Is Renting out our house worth it?

Question

Hi everyone! We need help with making a decision with our current property.

We recently bought our home back in November 2022, and due to a death in the family we are going to have to move out of state (not too far though) this summer 2023. Originally we were going to “house hack” and stay in this house a year then buy another house nearby and rent this one out. However, upon further research it looks like renting this house will actually still cost us monthly because our mortgage is right at the max we could probably charge for rent, let alone additional insurance and property management, etc.

We are having a tough time figuring out if keeping the house to rent is worth it when we know we are negative $200-$300 a month on it. Does anyone have any advice?

Ryan Lesley · Answer

Hey @Deborah Bailey,

like @Kyle Spearin said there are a few options you can go with it and as he said even if renting it out may cost you a little up front, the big take away is that the majority of that mortgage is being covered by the renter and at the cost of $200 - $300 per month you are gaining: equity, appreciation, increasing your net worth. Couple that with the fact that you may or may not have a lower interest rate than what you could get currently and I'm in agreeance with Kyle that holding on to it an renting it is still a better option.

The other factor to consider is that you more than likely are gathering these numbers based on traditionally renting out your home (1 year lease) and as Kyle suggested, you can look into a Short or Medium Term rental that can net you more than what you would be getting from a long term (1 year) rental. Not to mention if you really wanted to increase your net, you can look into insurance contracts (insurance company pays you to house their clients displaced by fire, flood, etc.) or the travel nurses (if you are close to hospital(s).

A lot of this may be new to you and luckily BiggerPockets very own Zeona McIntyre and Sarah Weaver have a book in the store called 30-Day Stay that covers all you need to know about getting started in Short/Medium Term Rentals.

I hope this helps and wish you the best of luck with figuring out what's going to work best for you 🤝🍀

Kyle Spearin · Answer

@Deborah Bailey very sorry to hear about your loss. There are multiple schools of thought on this and it really comes down to your personal comfort and financials.

One argument is to keep the property and bleed a little bit up front to build equity through appreciation over time. If you can force appreciation through a rehab and raise rents, then you might be able to cash flow as well.

You could also try a short or medium term rental to increase cash flow if your area is conducive to it. Additionally, renting by the rooms might work in a college town or with populations that are attracted to cheaper housing.

Selling may be a good option if you can deploy the capital and get a higher return elsewhere-- but since you just bought this and paid closing costs and will have to pay realtor fees etc., I'm wary of this unless you absolutely need it.

I'm really curious what the rest of the community thinks and look forward to hearing what you end up doing. You got this!

Aaron Porter · Answer

I am going to repeat others sentiments when I also say, sorry for your families loss.

I look at it similar to what Nathan said, homes have huge expenses and tenants can cause damage intentionally or unintentionally.

Because of this I like to hedge my bets.  for me going backwards on any of my investments is something that I don't like to think about.  If it is within my tolerances then taking the loss for a short term is ok.  But I always set limits, these are business deals and I try to keep it that way.  If I said that I can handle losing $300 a month on it but it starts costing $301 a month I am going to drop that because it has become a liability it is no longer an investment.

Like others have said, maybe you can turn it in vacation rental, or a medium term rental, rent by the room, or other strategy that while it is more "work" you will not be going negative every month.

Also remember that every month that you keep the house you are paying a substantial amount of money in interest to the bank, so that is also an expense and needs to be taken into consideration.  If you go to sell the house in 6 months because going negative doesn't work any longer you are still going to take almost the exact same hit if the market holds but you will have paid 6 more months of interest on the loan, the insurance, the utilities, taxes, etc.

If it were mine, I would get the house set up to do either STR or rent by the room.

You will need to find out if you have an HOA if it is allowed and if the town/city will allow you to STR

Laura Stayton · Answer

Have to agree with this one..

Nathan Gesner · Answer

Your expenses are not just the mortgage. You have mortgage, taxes, insurance. When it's vacant, you have no income and are paying utilities and possibly other expenses like lawncare. Maintenance is typically 10% of the annual income. Property Management is at least another 10%.

Example: rent is $2,000 a month

$1,800 mortgage

$   200 maintenance

$   200 property management

That's negative $200 each month or $2,400 a year. Taxes are another $4,000. Insurance is $1,600. The house sits vacant for a month before you place your first tenant, so you pay the mortgage and utilities out of pocket for another $2,000. You are already $10,000 in the hole. What would happen if you have a bad tenant that fails to pay a couple months of rent, then leaves the place trashed and it takes two months and $6,000 to turn it around?

It's a loser. Sell it and cut your losses.

Caleb Brown · Answer

Happy to chat. I'd say it depends on the location. KC is seeing an upswing in activity so long term I think it's great. Another question I'd be curious on is if you sell would you break even at least? What's your financial situation like(not trying to get personal but that's a big part of this)?

Buddy Holmes · Answer

if you can afford the monthly cost ...

if you plan to return to this area in a few years, look at the cost of selling the home vs the negative cash flow. also as a small part consider the possibility of appreciation. DON'T COUNT ON IT just consider.  But also count on vacancy, repairs and PM as well as tax, insurance, etc.

Angel Hagen · Answer

@Deborah Bailey nice to meet you. I am a problem solver and live/invest in KC. It is a bit difficult to communicate in a chat like this, so if you want to chat on the phone,  I would be happy to see if I can help. I am not an agent so can’t list the house if you go that direction, but if you don’t have one already, I do know many.

Dan H. · Answer

Sorry for your loss.

You fail to Indicate how much equity you have.

As is often the case, I am the contrarian but I will provide rationale for why I would not keep your current home to rent as an investment property.

- why invest for negative return?  Currently money market and CDs are returning near 5% with no effort or risk.

- I suspect your underwriting is underestimating the true negative.  A very large percentage of new RE investors underestimate cap ex/maintenance.  I suspect your expenses when including vacancy, PM, Taxes, insurance, maintenance/cap ex will be about 50% of your rent.  Did your mortgage payment that equaled the rent include insurance and tax (PITI) or was it only debt service (P&I)?

- even with use of a PM, Residential property ownership is not passive.  As the owner, you are the asset manager and responsible for managing the PM.  Depending on quality of PM can dictate level of effort necessary but even if you get a good PM things can change (bought out, retire, simply no longer perform at the same level).

- your reliance on appreciation will result in gains tax (assuming no 1031) because you never lived in the place 2 years to satisfy the 2 of 5 year rule.

- typically home purchased to be your home are not the best rental properties.  I have an ex-home in my properties.  It is my worse performing property.  This is because it was purchased to be a good home for my family and not necessarily to be a great investment properties.  The properties I purchased as investment properties were purchased because they were great investment properties.  I suspect your home is not as good an investment property as other options.  good luck

Mohammed Rahman · Answer

Hey @Deborah Bailey - sorry for your loss, and for the predicament you're in.

It's not a tough question to answer, I would lean to the side of renting it out, even for a few years. Your market rent is typically going to go up every year when you renew a tenant's lease, but your mortgage payments will stay the same. Even if you're in the red every month for the first couple of years: your tenant is paying for a big chunk of the equity in your home. Your home value is also increasing (typically).

Even if you were to sell now, you would lose enough money on the closing costs and likely price reduction due to today's rates. I recommend holding it for as long as you can comfortably manage from out of state (or look into a small time property manager).

Is Renting out our house worth it?

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