1. Try Becoming an Investment Property Owner For a Change!
An excellent way to see if you have what it takes to be an investor is to rent out your home. When you bought your home as a primary residence, you were likely given a mortgage loan with favorable terms such as a decent interest rate and lower down payment than you would be able to get as an investor who purchased an investment property.
In general, investment property loans require larger down payments of 15-to-25-percent, have higher interest rates and different rules for underwriting. So, without going through all the limits and added rules, you can avoid that by changing your primary home into a rental property.
Try renting it out for a year or two and see how it goes. You are still allowed to sell your home with a tenant on a lease. The new buyer will simply have to accept that and get a mortgage for an investment property if the current lease is for more than 120-180 days.
2. Generate Cash Flow
If you have lived in your home for five or more years, hopefully, you have paid down your mortgage balance a bit and can enjoy some monthly cash flow from your home. An extra few hundred dollars a month really comes in handy during these uncertain economic times.
3. Benefit from Tax Deductions on Your Rental Property
There’s still great reasons to rent out your home if it doesn’t bring in cash flow. Lots of people who become landlords and move away for new relationships and new jobs do not purchase a home immediately as they want to “test the waters” in their new situations. Since they are now leasing in their new location, getting tax deductions on their former home can help a great deal.
For example, if you rent out your home and receive $3500/month or $42,000 gross income, but your rental expenses, were $30,000, you’re only taxed on $12,000.
All maintenance repairs, landscaping, utilities, insurance, HOA fees, and even travel back to the home, can be deducted as a business expense. Moreover, you may be able to also deduct your property structure’s depreciation over a period of 27.5 years, based on the Modified Accelerated Cost Recovery System (MACRS).
What this simply means is that if your property was purchased for $600,000 and the land value is $125,000, then you would be able to deduct around $17,272.00 every year for depreciation based on $475,000/27.5. You can only use the building value portion in the formula.
These deductions and depreciation can immensely help cancel out gains elsewhere so you should definitely speak with a licensed tax professional for the most up to date tax information.
4. Return to the Area in the Future
Sometimes these new jobs and new relationships don’t end up the way you had hoped. By preserving your home as an investment property it allows you the flexibility to come back in the future. Of course those tax deductions as a rental home will no longer apply. So, you need to weigh everything by speaking with a licensed tax advisor.
5. Gain Experience as an Investor
Discovering all the nuances of managing an investment property is excellent experience to see if you’re suited for this in the long run. Typical parties you’ll work with are the property manager, a CPA or tax accountant, insurance agent, maintenance crew, and others who handle aspects of property management. You may find the whole process easy and decide to purchase more properties, learn how to maintain your own home better or, you will recognize that being a landlord is not something you want to do actively or passively.
6. Property Values Are Going Up
The economy is on the upswing in 2018 which means more people have jobs which keeps rents stable or increasing. If you bought your home from 2009-2013 you may have gained significant equity, especially in certain areas of California, Seattle, Las Vegas, Oregon, Colorado, and Florida.
By renting out your house and home values on the rise, you are gaining equity at the same time as your tenant pays down your mortgage balance. Why dip into your retirement or stock brokerage account and possibly incur a tax hit to purchase another home when you can rent yours out for a year or more.
Market conditions should be strongly considered in your decision not only if the mortgage payment is covered by the tenant. In areas of high appreciation but rents don’t cover the mortgage, you may want to put up with the monthly loss in return for keeping your investment.
Study the trends in the neighborhood to evaluate the long-term outlook. This will help you determine if the home is likely to increase or decline in market value.
7. Return on Investment?
Keep in mind how much your net profit would be if you sold the property today, presuming you’d subtract about 8-10 percent for real estate agent fees and closing costs. Sometimes when you take out their fees, your take is not as much as you thought. So, it may be beneficial to hold onto the property, and allow the market to improve over time. This is even more accentuated if the property can easily generate positive cash flow during that time.
EXAMPLE: Sale Price: $475,000
Mortgage Balance: $410,000
6% Realtor Fees: $28,500
Settlement & Title: $2,000
Transfer Taxes: $3,000
That $65,000 in equity becomes just $31,500 when it is all said and done.
If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and would only achieve $1,000 per year in cash flow, that’s a 1% return on investment. I would much rather take that $100,000 profit and invest it in something else that could give me a higher return.
How to Avoid Paying Commission
If your current tenant prefers not to leave and wants to buy the home, you may have the opportunity to sell your home without paying that 5-6% real estate agent commission. However, in a high-demand area realtors may be able to get a buyer who will pay more than the listing price.
8. Rental Demand Is Increasing
A much lower number of people are buying homes today due to the housing bubble in 2009 -2010. It is now a nation of renters which means rental property demand is increasing every day. This general change in thought has provided landlords more of a say with their residences, allowing them to collect premium rents and determine the lease terms.
It is a lot more difficult to find the right buyer for a home than it is to find the right renter. Buying a house is thought of more as a lifelong decision while renting a place can be viewed as a temporary scenario, so people are more likely to act quicker when renting than they do when buying.