The path to financial freedom is lined with passive income.
Or at least that’s what so many financial articles assure would-be landlords. Homeowners are often tempted to try their hand at keeping their old homes to rent out when they move. But is it really worth it?
Let’s get real about the rent or sell question for homeowners.
How to Decide to Rent Your Home Out
Deciding to rent your home instead of selling it can be as simple as a math problem. Can you rent it for more than your mortgage payment?
Landlords have used the gross rent multiplier (GRM) for years to determine whether a property is a good candidate for renting. GRM says that you can rent out a home for 1% of the price you paid for it. That makes sense if the home you purchased was $100,000 or even $200,000. $1,000 or $2,000 monthly may not seem out of place in today’s rental market.
However, home prices have increased so much recently that asking a renter to pay $4,000 monthly for a solidly middle-class home is unrealistic. Using the financial rule to budget 28% of a household’s income on rent, a renter would need to earn around $12,000 a month to afford a $4,000/mo. rental property. And that’s simply not a middle-class salary.
Depending on the price you paid for a home, you may find that your rental market cannot support the GRM.
Renting out your home can quickly become complicated, too.
- Do you need the money from a home sale for a down payment on a new home?
- Do you have the cash to cover home repairs for a rental?
- Would the home’s location or amenities be attractive to renters?
- Is the home ready for renters, or will you need to make some changes to the property?
- Will you be close enough to deal with tenants or will you need to hire a property manager?
- Can you afford to pay two mortgages if your property doesn’t have a tenant for a few months?
If you’re still considering renting, the next step is deciding if a short-term or long-term rental is a better fit for your situation.
Long-term or Short-term Rental?
A decade ago the debate between short-term and long-term rentals would’ve been very short. Today, turning a residence into a vacation property is significantly easier with the surge in popularity of online booking platforms. And of course, it has many benefits, not the least of which is the higher income it brings in compared to long-term rentals.
Unfortunately, HOAs, city councils, and neighbors across the country are pushing back against this lucrative real estate venture. Extra traffic, strangers in community areas, and loud parties have soured many communities on short-term rental platforms like Airbnb.
As you weigh the pros and cons of short-term and long-term rentals, it would be wise to put your finger on the pulse of public opinion. If the trend in your area is to restrict or legislate short-term rentals, you may want to avoid the headache of a legal fight and just sell your property.
Short-Term Rentals
From its humble couch surfing beginnings, Airbnb has become a lucrative and glamorous home-away-from-home business. While renting out a spare bedroom still occurs, many homeowners are turning their properties into mini boutique hotels. There’s even a section simply called OMG! that highlights unique homes like train cars, yurts, treehouses, and siloes.
Not every property is a prime candidate for a short-term rental, though. Here are some property amenities that are popular in short-term rentals.
- Close location to an anchor point, e.g. museums, local attractions, parks, sporting events, universities
- Comfortable beds, linens, and toiletries for a luxury experience
- Cleaning service between guest stays
- Novel features, updated room features, and quiet neighborhoods
Check out AirDNA to see whether your area is already saturated with short-term rentals or ready for a property like yours.
Long-Term Rentals
Finding a reliable long-term renter is the dream of every landlord. But figuring out how to collect the rent (check, direct deposit, or mobile payment?), advertising for a tenant, and fixing appliances can be difficult to navigate for a beginner. Luckily, there are great online resources to help you understand your options.
Besides finding and communicating with tenants, you should research your legal obligations as a landlord. Landlord-tenant laws vary from state to state, and sometimes even city by city. You should understand how to evict a non-paying tenant, your responsibilities for maintaining the property, and your recourse for property damage.
Consulting with a lawyer about the best rental contract to use or using a reputable property management company is a sensible way to approach landlording. Be wary of asking a friend or family member to serve as your property manager because you risk a ruined relationship and even expensive renovations if the job is not being done.
Should I Sell My Home?
In a previous AgentStory article, we covered the top five reasons that homeowners sell:
- Financial distress
- Financial improvement
- Change in family circumstances
- Cashing out in a lucrative market
- Upgrading living conditions
Whatever your reasons for moving, there’s an additional layer of decision-making when working through the “Rent or Sell” question.
If a significant repair, like a roof, HVAC system, or hot water heater, looms on the horizon, it may make financial sense to sell your home now and walk away with the profit. Especially if you don’t have the budget for a capital expense or want to build a home.
A home that has appreciated significantly may be more profitable to sell than to rent. Crunch the numbers. If you sold the home today, how long would it take to make the same amount of money in rent as you would if you sold it?
Math Example: House purchased for $250,000 with 20% down. Currently valued at $500,000.
If sold today, homeowner would pocket $282,000 after paying real estate fees.
($500,000 – $250,000) + ($250,000 * 20%) * 6% = $253,000
If home was rented instead, at the market rate of $2,000/mo.
Math Example: ($253,000 / $2,000) = 126 months, or nearly 10 years to earn the same amount of money.
The Bottom Line
It pays to have an expert help you navigate the shifting real estate market. Get an accurate home value estimate today from an experienced agent. Whether you choose to rent or sell, you’ll want all of the information that will help you make the best decision. AgentStory provides the transparency you need to find incredible agents who work in your best interest.
