You’re ready to move to a new home but are conflicted about what to do with the old one. In many areas of the country, the decision may be simpler. But in Florida, the number one state in the country for population growth, we’re experiencing continued hot real estate markets for both homes for sale and homes for rent. Choosing to rent your house out in many cases may make as much sense as selling it—especially if you have a low interest rate on its mortgage.
If you’re lucky enough to own a property in Alachua, Citrus, or Marion County with an affordable monthly payment (or no monthly payment at all), you’ve probably wondered about the benefits and drawbacks of holding onto it and renting it out, either long-term or as a vacation or short-term rental. In this post we’ll explore pros and cons of renting, discussing considerations for turning your residence into a rental and how to lean on professionals to make an informed decision.
Reasons to Rent Your House Out
While the Florida rental growth is slowing down, it remains strong, with rents in nearby Orlando up 2.3% over last year after several years of significant growth. There is no indication that rental prices will come down, either. Because of this, many individuals are deciding to rent out their former residence, rather than put it on the market. What are some of the main reasons why property owners are choosing not to sell? Let’s take a look at a few.
Maintain Your Investment
Whether you have a mortgage on your current home or not, chances are that the equity in your home—the value of your home minus any loans you have against it—has grown quite a bit.
There are several reasons this is likely the case for you. Firstly, real estate is a fairly stable investment, generally growing in value slowly but surely, as property values rise over time. As we discussed in our recent post, Investing in Real Estate: Your Key to a Diversified Investment Portfolio , “While the average home cost was just under $40,000 in 1975 (about $228,000 in today’s dollars), the current average home price is over $500,000.” This is not simply due to rising costs across the board, either, as US home prices consistently outpace inflation. The current housing market crunch also serves to safeguard the rising value of homes.
Additionally, if you have a loan against your home, you’ve likely paid off a chunk of principal, even if you’re still in the early stages of your mortgage term. Your amortization schedule will vary based on your loan amount, loan term, and interest rate. While your initial mortgage payments are largely comprised of interest, taxes, and insurance, the amount you pay off in principal increases with each payment. This amount, along with your original down payment, only adds to the equity that you hold in your property.
Renting your home allows you to use rental income to cover your out-of-pocket costs (including any mortgage payment) while continuing to build equity and allow your investment to grow—often at no cost to you. And with rental prices in central Florida rising 46% since 2020, you likely even have some money left over after your expenses, creating a reliable source of passive income.
Take Advantage of the Rental Market
As we mentioned above, with rents increasing swiftly here in Florida due to housing shortages, our market not only needs more rental units, homeowners will also be rewarded well for offering their properties for rent. If you don’t need to sell your home to purchase your next one, it makes sense to take advantage of these market conditions.
There are many routes to take when renting your home in our area, and each has its own benefits and demands:
- Vacation Rental: If you don’t want to rent your home long-term, consider shorter term vacation rentals, which can fetch high prices without locking your home into years-long leases.
- Furnished Rental: We often choose to purchase new furniture when we move into a new home—furniture that better fits the space or our current tastes. If you don’t need much of the furnishings from your previous home and they are in good condition, consider the fact that furnished rentals can fetch 15-20% more than unfurnished rentals. This may also be a great option for individuals looking to rent to snowbirds, who will pay higher rents for furnished spaces, renting for up to six months at a time.
- Traditional Rental: If managing a vacation rental or supplying an entire house of furniture is more effort than you can commit to, know that a traditional rental is still a highly-sought-after option. Long-term leases can help ensure stable income, and property management companies can reduce the amount of time and stress you spend on maintaining the property and finding quality tenants.
Hold Onto Your Home
There are also personal reasons that we choose to keep our homes rather than sell them. It’s important to keep in mind that these other factors—beyond the bottom line—are often equally valid when choosing to rent or sell.
Personal Attachment
Your home may be special to you. It could be your first major step as an adult—the place where you got wings. Maybe when you look at the walls, you have strong memories of raising your children and spending time with loved ones. Or perhaps you put in years of blood, sweat, and tears into improving and renovating your space and making it your own. While simple attachment might not be the most fiscally responsible reason for keeping your home, if your home is a valuable investment, it’s okay to let personal reasons help you make your decision.
Future Use
Just because your home doesn’t meet your living needs today, doesn’t mean you won’t have use for it tomorrow. Do you love your home and neighborhood, but find that your family has outgrown your space? Do you have a child or loved one that could live in your home in the future? Renting your property in the near term can allow you to grow your investment, pay off your mortgage, and keep your home open as an option for future enjoyment. Whether you’d like to return to your starter home in retirement or hang onto it for your kids, consider the payoff of keeping your property to meet tomorrow’s needs.
