When the time comes to move out of a house or a condominium, there are some tough decisions to be made. For some, the question of selling a house or renting it may arise. Clearly, there are personal reasons for choosing either, and obviously, every individual has different priorities and aspirations. But regardless, having a good sense of the options will definitely make for better decision making overall, and much less regret (if any) over the long term.
The fact is, renting out a home that you own can be an excellent way to create “passive income” (regular, ongoing income, with little work or effort). At the same time, it can be an endeavor with huge, unforeseen costs that could destroy any profit potential. So it comes down to assessing the pros and cons, doing a cost-benefit analysis, and taking some risk. All things considered, and with deference to the real estate market, renting out is worthwhile considering.
Why rent out your home?
When a tenant pays rent, one of the primary benefits is that the mortgage is being paid on your behalf. Beyond that, the home is earning market equity. In the event that the home is mortgage free, the monthly rent is a source of income.
For those who are able, renting out a home provides an additional income stream, and can serve as an investment that generates income when another source might fail. For those who are about to retire, selling the property may pay off.
Renting must cover costs
Rental income must cover all overhead costs: mortgage (principle and interest); property taxes; mortgage insurance premium (if applicable); property and landlord insurance; condo fees (again, if applicable); and a maintenance “fund”.
Rental profit and/or loss
All expenses in, and with competitive market-value rent, incoming revenue should cover all of the overhead costs. As it is, revenue is taxable and overhead is deductible. For some, a comfortable break-even scenario may be the best.
Capital gains on rentals
Depending on tax law, a rental property may not fully qualify as a primary residence. It means that there is capital gains tax when the rental property is eventually sold. This may be a dilemma for homeowners who want to avoid this.
Beyond the dollars and cents, the debate on selling or renting a house has one other dimension – being a landlord. The role of a landlord can be time-consuming, and often stressful. As such, every individual will handle the demands in a different way, and not everyone is going to manage well. Yes – you can certainly hire a firm to manage the property from A-Z, but this will encroach on the revenue. It’s also important to consider the element of risk. Homes appreciate and depreciate – occupancy rates rise and fall – and rents can fluctuate with the real estate market. In the end, it’s about doing the homework, crunching the numbers, and getting comfortable with the risk.