5 Reasons to Rent Out Your Home

Winter is here.  Spring is coming.  I sound like a Game of Thrones ad!

Seasons matter.  I love them all for various reasons - I love the freedom of summer, the crisp scents of fall, the cozy nights of winter, and the HOUSING MARKET in the spring.  

Okay, I also love the promise of new beginnings, budding flowers, and extra sunshine that spring brings.  However, I have to admit that I love the fun of house hunting in the spring.

Even if I am not moving or buying a house, I am always 'house hunting'.  I love doing market research and seeing what is for sale, what has or has not sold, and what is hitting the market.  This used to be an "inexpensive" way to window shop; I wasn't able to just "buy a house" with a click of the mouse. However, since we started renting homes, it has become a bit more risky because I tend to fall in love with homes and now have a business that supports buying them!

With every spring comes change.  People often move jobs and locations along the timeline of school seasons and semesters, so that means people start to offer their homes for sale in the spring in anticipation of moving in the summer.  Therefore, the housing market is most active in the spring and houses tend to sell most easily during this time period. 

Most people consider selling their home as their biggest obstacle in the their move, and that is for good reason.  It is a lot of work, time, and effort to sell your home.  There is a lot of mental and financial stress that goes along with all of that as well.  Obviously, there are lots of reasons to sell your home when you move, but some times, people overlook a great opportunity when they are moving.  That opportunity is a chance to rent out your current home.

The reasons to rent your home go far beyond this list and I will take the time to cover them in additional posts, but I wanted to share a few reasons that are often not even understood or known by the general public when it comes to renting your home.  There are some advantages that you might not have considered beyond the obvious ones that you probably have considered.  You can also create an opposing list of reasons to NOT rent your home.  That is also true.  However, that same thing can be said for any type of situation that has benefits and risks.  

So let's get down to it.  Here are five lesser known reasons to consider renting out your current home rather than selling it.  I hope you find this fun and a nice tool in considering whether or not to rent your home!

YOUR LOAN INTEREST RATE IS LIKELY BETTER

Interest rates on loans for primary residences are almost always cheaper than interest rates on investment loans.  This means that you can rent your home with less cost than if you were to invest in a different home to rent.  Using an example, let's say your primary home mortgage is $250,000 and your interest rate is 3.50% at 30 years.  That makes your monthly mortgage payment $1123/month.  If you were to purchase this same home as a rental investment (aka, in addition to your primary residence), you would likely have a loan that was structured more like $250,000 at 4.75% for 30 years.  This would make your payment $1304/month for the same house.  That is already a difference of $181/month in cash flow and you have not had to do anything different.  That amounts to $2172/year.  Not bad.

YOU ALREADY HAVE THE HOME

Securing financing for a rental home is time consuming.  Remember when you had to secure the loan to buy your home?  It's a pain, right?  Well, escalate that pain up a notch when you are buying an investment property.  There is even more paperwork, time and particulars involved, making the process fairly time consuming and more difficult.  If you already secured financing for your home (or even own your home outright), there is very little you need to do to change it to a rental home. 

YOU WILL LIKELY PAY LESS FOR INSURANCE

When you convert your primary home into a rental home, you change your homeowner's insurance policy to what is often referred to as a "fire policy".  This policy covers your home, the land, and the rebuilding cost of the structure.  You are no longer insuring your valuables inside the home (that will be the responsibility of the renter through their rental policy).  In our experience, a fire policy has generally been less expensive than a homeowner's policy.  That amounts to more money in your pocket again.

TAX ADVANTAGES

This topic is broad enough to fill entire books on the subject, so I will gloss over this and keep it brief.  However, there are substantial benefits to renting your home.  In a nutshell, when you start renting out your primary home (which will now not BE your primary home and you are allowed to obtain a new one with the same lower financing as before - yay!), you will start making income from your renters.  However, any income you obtain will be offset against expenses incurred in owning your home (care, maintenance, repairs, and more).  Any improvements you make and or large repairs you make (like a new roof), can be expended as a depreciation expense (meaning you will be able to deduct these costs over each year you rent the home up to the usable life of the item).  You even depreciate the cost of the house structure.  This is all overwhelming to discuss, but know this:  You will be getting to deduct a lot of things from the rental income you make while also reducing the amount you owe on your home.  Therefore, you are getting to offset a lot of the income you are making, and your debt on the house is still going down.  Your home is gaining equity and you get to do it without a large burden of tax impact. That is a good thing. 

LESS TIME ON THE MARKET SAVES YOU MONEY

In our experience, renting a home happens a lot faster than selling it.  You can complete the process in a day, in fact, we have often rented a home in a matter of hours.  That means, there is not a day that goes by that we spend money on utilities, mortgage payments, or property insurance or taxes in waste.  If your house sits vacant on the market while waiting to sell, you rack up costs pretty quickly in all these areas.  Renting a home is a less serious commitment for most people than buying one.  They are more readily willing to enter into an agreement and the coordination of the transaction is simpler.  Time is money.  Renting saves on that front.

