If you are a homeowner, this question has surely crossed your mind at some point! Should I keep my home and rent it out or should I sell and move on? This topic comes with many considerations, but we thought this month’s article would be a great way to highlight the pros and cons of becoming a landlord and turning your home into a rental property. With rents increasing and many owners locked into historically low interest rates, the idea of having rent to help cover a mortgage has made this a possibility to many who never had intentions of being a landlord.
To focus on the San Pedro rental market specifically, over the last 180 days (based on local MLS stats), we have seen single family homes rent out between $2,500 to $6,000/mo. Rental amounts will vary depending on location, size, features, condition, view, etc. Not included are fully furnished homes that possibly rent for more. So as one can see, the financial benefit of renting your home becomes something to consider when evaluating what a home like yours may rent for.
So, this leads to the next question. Is your home a good fit to be a rental and, if so, does it require any major repairs or improvements prior to a tenant moving in? The general expectation is that you deliver a home to a tenant that is functional and with all major systems being operational. Are you prepared to be a landlord? Managing a property requires more than just collecting a rent check. It’s the role of the property owner to locate a qualified tenant, take maintenance requests, coordinating repairs (often at odd times), and communicating with the tenant as needed.
If you’re considering renting primarily for passive income, remember, there are additional costs you should anticipate. As explained in an article from Bankrate:
Mortgage and Property Taxes: You still need to pay these expenses, even if the rent doesn’t cover all of it.
Insurance: Landlord insurance typically costs approx. 25% more than regular home insurance, and it’s necessary to cover damages and injuries. So be sure to get an updated quote on this before proceeding to know what your new payment will be.
Maintenance and Repairs: Plan to spend nearly 1% of the home’s value annually (ballpark) or more if the house is older. Once a tenant moves out, painting and cleaning can be something that will need to be done before marketing the property again.
Finding a Tenant: This involves advertising costs and potentially paying for background checks. If you hire a Realtor® to help with this process, there will be compensation to that individual as well.
Vacancies: If the property sits empty between tenants, you’ll lose rental income and be required to cover the cost of the mortgage until you find a new tenant. You should be able to cover 3 months of lost rent as a safety net during transitional times.
Management and HOA Fees: A property manager can assist in managing your property but typically charge approx. 10% of the rent. HOA fees are an additional cost too, if applicable.
In closing, the decision on how to proceed comes down to many factors and ultimately what you are comfortable with. Consulting with your accountant to determine tax benefits/liabilities is another very important element to consider. Also, reaching out to your local Realtor® is always recommended so that you can get a professional opinion on all the considerations mentioned in this article. If you ever have any questions or need any more information, please reach out to us through our website: www.hhcoastal.com or email: info@hhcoastal.com
Mike Harper and Peter Hazdovac are both licensed Realtors® and co-owners of HH Coastal Real Estate, an independent local brokerage. For more info, visit www.hhcoastal.com.
