Should You Rent Your Primary Residence?
By JD Esajian on March 30, 2018
There are many ways to get started in the real estate investing business. If you talk to ten investors you may hear ten different stories about how they began investing. A common starting point is renting a primary residence. This method was particularly popular last decade just after the market collapsed. Many homeowners who could not pay their mortgage decided to rent and it turned out to be the best thing they could have done. They avoided foreclosure, made money on their property and in the process, started their real estate portfolio. Renting a primary residence may seem like taking a step back but in the right situation it can be the best decision you can make. Here are five factors to consider if you are thinking about renting your primary residence.
- Equity. Many of the homeowners mentioned in the previous example rented out of necessity rather than desire. They were late on their mortgage and didn’t want to deal with a short sale or foreclosure. The first thing you should do if you want to rent is get an idea of how much equity is available. You will never truly know unless your home is on the market, but your real estate agent should be able to give you some idea of the value. In some cases, the equity will be a surprise, in either direction. With increased equity you can sell without anything hanging over your head and use the proceeds to purchase something else. If your equity is limited renting is a viable option to buy some time until your market turns. You always want to know what your equity position is prior to doing anything drastic with your property.
- Goals. Why would you rent your property? Are you late on the mortgage and need to find a way to get current? Are you faced with little to no equity if you sell? Do you have an opportunity to greatly reduce your housing expenses by living somewhere else? Are you in an area where rents are 20-25% higher than the rest of town? Renting your home and moving out is a big decision. There are times when it truly is the best financial move you can make. Other times it is an overreaction and you are just putting a band aid on a short-term problem. Renting your home means you will be uprooted for at least a year, and most likely longer. Before you agree to rent you should be comfortable in your decision and map out a five-year property plan. Being a few weeks late on your payment may seem like a struggle but you don’t want to compound your problem by making another. Whatever decision you make should be backed up with reason and you should be comfortable with whatever you do.
- Numbers. The numbers should have a large influence in whatever decision you make. It is not enough to take the numbers of a neighbor’s property and apply them to yours. Every property has unique features and characteristics that determine rentability. An extra half bathroom in the basement or a laundry room in the house can make a huge impact. You should never assume that your property can produce a monthly rent number without doing your homework. Look at area listings in the newspaper or online and see how your home compares. If you are near a major college or university you may be able to rent for much more than you think. Conversely, if your home is in a quiet part in the corner of town you may not have the demand you anticipate, even if your home is completely updated. Talk to any landlords you can find in your area and ask them about rental specific numbers, fees and costs. Depending on your long-term goal you may be able to live with netting a minor cash flow profit every month. Whatever you decide make sure you understand the numbers.
- Living accommodations. If you rent out your home, you are going to have to live somewhere. With rental properties abundant you can most likely find a rental to fit your goals. If you want to rent your home and buy a property you need to discuss this option with your lender or mortgage broker first. There is a huge difference in the guidelines and down payment for an investment property as opposed to a primary residence. Just because you want to rent and buy a home doesn’t mean the lender will see it this way. You may need to have a signed lease in place for underwriter approval. You also need to make sure the income and numbers work for the property. Rental income typically only allows for 75% of the rent received. This can cause your loan to be subject to a higher rate or even rejected.
- Management. Rental properties do not just run themselves. Even if you have an updated property on a quiet street there will be tenant issues to deal with. When these issues pop up how are you going to handle them? Do you have the time and ability to deal with maintenance problems? If not, are you willing to give up 10% to hire a property manager? In most cases, you will find good tenants that take care of the property but there are always exceptions. Before you commit to doing anything, you need to figure out how you will manage the property.
Renting your primary residence can help you realize cash flow, learn property management and help pay down your mortgage. It is also an adjustment that not every homeowner is ready to handle.