with an unexpected and costly repair, such as a furnace or A/C unit dying. A typical home warranty costs around $35-40 per month, and there’s a service fee (usually around $50) each time a contractor is sent to the house.
What you get in return is coverage for the electrical, plumbing, and heat systems, plus most of the appliances in the house. If the furnace dies or the plumbing implodes, at most you will pay is the service fee instead of shelling out hundreds or thousands for the repair.
We haven’t fully decided yet, but will likely opt for a home warranty package.
I know that insurance is far from the most interesting subject to discuss, but it’s another required issue to consider. When your home shifts from a primary residence to an investment property, the insurance will likely go up. Frankly, this is tantamount to highway robbery, because not only will your insurance company charge you a higher rate for the same house because it’s now an investment property, they would also love the chance to sell renter’s insurance to your tenant. It’s pure profit for them, leeching off both sides.
However, you still have one advantage: the ability to shop the competition. The last thing you should do is just call up your current insurance company, report that your primary residence is turning into an investment property, and accept whatever new rate they charge you. Call them and ask for a quote, then tell them that you’re planning to call all their competitors. If you get a lower quote from a competitor, call your current company and ask them to beat it.
I find insurance a necessary evil, and I have absolutely no loyalty to my current company. If given a lower rate, I will not hesitate to switch all of my policies to a competitor.
And this brings us to the final element – cost. In the end, is it worth it to rent your home versus selling it outright? Especially if you opt to hire a property manager, purchase a home warranty, and pay for lawn care, can you make enough in rent each month to cover these fees plus the mortgage, insurance, and property taxes?
If you can, then renting your home is a great idea. Even if you end up taking a small loss each month, it may still be manageable provided you have enough other income to offset the small loss. There’s always the possibility of raising the rent a little after a year or two to negate the prior loss.
In our case, we’re just hoping to break even, thus allowing our investment property to pay for itself. We’re not trying to make big bucks right now – just having someone else pay the mortgage and build equity for us is a wonderful feeling.
In the near future, I’ll be shopping for a property manager, a home warranty, and insurance. Stay tuned!