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

— Ayn Rand

Hopefully this was interesting and helpful to you in the process of considering home rental.  There are so many factors that go into the decision to rent or sell your home, and this is only a smattering of them.  Knowing your advantages, including more obscure advantages, can be helpful when it comes to making the decision to rent or sell your home.

Have you ever rented out your primary residence? What made you decide to do so? Did you decide to sell instead? Were you happy with your choice?  I would love to know!

- Casey

WHY WASHINGTON WANTS YOU TO RENT A HOME

Sing with me: Fa La La La La, La La La....TAXES.  Happy 2018!

Like many of you, I spent the last two weeks of 2017 scrambling to understand the new lax code.  Not that I am complaining (okay, maybe I am), but hopefully next time we decide to complete a total overhaul of the tax code, maybe we could do it with a little more time on the tail end for the nation to react before the end of the year!  I felt so bad for the employees at tax firms, accounting and investing companies that were handling such a rapid increase in call volume and servicing right during the holidays.  However, all those wait times allowed me some extra research into the new tax laws for 2018. 

After a lot of reading, it has become pretty apparent that the new tax codes are favoring the rental market.  This is not a great surprise to me as the new code is likely designed with business in mind.  Though I am still a homeowner and plan to be in the future, I wanted to highlight a few areas in which the code is more attractive to renting homes.  Whether that means you are thinking of renting or buying a home, or if you are planning to pick up a property to rent, this post is just another consideration in your journey in either aspect.

One more disclaimer.  I am not an investment adviser, attorney, or accountant (though after reading through the tax code, I think any of these credentials would have been helpful!).  Therefore, this is just what I am sharing from my reading.  Little old me and my ideas.  Read this with a grain of salt.  Ok. There THAT is. 

Mortgage Interest Deductions Have Decreased

You cannot deduct as much interest on primary and secondary home mortgages as you did in the past.  Current loans that are in place prior to the new tax code are grandfathered in (meaning you can treat them as you did under the past tax code).  Moving forward, any new loans will be subject to new level of interest deduction.  This might affect you if you are looking for a larger or more expensive primary residence or considering a second mortgage for upgrading your home (or financing another thing like college using your a home equity loan).  You can now deduct the interest from a combined value of all home mortgages of $750,000, which is reduced from the prior code.

$10,000 Cap on Local and State Tax Deduction

If you have a home and work in the same state, your deduction for your property taxes (local) and state taxes (from your income), are now capped at $10,000.  This means if you pay $10,000 in property taxes every year, you can deduct them but no longer receive credit for the taxes you paid to your state in income.  If you paid $10,000 in state income taxes, you can no longer receive credit you paid for property taxes to your local government.  If you paid $15,000 in property taxes, you don't get to deduct that last $5k.  Same goes for your income tax.  Therefore, depending on your local and state tax rates, some of your previous deductions gained by owning a home, might be diminished.

Mortgage Interest and Property Taxes on Rental Properties are a Business Expense, not a Deduction

Looking at the first law, you might be nervous if you own several homes as rental properties.  I know I was. Upon further review, I remembered that the mortgage interest and property taxes of rental homes are taken as business expenses on the rentals, not as deduction on the taxes.  What this means is that the full amounts of interest and property taxes paid are a direct expense to the business and are not taken as a proportionate deduction on taxes.  Therefore, these new tax laws for home ownership are not the same for a business renting homes. Whew.

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.
”

— Sir Isaac Newton

Where does this leave us?  Owning a rental property is not a bad plan with the new tax code, even though it might seem scary at first.  If you are considering a jumbo mortgage, or a second mortgage, and are using property taxes and interest deductions as part of your rationale and computation, you need to consider the fact that those rules have changed.  That does not mean buying a home is a bad idea (not at all in my opinion), but when playing the game of home purchases, you better be sure you understand the rules.  

Are you going to buy a new home this year?  Does the new tax code change your thoughts on any of it?  Have you thought about buying a rental property this year?  I'd love to hear your thoughts!

- Casey

 

WHAT IS THE 50% RULE OF REAL ESTATE INVESTING?

The 50% rule is a easy way to estimate the year end cash flow of a property. Simply put, you can assume that over the average span of you owning and renting the home, 50% of your rental income will go towards expenses.  Those expenses can include maintenance, capital replacements (ie, new appliances, roofs etc), property taxes, insurance, and more.  You can quickly determine what your profit on a house would be by applying this 50% rule to any house you are considering. 

