CONVERTING YOUR HOME TO A RENTAL- THE BENEFITS AND CHALLENGES
Thinking of selling your home soon? Time to take some of that equity, turn it into cash and buy a new place to live? Have you thought about renting it out instead? Some owners discover the real estate market isn’t all that strong and the list price your agent suggested was much lower than it might have been just a couple of years ago. But a soft market isn’t the only reason to think about renting instead of selling. Sometimes it makes perfect financial sense. But there are some challenges as well.
Take a look at your monthly payment and then add in a monthly allotment for property taxes and insurance. This PITI, or principal and interest, taxes and insurance, is the minimum the monthly rent should cover. Yet don’t just look at the minimum. Instead, look for monthly cash flow as well. For example, your PITI is $3,000 per month and market rent for your home is $3,500. Not only will your tenants be paying your mortgage for you but associated costs as well. This example frees you up from a $3,000 per month payment but also puts $500 in your pocket each and every month.
You’ll discover some new income tax advantages you don’t have with a primary residence. Each year, you can deduct such items as any utilities you paid, operating expenses, repairs and maintenance. You can also depreciate the property over time. And of course, property taxes and mortgage interest are also deductible. Not only will you cash flow each month but it’s likely with all the deductions you’ll pay little or no income tax on the rental income. Further, many properties show a loss each year based upon the available deductions. You need to speak with your financial planner about these tax savings.
On the flip side, you’re now a landlord. That means when the hot water heater goes out or there’s plumbing leak that flooded the garage, you have to stop what you’re doing and take care of the issue 24/7. Many new landlords soon discover it’s better to hire a full time property manager to take care of such issues.
If this is your first and only rental, you might experience some difficulty qualifying for a new mortgage to buy and finance another home. That’s because unless you have two years of experience as a landlord, evidenced by filed income tax returns, your mortgage company will hit you with both mortgage payments without the benefit of the rental income.
Most people do find out however that renting can be a better option. Not only are there closing costs to consider when selling but as property appreciates over time, selling eliminates future equity from the property.
For more information or questions about mortgage loans,
Please visit Majestic Home Loan
Or Call (855) 757-8748