Things to Consider Before Renting Your House
All of the reasons we explored above are crucial to consider when debating whether you want to sell your home or convert it into a rental property. Ultimately, however, you need to carefully examine all involved costs—upfront and ongoing—as well as your lifestyle needs, to determine if renting your home is the wisest choice for you. Let’s take a closer look at some of these key considerations.
Is your home rentable?
Before you head too far down the path to renting, take some time to consider if your home is a good candidate for being a rental. Is it well-maintained, or is it too outdated or in too poor condition to be a suitable rental? How much money would it cost you out-of-pocket to get your home in rental shape (and do you have that cash available)? Speaking to a real estate agent can help you navigate many of these initial questions.
Out-of-Pocket Costs
Ideally, when you rent a home you want your rental income to cover out-of-pocket costs. Unless you have an important reason to hold onto your home at an initial loss, if the income you receive can’t offset your expenses, it is likely not a wise investment.
Speak with a Central Florida real estate expert to determine how much rent per month you can typically expect to receive for your property. Then calculate your expected expenses to be sure you are in the black. These include:
- Mortgage payments (or insurance and taxes if there is no mortgage).
- Utilities you may need to cover (many rentals include water, sewage, and trash).
- Maintenance. A general rule of thumb is to set aside 1% of your property’s value each year for maintenance.
- Expected improvements. You likely know what systems and elements in your home are nearing the end of their lifespan, from HVAC units to windows. Include these costs in your calculations for the first five years.
- Landscaping and pool maintenance. Unless this will be the responsibility of the tenant, if you have a pool or yard you’ll need to keep these costs in mind.
- Lost rents: Even when renters do pay each month, you will likely lose up to a month between leases in order to find a tenant and make necessary repairs.
- Property management fees: If you choose to use a property manager, expect to pay up to 12% of your rental income in fees (though this may be offset by getting higher rents).
Opportunity Costs
There are two opportunity costs to consider here: the long-term opportunity of building a rental portfolio and growing your wealth by keeping your home and the opportunity of using the equity in your current home to help you to afford a new home that meets your wants and needs.
There is no one right decision for everyone, and the choice you make today, with today’s housing prices and interest rates, may be different in another economic climate. Speaking to professionals, including an experienced real estate agent, your lender, and possibly an accountant, can help you clarify your short and long-term gains (and losses) with each option.
Property Management or Self-Management?
Many property owners choose to utilize property management professionals to take the burden off of maintaining a rental. Property management companies can find and screen tenants, take care of minor and major maintenance issues, and ensure that someone is always there in the case of an emergency, removing much of the stress associated with rentals.
The downsides to property management are that you, as a property owner, will have less say in the day-to-day management of your rental, and property management fees will eat into your profits. However, if you don’t live locally or don’t have the time or experience to be a dedicated landlord, you will probably need to hire a property management company. If you’re on the fence, speaking to several companies, as well as the property owners who use their services, can help you make your decision.
Legalities
From proper leases that provide adequate protections for landlords to following local rental laws, it’s important to be sure that you do your rental the right way. Many municipalities require rental properties to be registered and regularly inspected, and some areas have banned short-term rentals like AirBnBs altogether.
Rules and restrictions can vary from one street to the next, which is why it’s beneficial for new landlords or individuals considering renting a home to work with professionals including real estate agents and property management companies familiar with local landlord-tenant laws. Additionally, if you plan to accept housing vouchers, there are often additional regulations you must follow. For instance, the Ocala Housing Authority of Marion County has very specific requirements for leases.
For more details on state regulations, visit the Florida Department of Agriculture and Consumer Services guide to Landlord/Tenant Law in Florida.
Landlord Insurance
Per your lease, you may require tenants to maintain renters’ insurance to cover their personal property losses. However, you will also still need to provide your own insurance to protect your house (and your own financial wellbeing).
There is no law in Florida that requires that you maintain insurance on your property, though if your home is still being paid off, your lender will. However, with the risk of catastrophic loss so high in our state, it’s crucial to maintain this coverage regardless. And it’s not cheap—expect to pay 25% more for landlord insurance than you did for homeowners’.
Taxes
Property taxes. Federal income tax. Sales and use tax. Tax deductions. Owning a rental will indeed make your tax situation more complicated. But that doesn’t mean that it’s not worth the extra time spent navigating your taxes. Be prepared for:
- Property taxes. And if you received a homestead tax reduction when you occupied the property, know that you will no longer qualify for this.