For example, if you are considering a $100,000 all in price on a home, we already know that the 1% rule would mean that you needed to be renting this home for $1,000/month.  If you had the home rented all 12 months, you would have a gross rental total of $12,000/year. Sounds lovely, right? Now we apply the 50% rule.  That $12,000, turns into $6,000/year once you apply costs.  Now, if you put 20% down on that same $100,000 house (which would be $20,000), that means in the first year, you'd earn $6,000 on your $20,000.  That's nearly a 30% return.  For this reason, many people advocate buying homes with loans because you can spread your investment over several houses, making your returns higher.  However, your risk also increases with debt.  We'll cover more on that topic later.

Applying the 50% rule means you are applying this math across the ownership duration of this house.  The first year, you might sneak by with only $4,000 in costs, meaning you are ahead. However, that next year, you might need a new roof, and your total is now $8,000 on the year.  The idea behind the 50% rule is that everything will average out over the course of time.  It is simply an easy way to judge what total profit you can claim from the home.

Clearly, this is a simple way to calculate profit.  Actual accounting is far more accurate and in depth.  However, this is a fast and easy way to size up the potential earnings on a home before you decide to buy it!

Have you ever considered the 50% rule when purchasing a home?

- Casey

STOMACHING REAL ESTATE

Having the patience and stomach for real estate is not for everyone.

After our offers, counter offers, and attempts at negotiating on this newest house, another offer was accepted.  We were frustrated by the fact that we were not even told another offer had been accepted, but rather found out on our own accord on the internet.

It's hard to be patient and disciplined. We had our budget, did not want to overspend, and also tried to make fair and reasonable offers.  This time it was not in the card for us and that is okay.  We have to trust in timing and what makes sense.

Of course, I get emotionally attached to each house I tour.  I see its potential and imagine what I could or would do if it became ours.  It is hard to walk away, but it is necessary to move on and trust that the next thing will happen as it should.

Trying to get a new home always motivates me to save, however.  Sometimes I lose focus, get lazy, and forget to keep my eye on the target.  Having money for houses and down payments is a lot easier when you set a target for it.  Falling off the wagon is easy when I am not focused on house hunting.

Whatever your timeline is for an investment, remember to keep your eye on the target and stick to your guns.  Sometimes it will fall into place and work out.  Sometimes it won't.  Know what you want and how you plan to get after it.  If you plan ahead, then you can make fast offers that make sense and fit your goals. 

Until then, I will keep my eyes open...and on target!

- Casey

Organizing Your Lease

Found a client to rent your home!  Check that box.

Yikes.  Now you need a lease. 

Creating a lease and organizing your paperwork is not as hard as you might think.  There are plenty of services out there that will let you customize your lease according to your state and needs.  We use EZ Landlord Forms for our homes as they have an array of forms and state specific topics. We don't rely on their free forms, however.  We find them too general and not state specific.  When it comes to getting things in writing, you want to be sure that you are up to date and complete with your state requirements.  Rather than becoming an expert in the ever changing regulations and laws, we have found it much more effective to allow them to stay up to date and us utilize their service.

When it comes to what pieces to include in the lease, it makes sense to review everything that is included by you and everything that you expect from the client.  Some often overlooked things might include:

• Pet Requirements - deposits, fees
• Clean Out Expectations
• Homeowner Contact Hours
• HVAC Filter Replacement
• Utilities
• Emergency Contact Information
• Parking Instructions
• Key Responsibility
• Surface Care (ie, Granite, Tile, Grout, Wood Floors)

The more your outline expectations, the easier it is for you and your client.  We like the simplicity of the online services.  Most clients are in the middle of a move and have a transitional address.  It wastes a lot of time sending a lease through the mail to your client.  With online forms, you can use digital signatures that allow you to create, send, and receive the signed lease all within a few hours.  Additionally, you then have a saved copy already to go on your computer.

Even though the services do help automate your lease creation, that does not relieve your your burden of being familiar with your state requirements.  Things such as security deposits, late fees, termination notice, and more all vary by state.  There are cues in place with automated forms to help you understand what you need to be familiar with.  We will cover that in greater detail in another post.

“You are far too smart to be the only thing standing in your way.”

— Jennifer J Freeman

Don't be nervous.  This is a lot easier than you might think.  In a matter of an hour, you can have a solid lease that is ready for your client.  You just need to do it!

- Casey

RENTAL HOME YARDCARE - INCLUDING LANDSCAPING IN THE RENT

Including yard care in the rent? You must be kidding?  Rental homes are already expensive enough!

Well, I am not kidding.   I do feel like I have a valid argument for why including yard care is an important service for your potential clients. 

We include routine yard care for all our homes.  This includes mowing, trimming, edging, blowing, and such.  Including yard care in the rent has several benefits for both the client and for the homeowner.

