Our patio…
Have you ever thought about buying a rental home and becoming a landlord? Maybe you are debating about whether you should sell your current house or rent it out, just like we are.
Last month I talked about whether or not we should pay off our house early. In this post, I talked about the advantages of paying off your home early and disadvantages to that as well. I also brought up the fact that we are debating about whether or not we should rent out our current home when we buy our new home next year.
We plan on living in our current home for at least the rest of 2013. 2014 will most likely be the year that we buy the new home unless something extremely awesome pops up this year.
And yes, don’t worry guys, we already have a plan for how we will work everything out for when I pursue my passion.
Since we do know that we want a new house within the next year, we have been thinking a lot about whether or not we should rent out our current home. The monthly payment is currently around $960 a month (including home insurance and property taxes), and we would want to refinance that beforehand in order to eliminate PMI and to get a lower interest rate (and to save on interest).
I’m guessing that if we could eliminate the PMI and lower the amount in interest that we pay per month, then we could be paying around $800 or $850 a month for our mortgage, home insurance (I’m guessing this would increase with having renters instead) and property taxes.
Advantages of Renting Our House
Since I am looking to join the self-employment world eventually, we would like to become more diversified. Having a rental house will help us become more diversified. The additional income will be helpful as well.
We also bought our house for relatively cheap. We can easily rent out our house for more than what the current mortgage payment is. Plus, once we eliminate PMI and lower the monthly interest, we will be even more profitable.
I have looked at ranges for what we could rent our house for, and it could possibly go for anywhere around $1,200 to $1,500 per month. Our house would most likely be a good fit for a family, as our house is in a safe neighborhood that also contains two good elementary schools (they are literally inside our neighborhood). We also have a fenced in yard, the house is completely updated, and close to major roads and highways.
Related: What You Need To Know About Renting A Room In Your House
Disadvantages of Renting Our House
There are many disadvantages of having a rental house. We could have horrible tenants who will never pay a single month or maybe tenants who destroy the house. Maybe the future tenants will be double horrible and do both of these things.
We know of many people who have told us horror stories about their renters. Some didn’t pay rent for over a year because the eviction laws here are tough. Some had their rental homes completely destroyed by their renters also.
If we sold our house right now, we would probably profit a couple thousand dollars (maybe $10,000 to $15,000) after we pay all of the selling fees and expenses. This means that we wouldn’t have to be negative-anything when it comes to our house. We could then do something else with our future cash flow instead of throwing around $800 per month to our current home’s mortgage payment when we rent it out. Maybe a different type of investment will be more worthwhile with fewer headaches? Would you put your cash towards a different investment?
Also, would the approximate $400 to $700 per month before expenses and taxes be worthwhile? Would the stress just be too much to handle?
myfijourney says
I would try to figure out how much you could net for your rental house after putting aside money for taxes, maintenance, property management, etc. I wouldn't worry too much about bad tenants, but I would be concerned about vacancies and big ticket maintenance needs. I would also think long and hard about whether you want to manage your property or you want someone else to do it.
MakingSenseofCents says
I agree. We will have to figure it out!
My recent post Should We Rent Our Home or Sell It?
Matt Becker says
Myfi's comments are good. To me, the big questions are having enough in savings for maintenance for both the rental house and your house, which could both need significant work at the same time. The other big issue is whether you want to job of landlord. I've heard a lot of good things but also a lot of horror stories. It seems to me like the big advantage of having the rental home is the income that comes in once you've paid off the mortgage. Until then, it's likely a decent amount of work without a huge reward. How long will it take you to pay off that first mortgage and truly start realizing the benefits?
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MakingSenseofCents says
I agree. This is something that we will have to think about as well. We could keep chugging along and just pay the minimum monthly mortgage payment, but at that rate it would take forever to pay off the house.
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plantingourpennies says
I think with a single family home, the biggest factor is going to be the tenants you get. If they pay on time, damage the home, etc. What we've found is that we tend to pick better tenants than property managers do. Since we've got more skin in the game, we tend to be choosier. It takes more time, but in the long run it seems to be worth it.
MakingSenseofCents says
You are definitely right. We would be very choosy.
