So You’re Moving…Should You Rent Out Your Old Family Home?
Thinking about renting out your real estate Big Island Hawaii? It is not uncommon for people to become “accidental” investors by renting out a property that they did not intend to at the time of purchase. Oftentimes what we see are homeowners who hope that renting out their old family home will help them pay for a new one. They’re looking to establish a source of passive income and cut the hassle of selling the property. In many instances this is a sound financial decision, as buying and holding is one of the few low-risk, high reward investments.
However, renting out a previous family home is quite different than purchasing a property with the intent to rent. When you purchase a property as a rental, you already have an eye out for what pros and cons it possesses as a rental property. But when you rent out a property that you’ve lived in, you may have a more difficult time generating profits. Below we discuss why.
Running Your Numbers—The Right Way
Whether or not your real estate Big Island Hawaii would generate enough income to justify keeping and renting it out is a matter of numbers. The analysis is simple and straightforward: if your rental payments exceed your mortgage payments, you stand to profit from renting out the house—at least in theory.
There are two things that render this equation a bit more complicated when you translate theory into reality. Firstly, it is very difficult to project your rental income, as we’ve explained in previous posts. You must factor all housing costs, including property taxes, utilities, maintenance, and capital repairs, into your total expenditures. And don’t forget that time is money, too. If you are spending a lot of time consulting with renters and managing the property, you are in effect paying hundreds more for that property.
Many people, especially those who are not seasoned in real estate, fail to take these costs into account. Their expenditures end up exceeding their rental income, rendering the whole operation a financial loss. You stand to lose thousands of dollars in just a few short years in failing to project your profits correctly.
The Issue of Perceived Value
Of course, the former is an issue that all investors face, not just those considering renting out their family homes. The reason that calculations can go particularly haywire for the latter group is because of disparities in perceived value.
When you are deliberately investing in a property with the intention of renting it out, the decision to buy is purely one of business. What is the median market value of rentals in that area? Do you stand to profit from the property? Is there sufficient demand for that type of property in your market? It is easier to determine the profitability of an investment when you have no personal attachment to it. It is absolutely critical that you are able to objectively analyze relevant facts.
Those considering renting out real estate Big Island Hawaii they have lived in are a different story because their perceived value of the property is higher. Whereas an investor might recognize that, as an asset, a property will not generate income, those seeking a home are evaluating the house in relation to their personal lives. They are considering whether or not the home fits their needs and lifestyle, what it is close to, and if it suits their aesthetic tastes. Because that property fit the buyers’ needs and desires at the time, they may have been willing to pay a price that exceeds market value. By extension, their mortgages are higher than they would have been had they been thinking like an investor. In these situations, rental income rarely compensates for the higher mortgage rate.
Having a Strategy
Not only does a real estate investor have a more realistic eye for purchasing and renting profitable properties. Her or she also has a broader business plan that usually involves multiple buy and hold ventures. The income you stand to gain from a single profitable investment will never be enough to make you independently wealthy. This is true even if you calculate your numbers correctly. Buying and holding is a deliberate process that fits into a larger business plan.
If you’re thinking about renting out real estate Big Island Hawaii, you need to understand the principles of input and output. Perhaps you calculate your net profits and stand to gain some money from renting your home. But you probably have another job and other responsibilities, whereas many investors make real estate part of their career. Does the extra income really justify the hassle of having to maintain two properties? Could you obtain that extra cash with less time and effort by investing in stocks or working longer hours? Renting out your old family home is, in effect, a career move, and should be treated as such. If renting your home doesn’t make sense as part of a larger business plan for yourself, you should seek to sell the home instead.