The first thing to consider is whether or not you’ll be able to collect enough rent money to pay for your mortgage and other expenses. If this is possible, I would encourage you to take this route. It’s a great way to get your mortgage paid off. Later in life, you can sell your home for one lump sum and have some extra retirement money, or you can supplement your income with rent. Or, you can accrue more than one investment property and live off your rental income.
If you cannot cover your costs with rent money, consider whether you can cover the deficit and whether the property value will increase over time. You’ll also need to decide whether it seems worth it to cover the cost for a few years.
If you can rent out your property, it’s likely you won’t have to pay taxes on that rental income. There are several tax deductions to consider. For example, on a $300,000 home, you can usually deduct about $11,000 annually from depreciation alone. There are other expenses you can deduct at tax time, too, such as traveling to and from your investment property. The great thing about real estate is that it continues to appreciate, even as you get tax deductions for depreciation.
Renting is great if you’re leaving the area for a period of time but not permanently. This often happens during work transfers. When people do this and come back home, a large portion of their mortgage is paid off. If you do rent out your property, it’s important to find a good property management company. This will take away all the headaches of renting out your home. A property manager will can save you a lot of money as well as time and stress.
If you have any questions about renting or selling your property, or anything pertaining to Salt Lake City property, please contact us at Wasatchousepartners.com
Why Rent Your Home?
When a tenant pays you rent, you can use the check to cover your monthly mortgage. In a sense, your tenant is paying for you to earn equity in your home. Once the mortgage is paid off, you can keep any monthly rent as income. Renting out your home can diversify your investments and income streams, enabling you to reduce your financial risk. For example, if you lost your job, you would still have some income from the rental. Or, if you find your retirement savings are insufficient, you’ve got a piece of real estate you can sell.
Costs of Renting
When calculating the cost of renting a house, consider these potential expenses:
• Mortgage Payment. Consider both interest payments and principle payments.
• Property Taxes. These vary by area, but expect to pay up to 2% of your home’s value per year.
• Mortgage Insurance Premiums. If your down payment is less than 20% of your home’s value, expect to pay mortgage insurance premiums.
• Landlord Insurance. This covers tenant damages and protects you if someone is injured on your rental property
• HOA Fees. These payments are required if your house or condo belongs to an association.
• Repairs and Replacements. Windows, doors, walls, carpeting, roofs, and major appliances must be repaired or replaced.
• Maintenance. After a tenant leaves, common costs include exterior paint, interior paint, and carpet cleaning. You’ll almost always need to clean the carpet between tenants, and you may need to touch up interior paint as well. Exterior painting is more infrequent expect to paint every five years or so.
• Accounting and Property Management Fees. Property management firms typically charge around 10% of your rental revenue. Also, expect to pay a minimum of $200 annually for a CPA to prepare your personal and rental tax return.
You can get a fairly accurate estimate of potential rent revenues by checking out postings in your neighborhood. The online real estate marketplace Zillow uses MLS data and a proprietary formula to estimate rent values on specific homes. You can also talk to a local real estate agent or property management company, or check Craigslist to see the going rate in your area. Also, consider historical rental trends for your region – if you’re in a city that’s experiencing rental price increases, your rental revenue may soon outpace your expenses. As with any business, your revenue must exceed your costs if you are to be profitable. Thankfully, the costs you incur to rent the home are tax-deductible, which decreases the amount of income tax you have to pay on rents received and increases your take-home cash.
If your rental revenues immediately exceed your expenses, that’s a good sign. However, even if you’re not immediately turning a profit, don’t fret. It may be that rental rates are low at the moment or you’re still paying a hefty mortgage.
A rental calculator can offer insight into long-term profitability of your rental. Just enter details on rent price, mortgage interest rates, mortgage balance, payments, property taxes, insurance, association fees, and how long you plan to own the property. Then, the calculator provides a detailed chart of expected cash flows. It accounts for all the little costs and variables such as vacancies, property management fees, maintenance costs, selling costs, and tax rates. Along with profitability, the calculator also projects the future value of your home or rental property. When evaluating the calculator results, be aware of the time value of money. It may be exciting to think that your home could be worth millions in 30 years, but $1 million 30 years from now isn’t $1 million today. In fact, assuming a 2% rate of inflation, a present value calculator estimates that $1 million in 2045 is worth just $552,000 in 2015.
Preparing Your Home for Tenants
Major things you’ll want to take care of include ensuring there are working smoke detectors in every room, and working window locks in every room, which is not something a lot of people think to check. Then, you’ll want to get the property professionally cleaned. Have the carpets cleaned too. We always suggest using a truck-mounted system.
When we go through the property with new owners, we put ourselves into the shoes of a tenant. Think about whether it’s a place you’d like to rent. Make sure the paint is touched up. Tenants don’t like moving into a place that feels lived-in. If the paint is nice and everything is cleaned and there are window coverings and the home is free of pet smells, you’re in good shape. A lot of things depend on personal taste, but it’s good to know what tenants like and don’t like. When we get calls from tenants, we always try to get feedback from them about what they thought when they looked at the property.
Avoid Emotional Attachment
Some owners have lived in their home for 10 years and they don’t want to sell, so they rent it out. Most of these owners have a huge emotional attachment to the property. Try to remove that attachment. Once you turn it into a rental, it’s no longer your home. It’s a tenant’s home. If this is the home you raised your kids in, you can be emotionally invested in its condition. But, after it’s been a rental for 10 years, the place won’t look the same. If you’ve had a number of long term tenants, it’s not going to hold up as well. Be prepared for that. We weed out bad renters by using strong rental criteria and getting landlord references. But, tenants often won’t treat the home the same way you would as its owner.
