Ryan Severino liked the location of his family's home in Scotch Plains, N.J., but he also thought they needed more space. So in the summer of 2011, they decided to buy a bigger house. Mortgage interest rates were down, and so were home prices. "We were outgrowing our house," Severino says. "We didn't want to wait for prices to go back up."
But one thing he didn't realize was exactly how long it would take to sell the first house or to rent it, if that turned out to be the better option. "It comes down to more than pure economics," says Severino, senior economist and associate director of research at Reis, Inc., a real estate research firm.
Finally, in the spring of 2012, eight or nine months later, Severino found a buyer for the first house. In the interim, Severino weighed the pros and cons of renting versus selling, and he reflected on the decision he ultimately made. "It was tough to sell it in that market," Severino says. "We had the house on the market for sale while we were getting inquiries for renting it." But Severino knew he didn't want to be a landlord, and "didn't want the money tied up in the house."
Determining whether a property is a good investment takes research and analysis, and it's wise to take your time in making the decision because it's a major one, real estate experts say.
"You will break even if you rent out a place in some cases, and in most cases you will be profitable," says Walter Molony, an economic issues spokesman for the National Association of Realtors. "Investors swooped into the markets in 2011, 2012 and 2013 when they could buy up a place at a lower price," he adds. But the situation in many U.S. markets has changed with housing prices and rents on the rise, depending on the market. If you're thinking of renting your house, condominium or coop, do a comparative market analysis on your own or with the help of a licensed real estate salesperson or broker, he suggests. "Figure out how much money you will have to spend to get it up to market standard," Molony says.
Evaluating whether a property is a good investment and worth renting is both a monetary and personal decision that depends on your situation and tolerance for risk. "Figuring your costs - that's the easy part," says J. Frank Barefield, Jr., president of Abbey Residential, LLC, in Birmingham, Ala., and a member of the National Apartment Association. "The hardest part is the one variable that we can't control - time." A second factor is the unknown: Who is the person or people who will occupy your home and, hopefully, pay you the agreed monthly amount? "I would want to know everything I can find out about my potential renter," Barefield says. Whether you do it yourself or work with a management company, make sure you pay for both a financial and criminal background check on prospective tenants, he says.
To evaluate whether to rent or sell your property, here are six tips from real estate experts:
Evaluate current market conditions. Before you decide which way to go, consider the current situation in the area where your property is located. Determine the demand for rental properties like yours is in the neighborhood, Molony says. Through a comparative market analysis, which real estate professionals use, determine the value of existing properties in the neighborhood and the price similar properties rented for within the last six months. You can research online or ask a real estate professional - either a licensed salesperson or broker - to help you.
Consider the longer-term outlook for the neighborhood. "Where is the property located? Is it in an area that is likely to be improving or declining?" Barefield says. It's not always easy to determine which way the property values are moving in a neighborhood. You can find comparables from the last three to four years to detect a trend. If the neighborhood's property values are on the rise, you might want to keep the property and give it time to appreciate. If values are declining, and you will still make a profit, you might prefer to sell and take the profit before the market declines.
Determine your expenses for the property. Calculate your actual monthly expenses or carrying costs for the property: any mortgage payment, real estate taxes, insurance, homeowners association or other common charges such as monthly condominium fees and any assessments the homeowners association may have added. If there are monthly assessments on a property, factor into your calculation how long they are expected to last.
Analyze your cash flow. Determine how much monthly rent you can secure for the property and for how long. Then, compare that to your expenses to determine if the place is "going to carry itself," says Michael Corbett, Trulia's real estate expert and author of the book "Before You Buy!" In addition, he and others advise having a maintenance or emergency fund for the property for "when things break," Corbett says. A key question to ask yourself is what to do if you don't think you can break even or make a profit. "Analyze: Can I carry that extra debt? Is it worth it to me? Is the market appreciating?" Corbett says. Sometimes it's worth taking a shortfall now because you will be able to sell the property down the line at a higher price, he adds.
Weigh personal factors. Renting your home is more than a financial decision. It's a personal time commitment, which isn't for everybody. Be aware that as a landlord, you may receive calls at inconvenient times unless you hire a management company to handle repairs and emergencies for you. In that case, your costs can be higher. Approximately 1 to 2 percent of tenants do not pay the last month's rent or fail to pay at some time during the term of the lease, Barefield says, so weigh whether you are prepared for either situation. Ask yourself whether the personal costs are worth the trouble. How much time do you have to spend on a rental property, and is the financial return going to be worth it? Single-family homes tend to require more work and time from an owner than condominiums, but all properties require attention and time.
Get the property ready to rent. Determine how much it will cost you to get your property ready for the rental market. "Do not do anything more than necessary to get top dollar," says Barefield. The basics are painting and cleaning. Most people either don't improve their property enough or go overboard, he says. If you need help, seek out companies that do "apartment turns," Barefield says. They specialize in "turning a unit - taking it from a move-out to a rent-ready unit," he adds.
Renting your home as an investment can be worth it, but be sure to weigh both the financial and personal factors. For some people, like Ryan Severino, owning a rental property isn't desirable. "It's not just pure economics," he says. "If we rent it, how much difference it is going to make in our lives in terms of day-to-day living? I owned the house I wanted to own, and wanted to put the money into other investments."