How do you decide between selling your home or keeping it as an investment and rent it out for monthly cash?
There are many reasons you might own a home that you aren’t going to live in. Maybe you inherited it. Maybe you are having financial problems and can’t afford to live there. You could be in the opposite situation and are now able to afford another house and need to decide what to do with the current one.
You basically have two choices. You can either sell the house and use the money for something else or you can keep the house and rent it to tenants and establish some sort of regular cash flow. To make this decision you have to really look at the numbers involved.
Traditionally, you would think to just sell the house and use the money to help pay for the new house or to get a quick influx of cash, but there might be other factors at play that could have you delaying the sale.
If the current real estate market isn’t great, you might want to wait until the situation changes and you can get a better sale price for the house.
If you have a lot of faith that the area the house is in is about to take off you might want to hold onto the house until the value of the property increases.
You might even want to hold onto a property for your children or another family member to move into at a later date. If you are holding onto the property then you might want to rent it out in the meantime so that the cash flow will offset the expenses of holding onto the house.
These are all good reasons you might consider renting the property instead of listing your home and selling it, but, from a purely economic point of view, here are some things to consider:
The first thing you have to do is determine what your house would rent for.
If there are other houses in your area that are renting then you should see what they are bringing in on a monthly basis. Remember to compare similar properties with the same bedrooms, bathrooms, and square footage, or try to make adjustments for the differences. If you are thinking of using a property management company, they have a lot more experience at determining rent prices and will be a huge help.
This rent price will be instrumental in making your decision on whether or not to keep the property as a rental.
Compare the monthly rental income to the current monthly expenses.
It’s pretty basic but a lot of times the allure of being a real estate investor or having a regular rental income makes the owner overlook this simple math. The monthly income has to be more than the monthly expenses for a property to make any sort of economic sense as a rental property.
If you have a monthly mortgage payment of $1,000 but can only rent the house out for $800 then you are losing $200 every month. On the other hand, if you can get $1,200 then you have a positive cash flow of $200, plus the tenant is paying off your mortgage.
When you have this figured out don’t forget to add in other expenses like taxes and insurance. The bottom line is, if you do not have a positive cash flow then you better have another great reason for holding on to the house, because it doesn’t work economically.
Turning a house into a rental property has its own expenses.
If you do decide to go the rental route and get some cash flow from your investment, be aware that rental homes include a few extra expenses you need to consider.
• Management fees (if you are going to hire a company)
• Your time and money (if you are going to self-manage)
• Lawn care
• Turnover and cleaning
• Marketing to tenants
Items like these make up your “Net Operating Expenses” or NOI. Everything in your NOI should be included in your calculations when you are looking at renting a property. You are still shooting for that positive cash flow.
Even a positive cash flow might not be a great return on your investment
How much equity do you have in your house? Do you own it outright? Perhaps you’ve paid off the mortgage and have $100,000 tied up in the property.
If you are getting a positive cash flow of $200/month ($2,400 a year) but have $100,000 invested in the property, then you are just getting a return on your investment of 2.4%. There are a lot of things you could invest $100,000 into that will do much better than that.
On the other hand, if you only have about 40% equity in your home. Maybe you have $40,000 tied up in the property and you are getting a $2,400 return; that is 6%! You are getting a much better return on the amount of cash you have tied up in the house.
If you are waiting for the market to change, or the neighborhood to improve the value of the house then maybe you can wait it out with a 2.4% return on your house while you wait to sell. if you are thinking of renting the property long-term make sure the numbers work for you.
When you are making the decision of whether to rent or sell your house you need to pay attention to all of the numbers. Beyond the romance and fantasy of being a real estate investor, these numbers will tell you right away how to best handle the house.
You might want to use that cash to invest in houses that work better for you as an investor.