Perhaps you’re thinking of moving out of the house you live in and turning it into a rental. Becoming the owner of a rental property may seem like an enticing opportunity, but there are certain things to take into consideration. Ask yourself the following six questions before proceeding and converting your home into a rental property.
1. If I didn’t own this home today, would I buy it as a rental property?
This kind of question bottom lines the investment. This puts it all out on the table. In other words, if you did not own the home but had the cash equivalent, would you buy your home as a rental property?
You may point out that your home is too big or has too many amenities for a rental. Maybe it’s in the wrong location. Maybe you would be better off selling the home and buying a different kind of rental property. These points are necessary to recognize in determining the property’s success as a rental.
2. How much will my net profit be per month?
Crunch the numbers of which will give you your net profit value. This is an important total to calculate before taking on a rental property.
Take your rental income and from that, subtract the following:
- Mortgage
- Property taxes
- Insurance
- Repairs and management
- HOA
- The vacancy factor (3%)
3. Can I emotionally detach myself from the home?
It can sometimes be difficult to emotionally separate yourself from the home you’ve lived in yourself. To properly set your property up for rental success, you may have to make significant, physical alterations. It may take repainting the walls or pruning the bushes to do so, and sometimes prospective owners have an issue with these changes. Sometimes it may cause owners to leave behind personal property as a way to stay attached to the home.
It’s important that you to detach yourself from the property, as it’s no longer your house. Now, it’s becoming a rental investment and that’s how it needs to be recognized as.
4. What are my long-term plans with the property?
This is one of the most important questions to ask yourself. If you’re moving across the country and returning in two or three years, then it may make sense to rent it out. However, if you’re moving away permanently, it may make sense to sell the home and buy another rental property close to your new location.
5. How far away will I be?
Are you moving across town, the state or the country? Where you’re living geographically has a lot to do with whether or not the home is going to thrive as a rental.
Make sure you’re living close enough to the rental property so as to have the ability to manage it and check on it regularly.
6. What are the tax implications?
When you sell a home that you have been residing in, you’re given a break by the IRS on your capital. These are the gains that you make on the sale of the property. You will lose that tax break if you rent it out for longer than two years.
Therefore, if you sell the home after it has been a rental for more than two years, you’re losing that tax break. You’re able to make another investment in another rental property and avoid any taxes. This is called a 1031 exchange. However, in turn, you lose the ability to cash out, so make sure to consult your accountant about this matter.
East Bay Property Management and Consulting can help you in the process of becoming a new rental property owner. We provide services regarding all aspects of property management so that your rental business can flourish. If you have any questions concerning this post or other aspects of rental ownership, contact East Bay Property Management and Consulting.
