Get started in real estate investing by renting your home, not selling.
Are you a risk adverse person? But you want to get into real estate investing. Well, I have an idea for you. If you have equity in your home and you want to move up or down, then why not think about renting your home and buying that new grander or smaller home?
First, let’s talk about what factors you should take into consideration:
- Your financial situation – can you support two homes if you need to? Can you qualify for a new loan while retaining the current one?
- Local market conditions for rental homes – do you see a lot of “for rent” signs?
- Your future housing plans – is this a temporary move or permanent one?
- Your tolerance for being a landlord
- State and federal income taxes – have a projection done by your tax preparer
- Current and projected home prices – where is the current market? Housing, as with any market, has cycles – sometimes it’s good to ride out the downside of a market if you can.
Having money for a down payment on the new home you want without using the equity in your existing home is fabulous. But if you don’t have the down payment and you have a good amount of equity in your current home, you could take out a home equity line and use that for your down payment. You will also have to see how that will impact your debt to income ratio for a new loan.
One of the most important things is to make sure your current house payment, plus insurance and taxes (and home equity line if needed) will be covered by the expected rental payment.
There are other considerations as well:
- Cash reserves if property becomes vacant
- Emergency fund for large repairs
- Necessary funds for capital improvements
You also need to identify what your main goal of keeping the property as a rental is: To help with retirement, needed cash flow now, or a family legacy. Once that is determined it will help you decide if the projected cash flow and expense is worth the additional risk.
Although you need to have money for upkeep of the property, you won’t need to do as extensive or expensive renovations as if you were selling it. Renters more so than a buyer are willing to overlook outdated home fixtures. Renters know they’re just living in the home; they don’t own it.
Here is an additional list of things that you need to consider if you are planning on renting your home:
- Know what local laws are as they relate to tenants and landlords – also the equal housing opportunity laws.
- In some areas, you might need a business license.
- Find out what similar properties (homes) are renting for in the area.
- Insurance is likely to cost you more. Be prepared to have your tenants pay renters insurance to cover the interior.
- Find a good rental application
- Find a service to run credit on the applicants and do rental screening
- Look into a property management company
- Look into a home warranty program – this can cover issues with appliances and the like
- Make sure your lease is solid – everything needs to be in writing
This is the way I got started and it sure worked for me.
Diana D. Hill