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DC@Young Adult Money says
We are renting a studio apartment in our basement and I'm not gonna lie, it has been a bit of a challenge. But the challenge has been in finding out little things about our house that we otherwise didn't know (i.e. our sewer issue affected our renter since the access is in their bathroom, parking, etc.). Now that we are aware of some of these things (and fixed some) it's a lot easier. The thing that sucks is when a renter moves out, and I think ours will be moving out at the end of their lease for something cheaper. It's not fun having the uncertainty of not knowing when a new tenant will get moved in, whether they will be a good tenant, etc. But overall I would recommend it. Those monthly rent checks feel great 😉
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MakingSenseofCents says
Good to know! We currently rent out a room in our house to my sister, but that is completely different from renting out a single family home to a stranger.
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nicoleandmaggie says
My dad did this kind of thing. That is why I will never ever do it. Too much stress for me. Heck, renting the house out the year we were on sabbatical was too much stress, even though we eventually got someone who mostly didn't destroy the house.
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MakingSenseofCents says
I feel that it is too much stress also! However, W really wants to do this.
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John S @ Frugal Rules says
Like has been said, my concern would be having enough savings to cover repairs for both as well as if you want to manage the day to day yourself or hire a company to do that. If you can swing it then I'd be likely to go for it…especially for the additional income for when you take the plunge.
MakingSenseofCents says
Thanks John! Seems like we have a lot to think about.
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Brian says
When we decide to move (or should I say if since our home is big enough to be a forever home) we would just rent it out. Of course that decision is easy to make since we have the house paid off. We are already discussing maybe doing this in the next 5 to 10 years or so. We kind of want to build a home from the ground up using shipping containers (we just like that idea a lot). Of course some of this depends if we buy this water front cabin her family owns down on the Ohio river. If we do that then our timetable would change a bit.
MakingSenseofCents says
That is great that your house is paid off, I do think that makes the decision easier! And I love the idea of using shipping containers.
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ND Chic says
I would totally do this but my husband isn't on board and he would be the one fixing things. You probably know this but you need two years of self-employment income to use your income to qualify for a mortgage next year. Also, if you're going to refinance, do it when you live there instead of as a rental because you will get a lit better rate
MakingSenseofCents says
Funny that you say that because I'm the one who is hesitant whereas he is the one who wants to do this. And yes I do know that, we plan on buying before I make the switch 🙂
My recent post Should We Rent Our Home or Sell It?
MakingSenseofCents says
Yeah this is something that we have thought about. I'm not sure if $400 a month is worth the stress. $1,200 would be completely different though.
My recent post Should We Rent Our Home or Sell It?
MakingSenseofCents says
Thanks Jordann for all of these great tips!
My recent post Should We Rent Our Home or Sell It?
MakingSenseofCents says
Thanks! And with the $10,000, I'm not sure. We could use it towards many things, such as flipping classic cars too.
My recent post Should We Rent Our Home or Sell It?
Holly@ClubThrifty says
We turned our first home into our first rental home. It was a great move. Our first house sounds a lot like yours- a smaller house that would work well for a family. Anyway, it's proved to be a great financial move for us. I hope it works out for you either way!
MakingSenseofCents says
Good to know! I definitely wanted to hear from people in similar situations. Glad to know it worked out for you.
My recent post Should We Rent Our Home or Sell It?
louisianagirl16 says
I'm interested to see how this works out! We've considered keeping this house as a rental when the military sends us elsewhere. Because there are a lot of people who do this, there are actually lots of businesses in town who will manage your rental for you, some even right down to going to the bank to pay the mortgage. I'm sure the fee is hefty but I wonder if it would be worth it.
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MakingSenseofCents says
Thanks! I will keep everyone updated. If you do the same, you should definitely make a post on it!
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Betsy says
We are debating this right now too. Unfortunately we still owe more than our condo is worth and because everyone else in our building seems to be selling at ridiculously low prices. Therefore totally screwing us over with resale even though we've done really nice updates and have kept everything in good shape. I'd be interested in knowing how you're going about that and everything!
MakingSenseofCents says
That stinks Betsy! And I will keep everyone updated.
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mycanuckbuck says
No, I wouldn't – but I wouldn't want to deal with the hassle of renting. It can turn out fine – but it can also be a nightmare!
MakingSenseofCents says
This is what I'm worried about!
My recent post Should We Rent Our Home or Sell It?
