We all know the current state of the real estate market. If you have been following this blog, or if you have been following Boston Real Estate anywhere, then you are aware that the Boston rental market is through the roof, and people just aren’t buying (and therefore people aren’t selling). The sales are tricky right now.
People who are thinking of up-sizing their home due to a growing family are hanging on to their property with hopes of it commanding a higher price in a year or two. Also, so that enough money is made on the property so that they can comfortably invest in something larger. Because these people aren’t selling, they’re not buying. The other group of people not buying, who previously did, is newly weds (and other young, potential first time home buyers). With job insecurity, huge student loans left to pay, and the high expense of things such as gas and food, this category is more and more opting to rent.
[I will insert here, that we do have real, serious buyers in all the categories, and I don't mean to generalize in a way that is inappropriate. I am just describing a trend that I have seen, and it is my opinion]
With the realization that sometimes selling at a price you’re comfortable with is out of reach, some sellers today are turning into landlords. The rental market is healthy, and sometimes deciding to rent your old home is a viable option. In order for it to be so, however, here are some things to consider: (source)
1. Crunch the numbers. There are a lot of financial ups and downs to being a landlord. The general rule of thumb is that if you cannot get 125% of your mortgage payment in rent, then it isn’t worth your time. Bare in mind that rental units come with a lot of unexpected expenses as well. Also, when you’re thinking about renting, remember that if you’re using a rental agent there is a fee of one month’s rent. Sometimes this fee is payed by the tenant, but it is always good to be aware that it exists. Additionally, budget the cost of about one month’s rent for clean up at the end of your tenants stay. Not that they did anything wrong, but general wear and tear means that at the end of their lease you will probably need to repaint and freshen up a bit before being able to attract a new tenant.
2. Speaking of money, it is vitally important to price your unit right and competitively. Just like if you were to sell it, look at similiar places in your area and see what they are bringing in in rent. From there, if you’re not working with an agent, you can decide what price sounds reasonable. Remember to think rationally and not emotionally about pricing.
3. Finding the right tenant is crucial to a successful experience as a landlord. A rental agent can help you a lot with this task. If you are choosing to work alone, remember to check the tenants credit score, their references, their job, past rental experiences, etc. Be sure to get all confirmations in writing. Treat the situation like a business deal. Even if they make a good impression, or you really like talking to them, be sure to diligently check their background. People can be deceiving. (However, it is totally a plus if you do get along with them)!
4. Be aware that being a landlord means significant changes in your taxes in addition to your insurance. “While you probably know that rental income is taxable (Rent for 15 days or more, and you must report this income on Schedule E), and that there are numerous deductions on expenses and depreciation, here’s something you might not know: If you rent your place out for three years or more and then sell, you forfeit a valuable tax break ($500,000 in capital gains tax-free to married couples filing jointly; $250,000 in tax-free gains for singles). Rent your house for a year or two and you’ll still be eligible for this exemption, providing you’ve lived there — in your primary residence — for at least two of the past five years.” (source) Remember also that you will need landlord insurance. This will cover the home and the potential loss of rental income if there is damage to the home. Additionally, it covers you if the tenent gets hurt. Due to all the coverage, landlord insurance usually costs about 25% more than normal homeowner’s insurance.
5. The last major point is that being a landlord comes with a lot of responsibility and accountability for a lot of unexpected expenses. You need to have the proper temperament to deal with crisises in a timely fashion. There is a lot of room for error here, but remember you can always hire a management company.
Hopefully, this answers some of your questions about how well you would do as a landlord. There is definitely a way to make money and thrive at it, but you also put yourself in the line of fire for headaches, large expenses, repairs, and lawsuits.