Tenant’s Right to Break a Rental Lease in Utah
Many tenants who sign a lease for their apartment or rental unit plan to stay for the full amount of time required in the lease, such as one year. But despite your best intentions, you may want (or need) to leave before your lease is up—for example, if you’re a student at the University of Utah and only want to stay in your apartment for the period of time that school is in session. Or perhaps you’re moving in with your boyfriend or girlfriend. Sometimes, you may need to move in order to be closer to your new job or an elderly parent who needs your help.
Dealing with an evicted tenant’s property in Utah
You should have a crew of people ready when the sheriff arrives to clear out the former tenant’s property. Have bags, boxes, and tarps on hand. You or the constable/sheriff must store the property and provide reasonable notice to the tenant to pick it up, if the tenant is not present to take possession.
Separate these items:
• Financial documents
• Documents about the receipt of public services
• Medical information
• Prescription medications
The tenant can retrieve these items within 5 days without paying anything. Otherwise, the tenant must pay reasonable transportation and storage costs to reclaim any personal property collected from the dwelling.
Utah Code Section 78B-6-816 allows the landlord to sell or donate unclaimed property after 15 days if the tenant has made no reasonable effort to reclaim it, and if no hearing about its disposition is scheduled. This time period may be extended another 15 days in the event of hospitalization; domestic violence; or death, where the tenant has passed away and their surviving heirs are attempting to recover the property.
Evicting a month-to-month tenant in Utah
In Utah, you can terminate month-to-month tenancy with 15 days’ notice, presented at least 15 days prior to the end of the rental period. However, you can’t use this procedure if the tenant’s lease specifies a specific term of tenancy.
The Pros and Cons of Owning a Rental Property
The advantages to owning a rental property are relatively few, but they’re powerful. To put it simply, if everything lines up well, you can make a lot of money from a rental property.
Income from renters
The biggest benefit of owning a rental property is that the renters will provide you with a direct income stream. Those monthly rent checks go straight into your business account, ideally more than offsetting any expenses for the month.
For example, if you own a house that you rent out for $1,000 per month, that house when fully occupied will put $12,000 per year back into your accounts.
It’s hard to argue with a direct income stream like that. It is worth nothing, though, that those kinds of figures are optimistic ones and you shouldn’t just dive in expecting those results. Still, even partial results can be very good. If you can keep the property rented for just 75% of the year, that’s still $9,000 a year in income, after all.
Income from property value growth
In addition, since you own the property, you stand to gain from an increase in the property value over time due to changing demands in the area, even if the property doesn’t undergo any changes. This is obviously going to be a variable thing, as it depends heavily on the area where your rental property stands. In some areas, the value may rise significantly over the course of a few years, while in other areas it may remain flat. Ideally, this value growth holds pace with inflation at a minimum. If you happen to be in an above average area, you might find that you can beat inflation; on the other hand, a really stagnant area may not even keep with inflation.
The other factor that you should consider is that your sweat equity is likely to add additional value to the property as you maintain and upgrade it. Doing things like repainting the home, adding new siding, refinishing the inside, doing some basic landscaping to the yard, and so on will add value to the home without significant financial cost. Not only will this allow you to charge more for rent, it will also increase the value of the property itself should you choose to sell it in the future. If you enjoy home improvement projects, this should be a major attraction for buying a rental property. You’ll have the opportunity to fix it up upon acquisition as well as in between tenants, which will return very nice dividends for you.
Disadvantages of owning a rental property
On the other hand, there are a number of disadvantages to owning a rental property. Individually, these disadvantages are relatively small, but they add up to a significant cost.
Concentration of assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. It would take a significant portion of the average American’s net worth to fully own a rental property. The problem with that concentration is that it’s not diversified at all. That investment is in a specific house on a specific block in a specific neighborhood in a specific city. If that neighborhood goes downhill, you lose a lot of money. If that block goes downhill, you lose a lot of money. If something unfortunate happens to that house that insurance can’t handle, you lose a lot of money. Like it or not, by owning a rental property, you’re tying yourself to the local real estate market in a very tight way. Concentration of assets is not a wise investment strategy. However, the more wealth you have, the less this becomes a factor and the more that property ownership becomes a tool for diversification rather than something you’re concentrated in.
Tenants are never a guarantee to pay their rent. Even in the best of times and even with the (seemingly) best tenants, that revenue stream is far from guaranteed. Sure, sometimes you’ll get a great tenant that pays their rent on time for years and years and years, but that’s never a guarantee. Some tenants won’t pay regularly, and others won’t pay at all. You’ll be out several months of rent and also the time spent dealing with their non-payment and eviction. Some tenants may also cause more property wear than others. Sure, you’ll have that security deposit, but that’s still a cost and a risk. There’s also the risk of not having a tenant at all, which means that you’ll have periods where the property generates no rental income.
Taxes, fees and insurance
Regardless of whether you have people in the house or not, you’ll still be facing the cost of property taxes, the cost of insurance on the property, and the cost of any homeowners association fees associated with the property. Those bills will come in regardless of whether there is a tenant in the property or not. This is a pretty steady cost that you’ll clearly know about in advance, but no matter how you slice it, it’s a cost that cuts into your profits. It’s especially painful if you don’t have someone renting the property, as that means that such costs are going to be coming directly out of your pocket. These costs are not insignificant. For example, insurance on a rental property is usually around 25% higher than it is for a normal homeowners’ policy and property taxes are nothing to laugh at. If you’re caught without a tenant or with a tenant that’s not paying up, this will have a direct and fierce negative impact on your finances.