I’m branching out from my normal topics today to talk about our Milwaukee house and ultimately, why we made the decision to rent it instead of sell it in late 2015. Long story short, Jake and I bought a house in Milwaukee when we moved there for his medical residency. A little over four years later, we moved for Jake’s new job. We didn’t have much equity in the house. If we’d sold it, most likely we would have broken even or lost a little money. We’ve always talked about owning a small business or having another means of eventual passive income. We were able to work out our finances to allow us to buy our current house without selling the Milwaukee house. So instead of selling the house, we kept it and started renting it out.
Again, I just told you the short version of the story. If you’re facing a move in the near future, it’s important to consider the reasons to rent out instead of sell your home, which includes weighing the pros and cons, assessing your finances, and deciding which option makes the most sense for you. There is no right answer for everyone. I’m not receiving any compensation from a realtor or property management company to promote a specific viewpoint. I’m simply sharing my insight on the process thus far and why the reasons to rent out instead of sell your home have paid off for us.
Build long-term equity
The state of the local housing market and your specific mortgage determines your home’s worth. There is always the potential for the market to take a downturn, making it virtually impossible to sell your home. Even when the market is doing well, you’re never guaranteed to sell your house for what you paid or for what you believe it’s worth (i.e. maybe you spent $15,000 remodeling the kitchen).
However, over the past decade, the United States has had positive housing trends. The median sale price of existing single-family homes has increased 81%. Consequently, if you hold onto your home and rent it instead of selling it, your home will keep increasing in value.
Reap tax benefits
Owning a rental property offers multiple tax benefits. You can write off your rental home-related costs including property taxes, mortgage interest, insurance, utilities, repairs, homeowner’s association fees, property management company fees, and travel to and from the property. Keep all of your rental expense receipts and other paperwork, so you can file your write-offs properly.
As a rental property owner, you’re also allowed to deduct the property structure’s depreciation over a 27.5 year period. For example, for a property worth $125,000 when it was constructed, you may deduct about $4,545 annually as a depreciation cost for owning the property. You must calculate the property value as the building alone, not the building and the land.
Generate tax-free cash flow
Thanks to mortgage interest deductions and depreciation, when you leverage your capital property, your rental property cash flow is tax-free. The less you owe on your mortgage, the more flexibility you have with the rental property funds you’re generating. Tax-free cash is a valuable asset for maintaining the rental property and potentially investing in other pursuits (i.e. another rental property, college fund for your kids). Before converting your home to a rental property, I recommend consulting with your financial advisor or a certified tax professional to learn more about tax-free cash flow and the other key elements of owning a rental property.
Avoid loss in a down market
No one wants to lose money when they sell a house. Typically, even when housing prices are down, the area still has a high need for quality rental properties. While you may not be able to sell your house for the amount you paid, you will be able to charge a rental rate to cover your mortgage payments. When the market is down and you have the financial flexibility to purchase your next home without selling your current home, it’s worth considering keeping and renting out your current home.
Keep your options open
Renting out your home is an ideal way to start a long-term investment portfolio. It may also be a perfect short-term solution. If you simply want to build your equity for a few more years, so you can make a profit when you sell the home, or you want to wait out a down market, think about renting. Regardless of your long-term plans for the property, it’s important to re-evaluate your situation in between tenants and lease terms to ensure renting still the best option.
Rental demand is increasing
Rental rates have increased dramatically over the past few years. There are over 40 million single-family homes rented in the United States alone. This figure is up a staggering 185% from three years ago. With more demand and less supply than ever, many landlords are charging competitive rental rates.
Property management and ongoing maintenance
You can manage a rental property yourself or hire a property management company. We decided to hire a property management company. There’s a lot of security in having a professional manage the legal paperwork, screen the tenants, and play the mediator role in any issues that may arise with tenants. If you decide to manage the property yourself, make sure you understand these tasks in full. Hiring a property manager also takes away the hassle and stress of showing the property and handling emergencies (i.e. a plumbing leak in the middle of the night). A management company will take a cut of the rent. If you hire a reputable company, the cut is well worth it.
Whether you manage the property yourself or hire a management company, establish and enforce strict guidelines for the property. Then screen your applicants thoroughly to ensure you’re signing good tenants who will pay the rent and maintain the property. There are numerous resources available online to help you with these tasks.
Finally, you must be realistic about the ongoing commitment to the well-being of the property. We’ve all seen poorly managed rental properties. I understand how it happens. The landlord isn’t living there, so they aren’t very motivated to spend money on the property. The tenants don’t own the property, so they don’t want to spend money either. However, you don’t want to be this landlord.
Even when you have tenants that take care of the property, inevitably, there will be maintenance work in between tenants as well as occasional larger investments (i.e. new appliances, new windows). It’s fine to outsource this work (i.e. hire a cleaning company). But it needs to get done. Our previous tenants left no major damage, which is awesome. I still completed the following tasks during the couple of weeks the house was vacant in between tenants.
- Cleaned both bathrooms, the kitchen, all of the uncarpeted flooring, and all of the windows
- Installed new carbon monoxide detectors and put in new batteries and re-tested multiple smoke alarms
- Installed a new wireless doorbell
- Changed the furnace filter
- Replaced over a dozen switch plate covers
- Replaced about a dozen burned out light bulbs
We also hired out the following tasks.
- Removal of old carpeting and installation of new carpeting for the top level of the home
- Cleaning of all carpeting in the finished basement and on the main floor
- Plumbing repair for one of the toilets and the basement washer hook up
Remember the tax benefits? We can write off everything we spent working on the house in between tenants!
One more note
When you first convert your home to a rental property, there are a couple of tasks you must complete yourself, even if you’re hiring a management company.
- Switch the home insurance policy to a renter’s policy. Most likely the price will be pretty similar, but the terms are slightly different. We use State Farm, and our advisor did a great job walking me through this process.
- Change the mailing address for the property tax statement. You will continue to make the property tax payments, so you’ll want to receive the statements at your new address. Contact your town or city hall. They’ll be able to update the address or direct you to the title company who will update the address.
Obviously, I have tons of photos of the home we rent from the four years that we lived there. During the turnover of tenants in January, I took a few new pictures.
How amazing is the built-in china cabinet? It’s a staple feature in Milwaukee homes of this era and style. I would give a lot to have one in our current home.
One of the other amazing features of the home: the walk-in pantry. You won’t find anything like it in new construction.
The newly cleaned carpet in the finished basement. The finished basement completely changes the livability factor in this home, providing flexibility to create a playroom, entertainment space, office space, exercise area, etc.
The new carpeting in the upstairs level. It doesn’t look very exciting, I know, but the old carpet needed to be replaced before we ever bought the property. New carpeting gave the entire level a refreshed aesthetic.