Tina says
We currently have one rental and one "rent to own" house. We have gone through a few bad tenants – but for the past three years(once we learned) – everything is great. I would suggest patience with renters – a few days late and a bounced check is not a deal breaker in the big picture. Everyone goes through a rough spot – so patience and understanding is good – as long as it is not a pattern. I don't do credit reports(because some are going through divorces and have bad credit) – we allow animals(they pay extra) and do a background, criminal check – that is key.
We have the real estate to rely on for extra income – and it has allowed us to leave our regular 9-5's to pursue the at home careers we want.
Yes – it can be a pain once in a while – but it is worth it in the long run!
MakingSenseofCents says
Good to know Tina. Thanks!
My recent post Should We Rent Our Home or Sell It?
Ree Klein says
Hi Michelle, here's how I see it: RENT THE HOUSE!!! Now for my assumptions and rationale…
Assumptions:
– Your new home will be close enough to make it easy to keep an eye on the property.
– You will manage your property instead of paying someone else to do it.
– Reasonably safe investments are available that can earn 8% annual return.
– You are correct that your PITI will be around $850 and you can rent the house for $1,350/mo (I picked the mid point of your range). That gives you $500/mo income.
Rationale:
– You would have to have $75,000 earning 8% to net you $500/month.
– Your property is still an asset (even more so because it will now generate income).
– That asset will presumably grow in value so you not only have the income but you could sell it later for more.
– You'll pay taxes on the rent, yes, but you'd also pay taxes on the earnings from the measly $10-15k you'd net from the sale if you invested it.
Seems worth the risk to me. While I've never owned rental property, I do have a paid-for home that I will rent if I ever decide to travel for extended periods or move.
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MakingSenseofCents says
Thanks so much for this Ree! You always provide good rationales 🙂
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@RobaSorbo says
My parents own 3 houses and rent 2 of them. They actually use a management company, so they never have to deal with tenants. That management company also coordinated making the mortgage payments from the rent money, handled repairs, and advertised vacancies. I don't know how much they made from the rentals, but I do know that's how they bought several computers and how they bought me my first car.
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Budget & the Beach says
Since I've never owned anything it's hard for me to weigh in, but you have a cute patio. 🙂
MakingSenseofCents says
Thanks :0
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Alexa says
If it were me I would rent for awhile if you are only going to pocket 10-15k selling. This way you can pay your mortgage faster while bringing in a couple bucks on the side. When home prices go up you could sell for A LOT more money. I think if you screen properly you can find good tenants. All the renting horror stories I hear come from people who don't screen tenants!
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MakingSenseofCents says
True Alexa! I didn't really think about that.
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SavvyFinancialLatina says
I do believe rental income is a good way to build your investments. But you'll have to determine if you want your rental home for cash flow or if you can live with paying off the mortgage earlier, and having larger cash flow after you pay off the mortgage.
You'll also have to research if you can invest in other investments and generate the same cash flow/return.
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MakingSenseofCents says
This is where we are stuck! Thanks.
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The Norwegian Girl says
so, I don´t know about what kind of people who rent over there, but considering it ´s a house that´s perfect for a family, shouldn´t it be more safe to rent to a family than a single person? And btw, can´t you check the renters background in some way? demand some kind of references from former landlords.. you know, just like a employer checks a possible employee.
MakingSenseofCents says
You would think that, but usually the rental stories I hear are about families who destroyed houses and never paid. And here, most of the time landlords are afraid of giving a bad reference and getting sued.
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therandompath says
Would you guys handle everything or would you have everything go through a property management company? There is extra cost with property management, so that's something to consider. Good luck with your decision Michelle! 🙂
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MakingSenseofCents says
We would handle everything ourselves. Well, W would! haha
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Tina@MyShinyPennies says
When B and I get married and move in together, one of us is gonna have to sell/rent out our house. Right now, we're leaning towards renting because it diversifies our investment, and it would provide passive (hopefully) income. We are wary of bad tenants, but that's a risk we have to take.
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MakingSenseofCents says
Yeah my main thing is just bad tenants. I don't know of many people personally who have had good tenants.