- Income tax. While there’s no state income tax in Florida, you will still be required to pay federal income tax on any income you receive over and above your expenses, filing it on your federal return. You may also need to pay tax to local governments.
- Commercial property sales and use tax. If the property will be rented for commercial purposes (not residential), you will need to pay Florida sales and use tax.
- Accounting fees. Because your tax return may be more complicated, you may choose to use an accountant to ensure accuracy, as well as receive maximum benefits for deductions.
Deductions
Fortunately, tax deductions on your property can go a long way in offsetting additional tax costs. These deductions can include costs association with:
- Cleaning
- Maintenance and repairs
- Major improvements
- Landscaping/yard maintenance
- Pest control
- Trash removal
- Utilities
- Property management
As well as:
- Insurance premiums
- Local property taxes
- Mortgage interest
- HOA fees
Renting your house out can be a great investment and source of income, but unlike selling your home, it’s not a once-and-done process. Being a landlord requires ongoing work on your part, so be sure you’re not only up to the task, but that it’s worth it for your unique situation. If you’re still not sure if selling or renting is the right choice, check out this Rent vs. Sell Calculator by the National Association of Residential Property Managers.
How to Rent Your House
If after considering the ins and outs of renting your home, you are ready to take the plunge, there’s one more major consideration for you to think about: How to do it.
In general, there are three routes you can take, each with their own benefits and drawbacks.
DIY: On Your Own
When you rent your house on your own, you will be responsible for renting out the home, as well as all maintenance and repairs.
Renting out the home includes preparing the home for listing (cleaning and repairs), listing the home on social media or rental sites, accepting applications and screening tenants, selecting the tenant and notifying other applicants, and sealing the deal with an appropriate lease, collecting the security deposit and any other deposits and placing them in an escrow account, and ensuring a smooth move in.
All of this effort is just to get a tenant. You’ll also be responsible for keeping the home properly maintained, and may also need to help navigate setting up utilities, collecting rent, and staying on top of any local ordinances and requirements.
However, when you do the entire process yourself, you do get to maintain control over how repairs are done, who rents your home (while still following equal housing standards), and how much you charge. These added freedoms may help you save money, in addition to the savings on property management fees—though this isn’t always the case.
Work With a Property Management Company
Property management companies will take care of most of the work required in renting a home, though you may have to approve certain items including major repairs. They will get the place ready to list (as long as it is in overall good condition), list and show the home, find your tenant, use a standard lease, and ensure that rents are collected and passed onto you (after they take their fee). While it depends on the terms of the agreement, when your tenant has a problem, they will contact the property management company instead of you.
Property management companies will take about 10% of rental income in exchange for their services—and this does not cover repairs. If you are looking for a hands-off approach, or are unable to meet the needs of the tenant due to your location or demanding lifestyle, these costs can be well worth it.
Work With a Real Estate Agent
Real estate agents are not property management companies, though some real estate offices do over these services. Agents will not take care of ongoing tenant needs, maintenance, or repairs. But if you are looking for middle ground—assistance with navigating local regulations, finding quality tenants, and securing a sound lease agreement (while avoiding monthly management fees!)—it may make sense to work with a real estate agent to rent your home.
Through their listing experience and own online listing platforms, real estate agents can reach a larger audience, resulting in a better chance for you to locate the right tenant. The professionalism associated with using a real estate agent can also leave a good impression on potential tenants, and may help you to elevate your listing, fetching a higher rental price and better tenant pool.
Perhaps most importantly, real estate agents know local markets and can even make suggestions for how to make minor improvements or adjustments like decluttering to ensure your home is ready to list, and at the best price possible. And with their vast network of housing professional contacts, they may even be able to help you find a dependable person or company to assist you in any repairs or maintenance.
Talk With a Central Florida Realtor About Your Options
Over the course of this post, we’ve mentioned the importance of working with professionals as you navigate your decision to sell or rent your home, as well as steps to take if you determine you’re ready to become a landlord. Whether it’s a property management company, accountant, or real estate agent, leaning on the expertise of seasoned professionals can not only save you time and frustration, it can help you avoid costly errors, saving you money, as well.
Not sure if you’d like to rent or sell? At Showcase Properties, we’re familiar with Marion and Alachua, and Citrus County real estate—including the rental markets—and can help you make an informed choice, listing your property to rent or to sell when you’ve come to a decision. Reach out to an Ocala Realtor or Gainesville Realtor today to explore your options!
