You've had your house on the market for what feels like an eternity. And that "For Sale" sign? It's been out front for so long that you can't remember what the lawn used to look like without it. And if you've already moved out, you might be wondering if you should just go ahead and rent your house out. After all, renting it out would be a great way to generate a passive income opportunity stream to cover your mortgage. But, is it worth the hassle? Can you even afford it?
Let's take a look at the three main factors that you need to consider:
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1. Tax Positives and Negatives
If you rent out your home, your income from that rental is taxable. But here's the good news: you will actually get more tax breaks when you rent out your home. For instance, you can write off your mortgage's interest payments and property taxes, just like you do now. But you can also write off depreciation, utilities, advertising or broker fees, repair or maintenance costs, and even travel to and from your rental home.
However, some of the best home improvement ideas, including bathroom remodeling and new appliances, can't be deducted. But you can write off the depreciation for these items, which helps subsidize the costs considerably. If your expenses for your rental exceed the rental income, you can write off the loss as well.
Keep in mind, however, that if you do end up selling your home, you won't be able to claim the capital gains home-sale tax write-off. For instance, if you rent your home out for three years and decide to sell, any profit you make on the sale will be taxable. You have to have lived in your home two of the past five years to qualify for the exemption. Another downside? You may have to pay more property taxes. Many states have a homestead exemption, which offers tax breaks to people living in their home. When you move out, you become an "investor" and don't qualify for this exemption. As a result, your property taxes may go up as well.
2. Financial Planning
Becoming a landlord has its responsibilities and can add considerable stress to your life, especially if you get stuck with bad tenants who don't pay on time. Make sure you have some kind of a financial cushion to cover late payments. And, keep in mind that you may have stretches, even long ones, where you can't find a renter. Do you have enough of a cushion to cover lean times? Do you have enough to replace a major appliance, or pay for a repair, if the need arises?
You also need to think about how you're going to pay for cleaning and upkeep on the home if your tenants trash the place before you go. Yes, it makes your stomach clench, but it happens all the time. Paint, drywall, light fixtures, or even your dream home flooring designs may need to be replaced or repaired regularly.
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3. Budgeting Time
Hiring a premier property management firm might be worth the expense because they take on most, if not all, of the tasks related to the property. Most firms will find reputable tenants, collect payments, handle complaints and repairs, and even handle snow removal and lawn mowing. Although fees vary, many of these firms charge around 10 percent of the monthly rent for their services. Many homeowners find the fee is worth it because these firms eliminate much of the hassle and time-consuming chores that often go along with being a landlord.
If you decide not to hire a firm, make sure you think about how much time your rental unit might consume each month. You'll have to clean the home, photograph it, advertise it, screen prospective tenants, run credit checks and call references, show up for showings, collect rent, hound them if they don't pay, make repairs...all this can take an incredible amount of time. Make sure it's worth it before you jump in.
Have you rented out your home or apartment in the past? How did the experience go?
Heather Levin is a frequent contributor for the Money Crashers personal finance blog. She is passionate about "living green," while saving money and helping others along the way. Additionally, you can see more of her writing on The Greenest Dollar.