Landlording your own house would seem to be a certain money maker.
Many homeowners feeling the pinch of house payments look at renting out the house for cash. Regular income is the obvious benefit. You’re going to start seeing a check every month, a particularly awesome prospect when uncertain about making your mortgage month after month.
On the other hand, if you’re looking for mortgage relief and thinking of renting out your house, you need to go into it with eyes wide open.
Watch out for four major money pits of landlording.
When you set a monthly rental price on your property, you need to know the real costs you’ll face when you rent out your home. So figure these in — especially if you are renting the property you previously called your primary home:
1. Taxes: Two things to consider: Homestead exemptions on your property taxes and capital gains taxes. First, contact your local property tax office and find out whether your homestead exemption is retained if you become an investor of your property instead of the main resident in your house. If you choose to rent your house, you may face higher property taxes as a landlord than as a homeowner in the same house.
Second, look into the capital gains taxes if you should sell you home in the future. The housing markets are heating up. If you decide to sell you house in the next few years AND if you have NOT lived in your house for at least two of the previous five years (but rented it out instead), then you will lose a whopping $250 thousand of your capital gains tax exemption. That could really hurt!
2. Maintenance Costs: Every time your property changes hands you will need to clean it up. Repairs are often required by law. No putting off fixing that leaky faucet for the next month when you have more cash flow. That might have been the standard operation procedure when you were living in your hose, but that mentality won’t fly now. Tenants want their houses fixed right now. Maintenance, cleaning and upkeep will become regular out-of-pocket expenses. Be prepared!
3. Insurance: Did you know that your insurance company will probably change your policy when you turn your house into a rental property? Yes, and the landlord’s policy will cost you an average of 25% more than the homeowner’s policy. Add that into your bottom line.
4. Legal fees and administration costs: You may not have a regular lawyer now. But if you are renting out your property that you own, you will definitely need to consider legal costs. These will protect your actions in such landlord activities as
- the need to evict
- collect rent
- draft rental agreements
- perform tenant interviews
- interview tenants
- check credit histories, etc.
Other legal expenses may include code inspections and approval; or landlording courses required by your municipality covering the identification and reporting of criminal activity and/or legal property management.
The cost of being a landlord can be steep if you’re not prepared. To calculate whether or not you can profit from landlording, you must consider these expenses and adjust your rental price accordingly.
If you think you might be ready to get out from under your house payments, get your questions answered about landlording, or explore other alternatives to paying your mortgage; please contact us. We can show you some creative ways to get financial relief and put some money back into your pocket.
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