Austin has seen excellent price appreciation over the last few years. As a result many homeowners have decided to move up to a larger home and lease their current home. Before making that decision it’s good to have an understanding of what it costs to rent a home so you can make an informed decision about your property.
Renting a home is more than just multiplying the expected rent by 12 months. Here are some of the expenses you may incur if you decide to rent your home.
As always you should consult with your own tax and financial advisors.
Perhaps the biggest expense of leasing your home isn’t something you have considered. Opportunity cost means by making one choice you can’t do something else. Not selling your home means your money isn’t available for other investments.
A couple questions you should ask before renting your home are…
“What else can I do with my money? “
You may make money renting your home but it’s also possible you can make more money with a different financial choice. Paying off other debt or investing in the stock market are two possibilities.
“If I didn’t already own the house would I buy it?
We are real estate investors and I believe investing in real estate is one great way to build wealth. That doesn’t mean every home makes a great rental property.
I see many people holding on to homes for sentimental reasons or simply because they already own the house. If they took an objective look at their home they would realize it isn’t a great rental property and if they wanted to own rental property they would be better off selling that home and buying a different property.
Before deciding to rent do a thorough analysis of what a realistic return will be from renting your home and what other investments are available to you.
Will you manage the property yourself or hire a property manager? We do property management and are happy to talk with you about that option. Many people are able to manage their property themselves which can save a considerable amount of money. If you can’t manage the home yourself you should budget in a fee for a property manager.
Will you be able to find a tenant on your own or will you need the help of a Realtor to get your home leased? If you hire a Realtor that will be another expense you need to calculate. In addition how long of a lease will you sign? If you are in an area where people typically move after renting for a year this will be a fee you pay every year.
How long will it take to rent your home? What is the average for your area and is your home one that will lease quickly or take longer than average?
It’s not realistic to make your calculations based on full occupancy every year. This is another expense that many new landlords don’t consider when considering renting their home for the first time.
Losing the Capital Gains Exclusion
Currently if you live in the house for 2 of the previous 5 years you may qualify for a $250,000 ($500,000 per couple) capital gains exclusion. That means you may not have to pay taxes on the gain from selling your home. If you keep the home as an investment property you may have to pay taxes on that gain. Be aware that as of this writing there is possible legislation that may change the current capital gains exclusion.
Losing Your Homestead Exemption = Higher Taxes
When you move to another home and transfer your homestead exemption that means the taxes on your current home will go up. You will lose the 10% cap meaning your property taxes will be calculated based on the current value. In addition you lose the homestead exemption discount from each of the taxing entities. An increase in property taxes can be the difference between positive or negative cash flow on a rental property.
Insurance Costs Will Increase
When you convert your home from owner occupied to a rental property you will want to inform your insurance company about that change. Your insurance premium will likely increase with this change. Make sure you include this increase in your calculations. In addition, if your home is vacant, you will want to notify your insurance company to make sure that doesn't change your coverage.
What are the expected repairs and maintenance of your home? Is it a new home where you shouldn’t have many expenses in the next few years or is your home older and you already know you need to replace the HVAC system, roof, etc?
Expensive repairs and maintenance can eat up your expected profit very quickly.
Depreciation is one of the great advantages of investing in real estate. Many investors don’t realize when they sell the home they will likely have to pay a depreciation recapture tax.
As you can see deciding to rent your home is more complicated than multiplying the expected rent by 12 months. If you would like to talk about your options for renting or selling your home call with no obligation 512-791-7473.
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