Anything you think is in your way can be removed if you really want to become a homeowner. In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, my 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.
This week you’ll learn about why turning your home into an investment property could make sense, depending on the home, it’s location, and your financial situation.
Myth: If I’m not going to live in the property for a long time, it doesn’t make sense to buy.
Truth: Buying a home and living in it for a few years can lead to a great investment property.
Are you eyeing a certain popular neighborhood that you see yourself in for just a few years but not longer, and because of that, you feel it doesn’t make sense to buy?
What if you turned your home into an investment property when you did move? It could be a win-win for you — loving your life in your favorite place for a while and then reaping the rewards of your investment later on.
If you are investment-minded, you many love the notion of keeping a home as a rental when you move out of the area or plan to buy a bigger home.
Even if you’re ready to move but can’t see giving up your first home because it’s in a great location, renters could cover your mortgage. Or, if you need to relocate but hope to move back in a few years, you’ll have your property still there for you.
It’s understandable if you may be hesitant about having an investment property because of the long-term commitment and any financial requirements it may require. However, it’s worth looking into especially if you buy in a neighborhood that has the potential to be a good investment where you could benefit from this home purchase for years to come.
The questions and answers below take you step by step to see if an investment property could work for you.
What are the market conditions in the neighborhood so you can determine the potential income of your property?
You need numbers, and by doing a comparative market analysis (I can do this for you!), you should be able to gauge how the rental market is doing now and trending into the future.
You can see if the demand for rentals is strong and how much rent you could charge for a home such as yours. Keep in mind that condos, townhouses and single-family homes can vary in the rental market.
On the flip side, you also should determine how much homes are selling for and how long they stay on the market. Looking at home sales and not just rentals will give you a complete picture of the financial outlook of that particular neighborhood or condo building.
If prices and property values are rising, renting out your home can allow it to continue to appreciate.
If property values are declining, then that neighborhood could be more of a risk as a rental property.
By doing this research now you’ll have a better idea of what your potential income will look like. And your next step is to look at the expenses you need to consider, helping you to determine if you’ll gain any profit with this property.
What expenses do you anticipate when you rent your home compared to any potential income?
Continuing to own your home as a rental still means you need to pay your monthly mortgage, real estate taxes, homeowner’s or rental insurance, and handle any homeowner’s association dues or costs of a property management company (if you hire one).
Plus, you want to have an emergency fund for any unexpected costs if something breaks. You also need to build in a buffer if your tenant doesn’t pay or you need a month or two between renters.
And don’t forget to factor in any costs you may incur when preparing your property (paint, reasonable upgrades, getting it to meet certain codes). You don’t need to go overboard but you do want to attract tenants that you hope will be good renters.
Compare these expenses to the income you will make renting out your home and determine if you’ll make a profit or break even.
Keep in mind you’ll have to pay taxes on this income but can offset it by taking deductions on some of your expenses for the rental.
Now that you know the potential income and expenses associated with renting your home, you’ll be able to determine whether or not an investment makes sense over the short-term.
But what about the long-term outlook?
Does an investment property fit in with your future financial plans?
Several factors could come into play when taking into account your financial outlook down the road.
Even if you can make a profit after comparing your expenses and rental income, you still want to look at your complete financial picture. Consider these scenarios:
- Will you be stretching yourself by owning two homes, especially if you anticipate any additional costs for renovating or upgrading the home you live in with your family?
- Will renting be a financial bonus or burden if you expect to be writing some large checks in the near future, such as paying for private school or college for your kids?
- Will it make more financial sense for your home to be turned into an investment property if you bought your home for a good price and expenses are low, so that the rent can cover your expenses and more?
- Will it be better to keep your property and turn it into an investment property if you’re underwater on your home, since that way you can earn some money by renting it as you wait for it to appreciate in value?
No matter what, it’s important to talk to your tax advisor or financial planner. You’ll be able to weigh the pros and cons while comparing renting to selling your property.
These advisors can help determine if forgoing any tax breaks for capital gains is something to consider when you turn your home into an investment property. You need to live in your home for at least two out of the past five years to be eligible for this tax break when you do sell your home.
It’s hard to predict the future and what will happen not only in your life but with your finances. But any time you buy a home, you should always try to see what scenarios may lay ahead for you and take them into account.
Do you need the proceeds from your current home to buy your new home?
This is a biggie and hard to predict but something to keep in mind if you hope to turn your home into an investment property.
If keeping your current home as a rental impedes on your ability to buy your next home, then definitely sell. No question at all.
If you can buy the home of your dreams only if you sell your current property, then you absolutely should sell it. Only think about renting if you don’t need the cash out of your current home to buy your next home.
Can you handle the responsibility of being landlord?
This may be a simple question but it’s one of the most essential ones. Being a landlord is not always easy and comes with responsibility along with challenges. You’ll need to weigh the emotional and time costs against any potential profit.
You’ll be dealing with tenants and never know for sure what to expect even when you do a background check!
If “strangers” will be living in your home, you need to be prepared for it to have some wear and tear and not have complete control over visitors and other activities, etc.
It’s also a time commitment when you’re a landlord. That’s something to keep in mind whether you live nearby, out of state, or just travel a lot for your job.
If you don’t hire a property management company, then you’ll be the one getting those calls if the water heater breaks or the toilet needs fixing. Plus, annual upkeep and property checks will be your responsibility.
Most importantly, you will need to understand your state’s tenant rights laws and landlord requirements. You want to be ready for whatever comes your way. For example, what happens if your tenants can’t make a rent payment or don’t follow certain agreed upon rules? Can you evict them?
As you can see turning your home into a property investment can be a financial benefit for many of you. It could be a responsibility worth your time and effort and be the best of both worlds. Living in a home and neighborhood you love and not postponing homeownership, and then making a profit from that home for years to come!
I'm Elsa and I love freeing people from their old home and helping them move on to a new home. Let's talk about how I can help you!
2227 Prairie Center Pkwy Suite D
Brighton, CO 80601
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