Should I Rent Out My House and Rent Another?

Deciding whether to rent out your current home and lease another residence involves a careful examination of various factors, including financial implications, tax obligations, and the practical demands of property ownership and management. Making an informed choice that aligns with your financial goals and lifestyle requires assessing your current property’s potential as an income-generating asset and the budgetary considerations of your next living situation.

Financial Analysis of Renting Out Your Home

Evaluating your current home as a potential rental property begins with a financial assessment. Research market rent rates in your area by examining comparable properties recently rented, considering factors like bedrooms, bathrooms, square footage, and amenities. Online listings and local real estate professionals offer insights into current market conditions.

After estimating income, analyze all operating expenses. Mortgage payments (principal, interest, property taxes, and insurance) are a major cost. Property taxes and insurance are ongoing expenses that vary by location and value. Maintenance and repairs are also key expenses; allocate 1% to 4% of the property’s value annually for upkeep and unexpected issues, or budget 5-8% of gross rent for repairs depending on age.

Factor in vacancy rates, as unoccupied periods impact cash flow. Estimate potential empty periods, as even a month or two of vacancy can reduce annual returns. If hiring professional assistance, property management fees typically range from 8% to 12% of monthly rent, or a flat fee around $100 per month for a single-family home.

Additional costs may include Homeowner’s Association (HOA) fees if applicable. Utilities like water, sewer, or trash might also be borne by the landlord, depending on the lease. Landlord insurance is necessary, differing from standard homeowner’s insurance, covering risks like tenant-caused damage or loss of rental income. After totaling income and expenses, calculating net cash flow (rental income minus all expenses) shows profitability. Maintaining positive cash flow is key for your rental venture’s success.

Financial Analysis of Renting a New Home

Analyzing renting a new home complements assessing your current property. Research market rent for a new residence that meets your needs and budget, considering location, size, and amenities. Current rental listings and local real estate resources help determine rent costs in desired areas.

Beyond monthly rent, consider other expenses. Security deposits are typically required, often one to two months’ rent, though some states have lower or no limits. Deposits are generally refundable, minus deductions for damages or unpaid rent. Application fees are also common, covering background and credit checks.

Renter’s insurance is another expense, covering belongings and offering liability protection. Its average cost ranges from $12 to $27 per month, depending on location, coverage, and deductible. Moving expenses, including professional movers or truck rental, vary significantly by distance and volume. A local move averages $800 to $2,500, while a long-distance move might range from $2,200 to $6,800 or more.

Estimate potential changes in utility costs at the new location, as these impact your monthly budget. Some utilities might be included in rent, while others could be higher or lower. Assessing these costs helps create a budget for your new rental, allowing for an informed decision on the overall financial impact of concurrently renting out your old home and renting a new one.

Tax Implications of Rental Property

Understanding tax implications is key for landlords, impacting profitability. Rental income is generally taxable and must be reported. Most individual landlords report this income and related expenses on Schedule E (Form 1040).

Many expenses from operating a rental property are deductible, reducing taxable income. Mortgage interest is often one of the largest deductions, alongside property taxes. The IRS allows deductions for ordinary and necessary expenses, which are common costs for managing the property.

These deductible operating expenses include maintenance and repairs, utilities paid by the landlord, advertising costs for vacancies, and insurance premiums. Professional fees for services like legal advice, accounting, and property management are also deductible. However, improvements that add value to the property or prolong its life are not immediately deductible but are recovered through depreciation over time.

Depreciation is a non-cash deduction that recovers the cost of the building and improvements over its useful life. For residential rental property, the IRS mandates a 27.5-year recovery period. To calculate annual depreciation, the depreciable basis (property cost minus land value) is divided by 27.5. This deduction can create a tax loss even with positive cash flow.

Rental activities are considered passive activities by the IRS; losses typically only offset other passive income. An exception exists for active participants: if your modified adjusted gross income (MAGI) is below $100,000, you may deduct up to $25,000 of passive losses against non-passive income, such as wages. This allowance phases out for MAGI between $100,000 and $150,000, fully phased out above $150,000. Excess losses can be carried forward indefinitely to offset passive income in future years or when the property is sold.

When a rental property is sold, capital gains tax implications may arise. The IRS “recaptures” depreciation deductions taken over the years by taxing them at up to 25%. Any remaining profit beyond recaptured depreciation is then subject to capital gains tax rates. Given the complexities of rental property taxation, maintaining meticulous records of all income and expenses is important. Consulting with a qualified tax professional is recommended to ensure compliance and maximize allowable deductions.

Practical Considerations of Being a Landlord

Beyond financial and tax aspects, becoming a landlord involves practical considerations. Managing a rental property requires a time commitment, including tenant communication, maintenance, and administrative duties. This can be demanding, especially for new landlords.

Tenant screening is a crucial step to mitigate risks. This process involves conducting background checks, credit checks, and contacting previous landlords for references. A robust screening process helps in selecting reliable tenants. A legally sound lease agreement is also important, clearly outlining terms such as rent amount, payment due dates, lease duration, tenant and landlord responsibilities, and rules regarding property use.

Property maintenance and repairs are ongoing obligations. This includes routine and emergency repairs, and finding reliable contractors. Landlords must maintain the property in a safe and habitable condition. Setting aside funds for anticipated and unexpected repairs is important.

Compliance with legal and regulatory requirements is another responsibility. Landlords must adhere to federal fair housing laws, prohibiting discrimination based on protected characteristics. Understanding local landlord-tenant laws, which vary, is important for issues like security deposits, evictions, and habitability.

Dealing with difficult tenants can be challenging. This includes late rent, property damage, or lease violations. While eviction is a legal recourse for severe issues, it can be time-consuming and costly. Clear lease terms and consistent enforcement can help minimize such challenges.

Decide between self-management and hiring a professional property manager. Self-management offers full control and saves on fees, but demands time and effort. Hiring a property manager, while incurring fees typically 8% to 12% of collected rent, alleviates the burden of day-to-day operations, tenant issues, and maintenance. Weigh your willingness to take on these responsibilities against the cost and convenience of professional assistance.