1. What You Owe Vs. What You Can Sell it For
If the house would not sell for more than you owe on it, you probably want to keep it and rent it out. However, if property values are diminishing in the area and rents are decreasing, you may want to unload it sooner rather than later. If the market values look like they can increase, then hold onto it and wait for the market to improve, particularly if the property can generate some income in the meantime.
2. How Much Will It Rent For?
First determine what the realistic value of your rental property is on the market right now. You can get a free rental price analysis to determine how much you rent your property for. You can also learn more in our video.
There is usually a difference between what you think the property will rent for and the actual amount someone will pay to live there. In addition to the type of property you have, market fluctuations, the time of year, and area occupancy rates all play into the rental value of the property.
You can look at what houses are renting for in the area through sites like Hot Pads or Zillow. However, listings aren’t always accurate, and you aren’t always able to make an apples-to-apples comparison. For an accurate assessment of your rental property value, contact us for your free rental-price analysis.
3. Cash Flow Analysis
Next, you’ll have to deduct all of the expenses from the monthly rent collected. Expenses include:
- Mortgage Payment (principal and interest)
- Property taxes
- Mortgage Insurance Premiums (If you put less than 20% down on the home)
- Landlord Insurance
- HOA Fees
- Repairs and Replacement Costs
- Advertising (only incurred when it is unoccupied)
- Tenant Background Checks (only incurred during the leasing process)
- Property Management Fees
- Accounting Costs
- Vacancy Expense
Deduct all these expenses from the rent revenue to see if the property has a positive, negative or neutral cash flow.
If you can’t rent the property for an amount that is higher than all of the associated expenses, then you may want to sell it. However, if selling the property would create a significant cash loss, you should compare the overall financial impact.
Consider that even if renting the property leaves you in a negative cash flow, that loss may be less than the financial loss incurred if you sell it. Also, while you are renting out the property, you are paying down the mortgage which is creating equity. Additionally, while you are renting the property, the marketplace may improve and the house can gain more value as you are creating more equity in it.
4. The Property’s Long-Term Value
While no one can foresee what property values will be in the future, you can look at market indicators right now. Has the neighborhood gone up or down in value? Are there signs of economic development happening with businesses moving in or is there a downturn with empty retail stores and houses sitting for months unsold on the market? If the signs are good, the property may increase in value, so it may be worth holding on to. If the area looks like it’s taking a turn for the worse, you may want to unload the home before it decreases in value.
5. The Value of Rental Income Over Time
In general, the best return on a rental property investment happens over the long term, when you continue to collect rents for many years. For example, if your property nets you $250 a month (3,000 a year) and you invest that income at a 9% return for 15 years, you will have $89,069. And that is in addition to the value of the property itself.
6. Tax Implications
If you sold the house today, how much would you pocket from the sale? If you would make a healthy profit from the sale, then you must consider what the tax burden is on that profit. Capital gains tax can be as high as 20% depending on your tax bracket. However, the capital gains tax does not apply to all home sales. If you are selling your primary residence and the gain is less than $250,000 (or $500,000 for joint filing) the IRS won’t tax you on it. (You must have lived in the residence for two of the last five years to qualify.) Check with your accountant on what your tax burden would be.
There’s always risk involved in leasing out your property. The tenants can stop paying rent or damage the property. The market conditions can change leading to an extended vacancy. However, you can mitigate these risks with professional property management who have experience solving these issues.
8. Time and Stress
Once you have done the math and figured out the income versus expenses, the rental value, the potential long-term value, what you can sell it for, and the tax implications, you have to factor in your threshold for stress and the amount of time you have to devote to being a landlord.
Being a landlord takes time out of your day and increases your stress level. You can either manage the property yourself or hire someone to do it for you.
If you do it yourself, you will save the management fees, but you will need to obtain several new skillsets to do so successfully. Find out if you are cut out to be a landlord and the pros and cons of being a landlord to get a fix on whether it’s really for you.
You can also just hire a property management company to help you find qualified tenants and manage the day-to-day concerns yourself. If you hire a property management firm, you will be increasing your expenses. And bear in mind, not all property management companies are created equal. If you decide to hire pros, make sure you ask them these ten questions.