The decision to buy real estate in order to rent out a home is a big one, and it will take a lot of consideration to make the right decision. Fortunately, there are several ways to decide if selling or renting is right for you.
The first factor that will determine if you sell or rent is whether or not you can get a mortgage for a second home while you are still making payments on your first one. Of course, this is not a problem for anyone who is planning to make the purchase with cash, or who has already paid off their first home mortgage. If you don’t happen to be in this situation, however, you may discover that convincing a bank to give you a second mortgage is much more difficult to do than it was the first time. The decision is often determined by the bank giving the mortgage, and it can be difficult in today’s credit environment to predict the outcome. Having a good credit history, the income to support both mortgages (without rental income factored in), and a significant down payment of at least ten percent can help you to qualify for another mortgage.
Next, look at how much similar homes to the one you are considering purchasing in the neighborhood are currently renting for. The improving rental market in many areas means that homes are renting for more than they did just a few years ago. In addition to consulting with a realtor, search classified ads and rental listings to determine what similar homes are renting for. In order to be successful, you will have to be honest. Compare properties on the basis of square footage, location, and amenities. Also realize that as your rental price increases, tenants will expect a lot more in the way of upkeep.
Once you’ve determined a fair rental price for the home you’re considering purchasing, use this number to run a cash-flow analysis of the property. Consider how much you’ll spend each month on your mortgage payment, taxes, maintenance and insurance, and compare this amount to the amount of rent you will receive. If you’re buying a home with cash, consider how much the sum would earn sitting in other types of investments. Next, consider what would happen to these numbers if you were to pay off your mortgage and/or refinance your house. Also consider the investment value of the property. By holding onto the home for longer, you will be giving yourself time for the market value of your home to rise.
Finally, consider if you are ready to be a landlord. A property manager can help you to learn what is in involved with owning investment property. Really consider if you are willing to deal with the issues that rental properties can bring. Renting out your home can be an excellent financial decision. Renting a home can provide you with monthly income and a large asset, but it is important to be ready to become a landlord.