Pros and Cons: Why You May (or May Not) Want To Rent Out Your Space
Maybe you’re planning a big move just when the local real estate swings from a seller’s to a buyer’s market. Maybe you have a spare bedroom or guest house you never use. Or maybe you have a grand vision for flipping that garage into the coziest Airbnb.
Whatever the case, if you’re considering renting out your current home or property you own, you’ll want to be ready for everything that entails.
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“If you do rent out your house, you need to treat it like any other business,” Jay Zigmont, PhD, CFP® and founder of Childfree Wealth said. “You need to track income and expenses and pay taxes on the net income.”
Check this list of pros and cons to make sure being a landlord is a worthy investment.
Pros
Here are a handful of the financial pros of being a landlord.
Passive Income
Renting out your current home or property can provide a steady passive income, especially if the rent you charge your tenants is higher than your monthly mortgage payment. In 2022, the National Council of Real Estate Investment Fiduciaries Property Index found a 24.1% increase in returns on investment in multifamily apartment properties. An investment like this could help you pay off your home, or leave you with a little left over for improvements on the property over time.
Keep in mind, you will have to pay taxes on that income at the end of the fiscal year.
“When you are renting out your property, you will want to work with a CPA or EA to prepare your taxes,” Dr. Zigmont said. “How you file will change based upon the use of the property and how long you have it rented out.”
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Building Equity
Dr. Zigmont said you may also benefit from the appreciation in the price of the property over time. If you hold off on selling your property and maintain it as a rental, your home value may increase year after year, depending on location or improvements made to yours and other homes in the surrounding area.
As the homeowner, your increased equity could mean listing the home for a higher price when it’s time to sell, having the ability to increase the rent or even taking out a better loan on a new property further down the line. Keep track of your home value with an online estimator or a professional appraiser.
Tax Breaks
You could also be eligible for certain tax breaks when renting out your home. As a landlord, you can deduct expenses for certain materials or repairs. You can even deduct ordinary and necessary expenses for the management of your property. Talk to your tax professional about the deductions you could be eligible for, and keep a thorough record of these expenses throughout the year.
Cons
Despite the positives, there are certainly some drawbacks to renting out your property. Here are some of them.
The Expenses
While you would be making money on the rent, you are still responsible for a number of expenses as a landlord. For example, if a pipe bursts from age and wear, that money won’t be coming out of your tenant’s pocket. Owning your own home on top of renting this property could spread your finances thinner in times of emergencies like these.
There are certain expenses that can pile up before you’re even able to put the property up for rent. Dr. Zigmont said your state or town may have requirements that you have to meet before renting out your home. If you are accepting renters with rent assistance, you may also need to have certain inspections done on the property.
“You also need to have a plan for how you will handle if the property is not rented (or the renter is not paying) for an extended period of time,” Dr. Zigmont said. “Having cash on hand to cover low rent months and any expenses is a good idea.”
As a property owner, you already know the unexpected can happen. If you won’t be physically living on the property, it can make things even more unpredictable.
“Being a remote landlord can be a disaster,” Dr. Zigmont said. “My wife and I tried this, and the result was that the renters (and their dog) destroyed the hardwood floors in the two years it was rented. It cost almost as much to repair as we made in rent.”
Extra Hurdles
If you’re renting the property out while you live there, like an Airbnb or back house, Dr. Zigmont says you should consider the “return on hassle.”
Your homeowners association or zoning laws on your property may prohibit rentals. Even if you are allowed to rent it out, you must first check with your HOA to see if there are limits on the number of people you can rent to or the number of days you can rent it out each year. You may also need to update your homeowners insurance to cover rentals. Make sure you check in with these institutions before taking any steps toward renting.
At the end of the day, it’s important to understand that your property is an investment, which comes with highs and lows. While many people have great success with Airbnb and similar services, Dr. Zigmont said you can always consider other tools to get exposure to real estate investing.
“Do not use the justification that the rent covers the mortgage payment, as that does not take into account maintenance and other costs,” Dr. Zigmont said.
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This article originally appeared on GOBankingRates.com: Pros and Cons: Why You May (or May Not) Want To Rent Out Your Space
