The local real estate market is finally emerging from a buyer’s market; however, inventory remains high, and in many segments, buyers still have considerable leverage. Before you make a decision to sell your home, perhaps you should explore whether or not becoming a Landlord and renting out your property is a better option. Here are the primary factors to consider:
1. Will you need the cash from your current home in order to accomplish your move? In other words, if you’re buying another home (either relocating, or moving up or down), is there another way to facilitate that purchase without the proceeds from this sale? Could you take out a home equity loan for the necessary funds, or perhaps leverage a different investment? How will that affect your monthly cash flow? If the answer to that question is “yes, we have options,” then continue to ask yourself if renting makes sense.
2. How much control do you have over the timing of your decision? As a landlord/investor, it’s important to be objective about market cycles and timing, as timing of both acquisition and liquidation has a significant impact on the return on investment. In other words, if you can rent out your home and hold on to it until the values peak, and sell at that point, you will maximize the investment.
Unfortunately, it’s not quite as easy as it sounds to “play the market” from a timing perspective, and generally it takes a back seat to other considerations.
3. The next factor to weigh is probably the most important: cash flow. Start by getting a reliable assessment of what you can rent your property for (in other words, a market analysis by a qualified property manager…not what your neighbor thinks!). What is the shortfall, if any, between your mortgage payment and the rent? Can you afford that over time?
4. In addition to the cash flow shortfall, you will also have expenses and maintenance. Most property managers charge between 8 and 12% of the monthly rent, and a good one is worth his or her weight in gold. Additionally, you should forecast for normal expenses and maintenance, as well as a cosmetic overhaul (paint and carpet at a minimum) between tenants. Estimate the annual cost, and divide it by 12 to realize your true cash flow scenario.
You should also strongly consider a home owners warranty, and regular maintenance contracts by professionals such as an exterminator and HVAC specialist. You simply cannot rely on a tenant to care for your property like a homeowner, and it’s prudent to plan accordingly.
5. In addition to expenses and maintenance, you must also factor in vacancy in order to assess the overall picture. Your property manager can project how many months it should take you to secure a tenant in the first place, as well as how long you should be prepared for between tenants. As a rule of thumb, most banks consider a 20% vacancy factor.
6. What are the tax and long term investment benefits of being a landlord? On the plus side of the equation, your CPA can help you estimate what tax benefits you’ll enjoy from having rental property. Additionally, by applying a conservative factor for appreciation, you can estimate your equity gain over time. I would recommend between 4-6% annually. However, these financial upsides are not liquid, and so they need to be considered from a “big picture” standpoint, not from a cash flow analysis.
Your Realtor can recommend a reliable Property Manager to help you with this analysis. In some cases, you may find that it makes better financial sense to hold onto your property and rent it out, than it does to sell it in a Buyers’ Market.
If you’re a seller who has been wondering if it might finally be time to sell, email us at concierge@lizmoore.com, or click below, and we can prepare a complimentary analysis of market value for you – you just may be pleasantly surprised.
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