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By: Katy L. Chase, CFP®, MBA
Securities are offered through First Allied Securities, Inc. (FASI), a registered Broker Dealer, Member FINRA/ SIPC. Advisory s
Financial
Advisors,
Inc., a Registered
Investment
dba your
Lighthouse Wealth Management (LWM). LWM is not a subsi
Maybe you’re
ready
to upgrade
to a bigger
home. Adviser
Perhaps
spouse has accepted a job that requires relocation. A variety of
scenarios could lead to listing your current home in pursuit of
buying another. Will you be listing your current home for sale,
or for rent?
Real estate is generally considered to be a sound investment. So, when a family fi nds
themselves at the stepping stone of purchasing a next home, it makes sense to consider the option of renting the current property
as potential for a passive form of income, rather than selling it outright.
Th e goal of renting is to see the property value appreciate over time while the tenant’s rent covers all or most of the home’s expenses.
Eventually the mortgage is paid off and it becomes a passive income source for the original homeowner.
Sounds great, right? Becoming a landlord is an impactful
decision that should be carefully considered as tax laws and
fi nancial regulations change regularly.
Ask yourself the following:
1. Can you afford it?
Down payment. Th ere won’t be proceeds from the sale of the current
home, so the cash needed for a down payment on the new home must
come out of savings, investments, or cash fl ow.
Two mortgages. Ideally, the tenants’ rent covers the mortgage
payment, but if the home remains unoccupied or the renter misses a
payment, the homeowner is on the hook.
Upkeep costs. If your washing machine and the one in the rental
house break in the same month, you have to fi x them. Do you have
an emergency fund that will cover unexpected maintenance costs for
two houses?
Unique landlord costs. Landlord insurance premiums and marketing
and promotional costs to fi nd and vet tenants can add up, especially if
your tenants turn over frequently.
2. Is your current property underwater?
If you need to relocate and owe more on the mortgage than the
property is currently valued at, it can make sense to rent it out and
cover the mortgage, holding out for appreciation in value.
Depending on the situation though, it may not be an option to retain
the home; it can also make sense to cut your losses and sell to move
on fi nancially and emotionally.
3. Are you up for the sweat equity?
Tenant troubles. A hard truth for landlords is that tenants don’t always
play by the rules: late payments, poor treatment of the property,
disruptive neighborly behaviors, and misuse of HOA amenities all
must ultimately be addressed by the homeowner.
Honey-do times two. Some tenants are easy, others are needy. Do you
have time to fi eld emails and calls from your tenant? To complete
necessary preventative maintenance on the home and respond when
the tenant has issues that need attention?
If the answer is no, you’ll need to hire a property management
company who will do all that for you…for a cost.
4. What is your driving desire?
Is renting out property a strategic investment to diversify holdings?
If that is the intent but it is not fi nancially feasible, there are other
cheaper, more liquid ways to own a piece of real estate including
public and private REIT off erings, mutual funds, exchange traded
funds, and others.
Investing in real estate can be a smart move if it’s well thought out and
makes fi nancial and personal sense. Th e above list touches on some
considerations of renting