Primarily, by including yard care, you ensure your property's landscaping is well taken care of.  You ensure that the neighborhood says attractive and help your property values continue to rise.  You prevent drawing attention to the fact that the home is a rental property because it is continually manicured as if a homeowner was invested in the home.  All of these things help improve the neighborhood, deter crime, and hopefully will add to your property value over time.

Additionally, your clients are renting a home from you.  Clients that rent homes are more likely to be moving more frequently, have recently changed jobs, and are in a state of transition.  Many of them do not own yard equipment.  Often, potential clients will turn away from a single family home because they do not want the hassle of yard work.  You do not want to lose potential clients to an apartment or condo simply because they cannot or do not want to perform yard care.

Yard care is more reasonably priced than you might think.  We have several homes and our yard care professionals discount their work because we give them several homes to care for.  Additionally, depending on your climate and location, it might not be something that has to be done year round.  We service our southern NC homes twice a week from about March through October.  We usually include a leaf blowing, gutter cleaning, and hedge trimming in there as well.

Finally, if you have someone staying on top of your landscaping, you will avoid the negative connotations of having to bother your clients to keep up with the yard.  Negative interactions as a whole are bad for your relationship with your clients.  You will also ensure that there are minimal costly "whole yard" landscaping renovations once your client moves on.  This can often add up to more than the landscaping over the course of the season would have amounted too.  Even if it means an adjustment in your asking price, landscaping will be a huge benefit to the client and to you.

Clients love it when landscaping is included in the rent.  Often, they cannot believe it when I let them know.  I think it is important to think about what makes life a little nicer for your client.  Landscaping care not only improves their quality of life, but it will improve your stress and neighborhood appeal as well.

- Casey

SETTING A RENTAL RATE

650? 1000? 1500?

Utilities? Yard Care? Pet Rent?

Yikes! Where do you begin? 

Spinning from the last post about the 1% rule, we already know that the house needs to rent for approximately 1% of the total purchase price of the home.  So, using our last example, if the home was $100,000 to purchase, then the home needs to rent for $1000/month.

You have to understand your rental market to know if your home can command this price.  This is where you must become a student in your market.  You need to invest time researching your market.  There are plenty of rental sites to choose from.  One of my personal favorites, is zillow.com, but there are plenty of them to choose from.  Look around the area you are considering purchasing your home.  What are the going rates?

You'll quickly find that it is hard to compare.  Some homes will have the same number of bedrooms and bathrooms as yours, but yours might have additional rooms that offer more square footage.  Some homes have better or worse finishes than yours, such as granite verses laminate counters in the kitchen, or a master en suite bath verses a shared bathroom.  The list of comparisons can be daunting.

Comparing homes can be difficult, here are some fairly tried and true rules that I have learned that allow me to size up the market and the competition.

• Number of Bedrooms
• Number of Bathrooms
• Quality of the Kitchen and Bathrooms
• Overall Square Footage
• Yard
• Storage

Let me preface this by stating that we rent mostly historic homes.  These homes are in an area that particular streets are more desirable (less traffic) and yard size is often small (thus, more private, larger lots, matter).  Additionally, historic homes traditionally offer storage challenges, so when a historic home offers storage, this is a big advantage.

That stated, people overall care about having a nice space/street to live on, some place to store their holiday decorations, and enough space for their family.  They also care about the amount of bedrooms and bathrooms.  The price of the home is usually most dependent on the number of bedrooms, more than bathrooms, but no one will complain about having additional bathrooms!

People care about kitchens and bathrooms and the quality of the finishes.  Depending on your market, the level of quality can change.  However, across the board, attractive surfaces, cared for appliances, and nice flooring go a long way.

When you put this all together, you can start to compare homes on a more equal basis.  Perhaps you have a very nicely appointed two bedroom home that has 2 bathrooms, a fully remodeled and upgraded kitchen, and a private, fenced yard.  This might rent for the same price as a three bedroom, one bathroom house that has a standard grade kitchen and one less bathroom, on a busier street with a smaller yard.

It is not simply the size of the home that determines the rent, but as importantly, the quality of the home.  Some people will sacrifice more space for better finishes; others will want that extra bathroom. When pricing your home, consider the competition in your size range and determine if you were looking to rent, where would home fall amid the available competition on the market?  Would your home be as nice as the others? Nicer? Less nice?  If you were looking to rent, consider what price would make your home a "no brainer" or "I need to call quick before this house is gone?"  That is the price you want to consider.  Something that makes a potential client act so they don't lose out.

We'll cover more on this in the future, but hopefully this helps guide you in determining a rental price for your home. Once you know your market, you can better compare what your home has to offer a potential client, and you can more accurately determine the best price.

- Casey