Cash Flow
You could divide this decision into two distinct phases: First, there are the financial considerations that any accountant can explain, and then there are the eye-of-the-beholder issues only you can puzzle out. But most importantly, you’ll need to figure out how you’re likely to make the most money.
Right now, with home sales generally tanking, a lot of people who never envisioned themselves as landlords are now figuring that the monthly check from a tenant might be a more sure bet than a depreciated sale price. Well, maybe. You should first get a solid quote on your house from a real estate agent -- or better yet, several. You should see what similar properties are rented for in your area. And then you should prepare to do some complicated math that involves what you expect to charge in rent, property taxes and fees (such as maintenance costs, which you’ll still be paying), and any other utilities or expenses you’re not going to charge to tenants. Weigh that against what you’d expect to get for the house if you sold it. One possible rule of thumb is to see whether renting yields a better return on an investment than long-term treasury bills. (Right now, that’s just over 4 percent.)
You can web-search your way to a number of online calculators to help with this headache-provoking math. (If they use the T-bill standard, make sure the interest rate is current.) Of course, you also need to decide how urgently you need the instant money that a sale would bring -- for instance, to put toward buying another house.
Taxes and Insurance
If you find that baffling, wait till you see what renting out a place does to your taxes. Be sure to talk to an accountant or some other professional familiar with the latest tax codes before you start planning your career as a land baron. One key caveat: If you rent a home for three years out of a five-year period, you can lose the capital-gains shelter you would enjoy on the sale of a primary residence. On the other hand, if you take some losses on the rental property (if it sits vacant, for example), you might be able to write that off. Again, please -- talk to the pros and don’t take the plunge if this kind of stuff scares you.
You’ll also have to get a new insurance policy on the place, which can trigger unforeseen expenses. This year, a friend of the author’s found herself compelled to put a new roof on her soon-to-be-rented property before an insurer would write a new policy -- to the tune of $8,000.
“My Landlord Is a Jerk!”
Now we come to the less rational considerations, or at least those that don’t have a price tag attached. When you rent a place out, you essentially take on a new role in life. You’re now someone’s landlord. When the heater breaks, you fix it. When the roof leaks, you fix it. You might be comfortable living with a certain amount of squalor -- maybe you don’t care that the renovation project on your second bathroom is stretching into its sixth month. That’s fine in your own domain. Pull that laissez-faire approach with a rental property, and you’re officially a bad landlord. (In addition to the karmic cost of that status, you’ll also be subject to your state’s landlord/tenant laws.) Of course, you can pay a property manager to take care of all this for you. Usually that will cost you between 8 and 10 percent of the total rent --which, of course, could wipe out the profit you thought you were going to make in the first place.
-- Zach Dundas