Homeowners: Should You Rent Out Your House and Buy Another?
As homeowners there is a chance that at some point you will be ready to make a change. You may have outgrown your starter home, have too much room after the kids have moved out, or are experiencing a job relocation.
Whatever the reason you are looking to move, you have a choice to make on what to do with your current house. The obvious option is to sell it, but there is a growing population of homeowners who are deciding to rent out their first house and buy a second house.
It sounds simple enough, but there are some critical considerations that need to be made before heading down this path.
Financial Considerations
If you have ever thought about getting into real estate investment this can be a great way to do it. If you have lived in your house for long enough, you can convert it to a rental until while still maintaining the lower interest rate that you received on your owner-occupied mortgage. Since you will be buying your second home as your new primary residence you will be able to take advantage of the lower down payment requirement and interest rates again.
If you purchase a second house as a rental property, the lender will require you to make a larger down payment and you will most likely end up with higher interest rates. This makes renting your first house and purchasing a second one for yourself a great option to get started with real estate investments. However, you still need to be able to qualify for the second mortgage.
If you can show that you have a lease in place when you are purchasing your second home, there is a chance that the lender will consider some of the income from your rental property when approving you, but no guarantee.
Taxes
If you are thinking about converting your home to a rental home it is advised that you speak with a tax consultant prior to making the change. A tax professional can let you know about any tax advantages (or disadvantages) that will apply to your specific situation in the area that you live. They will also let you know what types of expenses can be used as deductions and how to take advantage of depreciation.
Is Your Property Rentable?
Most houses that have between one and three bedrooms will rent well. Houses that are larger than this will have a hard time renting. The more of the general population that your house fits, the easier the experience you should have in being able to rent it. Think about what would make you want to rent your house and use these features to help bring in a tenant.
Rental Fees
Determining the monthly rent can be tricky. Your best bet is to seek advice from a professional property manager, or to start browsing the rental market. Look for houses that are similar to your house and see what the average price is. Carefully compare you house to the rental comps to determine a good price point for your monthly rent.
When your house becomes a rental unit you still remain responsible for the extra expenses of the required repairs and maintenance. If you do not carefully strategize how much rent to charge you could end up losing money on your property.
If you are able to get approved for a second mortgage and carefully price your rental house, this can be a great strategy for stepping into the real estate investment market. Property values have historically tended to appreciate over time, so while you are making income from your monthly rent, you will also be growing your investment on the property itself. So, if you are ready to make a move, think about renting before you decide to sell.