There are benefits of using your starter home as a rental property. Here's what to know about converting your primary residence to an investment property.
When it's time move on and move up from your starter home, you have more decisions to make than simply choosing your moving company. For many, moving on from a starter home provides the option to potentially make income by turning the house or apartment into a rental property. If you're weighing the decision to outright sell or rent out a property you're moving away from, how do you decide? Follow the facts.
Separating Real Estate Fact Versus Fiction
Although your instincts are important, making a decision about selling versus renting shouldn't be a gut decision—it should be driven by data. You'll need to comb through the facts and figures about your type of property and the market it's in. A great place to start is debunking common real estate myths that could lead you astray.
Myth 1: Wait for the House to Appreciate
Many hold onto their properties with confidence that their value will appreciate, and they can sell for a guaranteed profit later. But nothing is guaranteed. Regardless of the the work you've done or how long you've held the property, waiting won't always serve you, especially if the market in your area is particularly hot. And, for those that do rise in value, you will find that appreciation isn't level across properties. According to the National Association of Realtors, your home's size, location, and features will determine your appreciation, which you may find isn't enough to justify holding onto a property outright.
Myth 2: Time the Market
Many wait to sell off properties in order to catch the market at its strongest. But this approach means a gamble that a better market is coming at all. In reality, many factors, including local market inventory and tastes can make what's otherwise a strong market in other places less advantageous for you. And there are, of course, global factors, including the overall strength of the economy, that may mean that a better market isn't necessarily coming. Act with the information you have now—not with your forecast.
Myth 3: Don't Sell
There's a prevailing sentiment that you shouldn't ever sell off real estate. Sometimes that's true, and you can make more money over the long term through rentals. But, sometimes, market conditions both locally and globally may mean that you can make more money by exiting the property than holding onto it.
The Factors to Evaluate
Examine data to support your decision, and don't forget to evaluate the other side of the coin before you make a choice. Here are some factors that you'll want to evaluate as you gather facts.
Factors that influence the rental market and your costs include:
- Market saturation: In your area, the number of both long- and short-term rentals will affect your value proposition as well as how frequently these rentals are booked and occupied
- Comparative properties: The average rental prices for comparable properties—also called "comps"—will affect how much you're able to make from your rental, and whether it's above or below other local areas
- Consumer tastes: Interest in both long- and short-term rentals in your area will determine whether your property is right for the market, and whether the market can support another entry—yours
- Seasonality: Some markets are dominated by seasonality—for instance, Vermont in the winter and North Carolina in the summer—which likely means that all of your rental income will be concentrated in one part of the year
- Location: Your neighborhood's desirability and proximity to major attractions and transportation will dictate how often it's occupied as well as the price you can command
- Upkeep: Rental properties require staff such as property managers, cleaning, repairs, etc., and this help can become more expensive in more popular markets
Factors that influence the sales market and your home's value include:
- Market saturation: The amount of inventory on the market will determine whether you can sell for the high end of your price range, the strength of buyer negotiating power, and whether you'll have interest in your home at all
- Comparable properties: The number of listings of properties comparable to yours in both location and size as well as how long they stay listed will dictate the sales market; the list price versus final sale price will also have an effect on how buyers view your property's value
- Strength of market: The real estate sales market is determined not only by what's happening right now, but its performance relative to last few years—both up and down, which buyers may use to evaluate an investment
- Renovations: If comparable homes are more updated than yours, you'll need to factor in the budget and time for any renovation you'll need to put in to sell at the top of the market; this investment will also affect your net margin on a sale
- Cost of sale: Selling your home will also include additional costs to factor in such as real estate agent fees, closing costs, repairs based on inspections, etc.
Making a Decision
There are myriad factors to weigh when you are evaluating both options, yes—but the more information you have, the better of a decision you can make. Evaluate each aspect with regard to both money and time to see which option comes on top for you. Don't forget to factor in whether or not you can handle two mortgages, or whatever your personal situation will be for carrying two properties at once.
Also take a hard look at the intangibles; although these aren't as concrete, they should factor into your calculus. These include whether you want to have access to the property again, how comfortable you feel with managing a property through technology, whether not you desire to serve as a landlord, and how far you're moving if you need to be back onsite for anything. You may find others, too, that are even more important to your decision.
Remember to weigh both the financial and economic factors as you decide, and be careful to stay data-driven and not get ensnarled in myths or pure "gut" instinct. Keeping your judgement factual and clear will help you arrive at the correct conclusion on what's right for your starter home.