Written by Blanche Evans on Thursday, 01 October 2015
With rental prices rising, you may be wondering if now’s the time to become a landlord. There are advantages to renting your current home while you purchase another to live in.
The advantage to renting your home is that you’re likely paying a homestead mortgage interest rate, which will make it easier to make a profit than if you purchased rental property with a mortgage at a higher interest rate. As you’ve owned your home, it’s likely appreciated in value, allowing your home to compete well in the rental market so you can use profits to put back into the home to keep it rentable.
Assuming you’re current on your mortgage, have the credit scores to buy another home, and have saved enough cash for a down payment, now may be the ideal time to add a rental investment to your portfolio.
Real estate has always served as a hedge against inflation and against other investments, so the first thing to do is find out how rents compare to home prices in your area. Your real estate professional can provide you with market comparables that show you how much homes are renting for per square foot and how quickly they rent, as well as for what prices comparable homes are selling.
If the rental income is enough to cover your mortgage, you’re in good shape, but there are other expenses to consider, such as income taxes, advertising, listing and management fees, and maintenance.
For income tax purposes, your current mortgage isn’t considered a cost of doing business that you can deduct like office supplies or equipment purchases. You’ll pay taxes on this gross amount, less repairs and management fees, if any. On the bright side, if you sell the property within five years and you’ve occupied the home two of those five years, you’ll likely pay no capital gains at all up to $250,000 for an individual or $500,000 for a couple.