My wife and I are in the process now and completing home repairs. The goal, at least initially, was to fix up the needed repairs and list the house for sale this coming spring. The thought, however, came up- what if we rented out the house instead? I'd love to hear some things to consider... pros/cons of each? Thanks in advance
Quick recap of situation:
- lived in house for 10+ years
- very little, to ZERO equity in property (very very bad mortgage initially)
- we refinanced 6 months ago to much better terms and lower monthly costs
- love the idea of passive income, all while building equity
- biggest concerns are major repairs that are inevitable: roof, furnace, electrical
- cash reserves are decent, but not significant
- very good credit score
What kind of payments do you have now and what kind of rents could you get for renting it out?
Looking online briefly, there are similar properties in the area around the same cost/month as our mortgage now. One of my questions would be, how much monthly profit would everyone recommend we clear to make it worth renting? $200/ month? $500/month?
Considering our on-hand funds are decent, would it be wise to rent? What if roof goes out? What if tenants are destructive? We wouldn't have money to fix, etc
It really depends on what your expenses are. $200/month cashflow for me would be fine on a 75k house, but I would want more than that if I had a $500k rental house.
A 75k c grade rental property with window units is going to have a lot less to maintain than a $500k house that has multiple AC units, landscaping, pool, etc.
You need to be able to cover your mortgage, taxes, insurance AND be able to pay a property manager (usually 8-10% of gross monthly rents) plus put enough away for reserves to cover those things like roofs, HVAC units, destructive tenants, etc (usually another 10-20% of monthly rent). If you can't do that, then it's probably not a good rental investment.
Makes sense. Thanks!
@Dennis A Higgs Jr hey Dennis. I'm actually in a similar situation with my mother's house. Originally I was thinking we could fix up her house just enough to make it a solid rental property. However, we are now considering a full kitchen remodel and some other updates in order to sell the property. She has a decent amount of equity in the house. My reasoning for selling is that it will allow my mother to pay off an exisiting home equity loan (previously used for an addition on the house) and it would also give her enough funds to purchase a small duplex in a neighborhood closer to her work, which she would househack.
As far as your particular situation, you said you have virtually zero equity in the home. Therefore, I would wonder how much value you believe your repairs will add to the sale price. Evaluating your ARV compared to the cost of your repairs will better help you decide if it makes sense to sell and re-invest the profit or hold as a rental.
Cassi Justiz makes some great points!
Thanks for the additional info. At that slim of a margin of rent over basic expenses, it would end up loosing money any time you had to do ANY kind of repairs. You would also be instantly loosing money if you choose to hire a property manager.
I would probably just cut your losses and sell the property. I don't think you will see any kind of net income on this property and you will most likely be putting money back into this property until the mortgage is paid off.