Episode 20 Accidental Landlord

For most military and federal employees deciding whether you should rent out your home usually comes up because you have orders to move to a new duty station or will be going on a long deployment. We’ll talk about the decision to sell or rent out your house, and then if you do decide to rent at your home what should you consider. Selling your home up for sale and finding a buyer takes time, so start early. Ask will you be able to sell for profit, or at least get enough to pay off the mortgage. Remember there will be closing costs, repairs and getting house ready for sale, fees for the real estate agent which can easily add up to 10% of your selling price. If you would have to dip into savings to pay off the mortgage after you sell, consider renting out. If you think you’ll return, it may be easiest and most profitable to just rent it out while you’re away.

Ideally the rent will cover all of your expenses including the mortgage, insurance, property taxes, maintenance and repairs, finding new tenants, and paying a management company. Mortgage interest rates are low now, it may makes sense to refinance. Rates are lower for a primary residence than a rental property. So it may pay to refinance while you are still living the home. Lower monthly payments may be the difference in whether your rental income would be more than your expenses. Don’t assume the rent in your area would automatically be enough to cover all the expenses. Do some research to get a realistic idea of what rent you could expect.

Can you meet all your living expenses if the rental was vacant for a while or needed a major repair? Do you expect home values in the area to go up? If homes are sitting empty or if the local economy is floundering, it may be better to sell while you can. Are cut out to be a landlord? You, or a management company, will need to find a good tenant, receive applications, do credit check and criminal history checks and check references. And make a detailed written lease applicable for the state and local area where the house is located. This is important especially if you need to evict a tenant.

Remember you need rental home insurance, also called fire insurance. To caver the home itself. You should encourage tenants to buy their own renters insurance cover their things. And consider hiring a management company, especially if you’re a first time landlord. They can help with all these things we just talked about.

Another thing to consider is the tax you would pay on the sale of your home. If you have lived in your home for at least two of the last five years before you sell it, you will not pay any federal tax on the first $250,000 of profit if you’re single, or $500,000 if you’re married. For federal employees and military service members, time stationed overseas on orders doesn’t count. If you don’t meet that 2 of 5 year rule you will owe capital gains tax on the profits, typically 15%, depending on your tax bracket. If you plan on hanging to the rental property long-term, then the income and possible appreciation would probably offset at additional cost in taxes.

Home ownership and having rental property can be a great way to built wealth, your tenants essentially buys you a home over time. But it comes with extra risk and being a landlord isn’t for everyone. And depending on your particular circumstances, it may not give you a positive cash flow. Weigh your options and ability to pay any unexpected expenses that may come up with the rental home. And especially if this is the first time becoming a landlord, don’t hesitate to work with a management company to help with the process.