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Liquid says
I currently rent out my property, but it's farmland, so it's a little different than renting a residential home. But being a landlord is a great opportunity. If you know what you want to invest $10K into right now that will likely make you a reasonable profit then it might make sense to sell. But in most cases, from a purely financial point of view only, renting it out is almost always better historically speaking. Like others have already suggested, if you don't want the headache of being a landlord, there are property management firms you can outsource the work to. The management companies in Canada normally get 100% of the first month's rent, and then 10% of the rent for the remaining 11 months of a 1 year lease agreement. The real long term value you will get out of your property isn't really the rent, but rather the appreciation on the land the home is build on. I believe the real estate market is recovering now, especially in your area of the country. Overall prices in the US were up almost 11% from a year ago in March. A $200,000 home last year would be worth over $20,000 more today. Bottom line, if you have other investment ideas then consider selling, but if not, and you don't have high interest debt, or need extra money in an emergency fund, then it's better to make some rental income than building up savings which is losing purchasing power (real value) each year to inflation. Let us know what you decide on 😀 Good luck.
MakingSenseofCents says
Thanks for your comment! All great things to think about.
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Tina says
Great timing for this post. We are right in the middle of doing the same thing. We have a pretty low mortgage that would allow us to rent out our current home with some funds to put away for maintenance/repairs. We have been pre-approved for a mortgage on a new house and our currently house shopping, I am somewhat nervous about the rental aspect as we have never done it before.
MakingSenseofCents says
You should let us know what you end up doing Tina. I'm sure others would be interested as well!
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Jenny@FrugalGuru says
I wouldn't pay off what I expect to become a rental property early. Only the house I plan on continuing to live in!
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MakingSenseofCents says
I agree 🙂
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MakingSenseofCents says
It's a hard decision. Not sure what we will do!
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Cece says
I will never be a landlord again! I rented out my condo and it was a nightmare. BUT-I think it's fine if you have extra disposable income to throw at it in case you have bad tenants, when things break or if you have to make up some of the difference on the mortgage. If you don't have the extra cash flow it's just way to stressful and probably not worth it.
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MakingSenseofCents says
Did you end up selling your condo because of the stress? Or do you still have it?
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John@MoneyPrinciple says
I know they all say that the way to passive income is property but you have to think of it as a long term job. If you are only just covering your costs (mortgage etc plus allowing for between-tenants, bad tenants and repairs) then I think there are much less painful ways of building a nest egg and passive income. And check the legal requirements too – these can be onerous. So I would be cautious.
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MakingSenseofCents says
I agree, and this is why that I'm nervous!
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Nick @ AYoungPro.com says
We became "accidental" landlords almost a year ago. While it can be a headache at times, I feel lucky that we were upside down in our house and forced to rent it out when we moved. We have had a great experience and it is nice to have the extra income!
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MakingSenseofCents says
This makes me happy that it worked out for you! Good to know.
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debtperception says
Some people shouldn't be landlords. I've had so many horrible experiences with landlords (slumlords is more fitting), and it's actually made me wish I could be a landlord some day because I think I would be a good one. It sounds like you have a nice home and would attract reputable tenants.
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MakingSenseofCents says
Thanks! And it's really just W who wants to rent it out. He said that he wants to get more into the rental home market. 🙂
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Brianna says
If you do your research on your potential tenants (credit check, income check, reference check), you have a pretty good chance of getting a decent tenant.
When you are looking at your potential profit, make sure you include the following in your calculation:
-mortgage
-insurance (should be about 25% higher)
-taxes (will increase to full amount if you currently have homestead exemption)
-vacancy (typically 1 month)
-maintenance (pick a high estimate of repairs. Are you handy? Could you fix them yourself or do you have to hire someone?)
-management (even if you decide to manage it on your own, this is NOT profit! you are having to do work on your own, so don't pretend like you are working for free. This is typically 10% of the rent)
-water/elec/gas bill (are you going to provide any of these? I like to include a capped amount for water, so I make sure they take care of my lawn)
-legal fees (you want to make sure your lease is written well and doesn't have any holes. ~$200)
-HOA fees
This is not meant to scare you, but there is a lot to consider when renting out your home. If you want your rental to be truly profitable, you have to consider all of the costs. 🙂 Including management in the equation is also a good way to realize your actual profits in the event that you no longer wish to manage it on your own (i.e. in retirement).
MakingSenseofCents says
Thanks for all of this! I really appreciate it. I will keep all of these in mind.
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Greg says
Rental properties are definitely part of my investment plan. Like all have mentioned, it can be a lot of work, but with the right tenant, it is a great way to go. With my rental, I did not have a good experience with the property management company and got rid of them. I have had no issues dealing with the maintenance myself and my tenants have stated I am much more accommodating than the property management company was. I think I am spoiled on my currently property, though, because I have had the same tenant for 2 years and they are in for a third, pay on time, and keep the yard and house in good order.
MakingSenseofCents says
We will most likely not have a property management company and just do everything ourselves. And that is awesome that they are in for a third!
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studentdebtsurvivor says
I'd probably rent if I were you (but bf and I are actually looking into buying a rental property because that sort of thing interests us). If it sounds terrible to be a landlord to you, then I'd avoid it. If you keep the home and the price increases, awesome. If the price doesn't increase but you still net a profit at least you haven't lost anything and you're making a little extra each month. Sounds like a win-win to me.
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MakingSenseofCents says
I agree. I should probably stop being such a worrier!
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thepotatohead says
I've been thinking for awhile about trying to become a landlord, and it always sounds like a good way to make money. But then I get scared away by all of the horrible tenant stories you hear about. I know many people make successful livings being landlords, but it seems like having one set of bad tenants can really set you back big time.
MakingSenseofCents says
Same here! I get so scared by all of the horror stories.
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chrisholdheide says
I was posed with this this option when I was looking to sell my last house, since I couldn't find a buyer for the house my realtor suggested that we rent the house and buy the house we wanted down the street. However as you stated in your article, what if you get bad tenants and they destroy the place. On top of that I'm not in the position to handle two mortgages right now so I had to pass and keep looking for a buyer.
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MakingSenseofCents says
Since our mortgage on our current house is small, we can definitely afford to keep it and rent it out, thankfully!
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emi says
such good thoughts! we are managing apartments on the side, so we have a whole new view of being landlords! XO
MakingSenseofCents says
Interesting! Have you had good luck with tenants?
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MakingSenseofCents says
I agree with your comment, and this is why we are not sure! Thanks for stopping by my blog.
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Simple Living says
I'd agree with many of the comments, its a good dilemma to have and both have their advantages. I'd lean towards renting in out but the main caveat would be to find great tenants. Its always good to have steady cashflow with the addition of appreciation!
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MakingSenseofCents says
I agree! Good tenants would be great 🙂
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MakingSenseofCents says
Good thing to think about. Thanks!
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Daisy says
It depends on the market in your area, in my opinion. Hold onto it if it's likely going to go up, and sell at the top of the market. That's my opinion.
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Mr. Bonner says
I absolutely wish we were in your position, which is where we're hoping to be in about 5 years. I would 100% rent it out. I think you've got a good head on your shoulders, so you can price it toward the low end of your range to drive up interest and hopefully find a great tenant using the numbers and your judgement.
We've paid our condo down quite a bit since we moved in 6 years ago and we're still just about even with it's value right now (we'll find out soon, since we had it appraised this morning). We're in the process of refinancing right now and paying it down quickly, so in 5 years we're hoping to buy a house and rent out the condo with a price that covers all our expenses plus a little extra (which should be possible if the refi works out). I don't want to sell because we'd take a huge loss, possibly up to six figures depending on how the market goes and there's not even a tax benefit for that loss. If I we can refi then rent it and have the renters paying down our mortgage then I can more easily digest the loss if we ever decided to sell it. By the time we retire and the kids are out of the house it would be great to hopefully have the condo and our next house paid off so we can pick up another place and continue the trend of owning income generating rental properties.
Soooo many of the seemingly successful PF bloggers and the like seem to be landlords, so take that for whatever it's worth to you. All the best in your decision!
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Joseph Santiago says
It never crossed my mind to rent my house though I'm thinking about it after I have read this post. I'm still skeptical though since I have to share with people that I don't know.
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Dave says
We are in the same boat. We paid off the current house and bought a new house so thinking or renting. Biggest concern is getting good tenants. More importantly the maintenance cost if they trash the house. I don’t have too much money saved up for big ticket items. However, I could probably use the rental income for maintenance since I don’t owe a mortgage. I think the big question for me would be, will the property value appreciate in the future. Anybody have experience with property management company?
villas in spain says
Its quite good to see both aspects of renting and selling. Its usually better to always take safe side decision. Thus I will suggest that if you want to give your house on rent,then give it for short interval of time like 6 months and so on. I will also advise you to take full verification of the person to whom you are giving your home or apartment on rent.
Kathy says
Thanks for the article! We’ve been looking into renting our home as the rental market is so crazy right now. Thanks for the tips and advice!