Because military families move so frequently, those who choose to buy a home are often faced with a dilemma when they receive PCS orders: should they sell their home when they move, or rent it out? If you rent your home to new tenants, you become a landlord, and your former home can officially become an investment property. There are some great benefits to owning a house and collecting rent! But it comes with some challenges too.
Here’s what military families should consider before they decide to rent out their home.
THE BENEFITS OF RENTING OUT YOUR HOME AND BECOMING A LANDLORD
You can pay your mortgage off faster. Collecting rent and using that to pay off your mortgage is a great way to build equity in your property. Equity is the amount of money you have paid off your mortgage principal. It usually takes years to build home equity. If you get orders after living in a home for only two or three years, you probably haven’t built any equity because most of your mortgage payments went towards interest and escrow, not principal. But if you rent out the home, you could potentially have tenants paying you enough rent to cover your mortgage. If your rent income is higher than your mortgage, you can even pay extra each month, which can take years off your mortgage and save you thousands in payments!
You get a discount on taxes. As a homeowner, you already receive some tax benefits from your mortgage payments. If your home becomes an investment property, there are some additional discounts and benefits. This doesn’t happen automatically when you get tenants. It must be either your secondary home, or a residence you have not lived in for three years. With an investment property, you can now write off home improvement and repair costs on your taxes. However, your taxes will also become more complex because those tenant rent payments now count towards your income. You can read more about the intricacies of homeowner taxes here.
You can choose when to sell. Just because you have PCS orders doesn’t mean it’s an ideal time to sell your house. Maybe it’s the wrong time of year to attract potential buyers. Or perhaps your local home market has dipped and home prices are down. If you rent out your home, you won’t be forced to sell. You can wait two years or ten years or more. Watch the market, weigh your repair costs, and decide when will be the right time for you to sell your property. Tenants typically sign a one-year lease, but you can request shorter term leases to fit your needs.
If you’re near a military base, you have a built-in market. One challenge of owning a rental property is attracting new tenants. However, since military communities have a constant traffic flow of new members receiving orders, the area around base is typically a stable rental market. That’s good news for you, since it means less down time between tenants.
THE CHALLENGES OF BEING A LANDLORD
You will need to pay a Property Management company. While it may be tempting to have a handshake agreement and let your friend rent out your home, the reality is that if you own a rental property, you need a dedicated property manager. Not only do they help respond to maintenance requests quickly, but they also help find and screen your potential tenants: they can run credit reports and ask tenants for income statements. This helps protect you from a less-than-desirable tenant who won’t make payments on time. Most property managers charge you 10% of the rent as their monthly fee, but they only receive that when there is a tenant on the lease, so they have an active interest in keeping your property rented and profitable.
You’ll need a savings account. Bringing in rent income each month sounds great, but there are many costs of being a landlord too. You’ll want to set up a savings account that will have enough funds to cover at least two months of mortgage payments, in case there is no renter or the property becomes vacant for any reason. You should add some of the rent to this account each month to store away for home repairs. When an appliance breaks, the gutters need to be cleaned, or there is damage after a storm, you’ll need the funds available to make repairs right away.
Bad tenants can cost you a lot. Being a landlord can be a costly risk. Yes, tenants should pay a security deposit of one month’s rent to cover any damages that occur before they move out. However, with pets or young children in the house, tenants can easily cause damages higher than the security deposit. If a tenant gets behind on payments, it takes over a month to go through the eviction process. Small claims court could help you recover damage costs, but the hassle of a legal case and cost of a lawyer may not be worth it. That’s why it is important to set up a professional lease agreement with a property management company and screen your renters to make sure they can handle the rent.
You need more insurance. You likely already have homeowner’s insurance since you purchased your home. When you move out, it’s recommended to get renter’s insurance too. This will cover your belongings while living in your next home if it’s in base housing or an off-base rental. Some landlords require their tenants to get their own renter’s insurance to cover personal belongings at the rental property. You can also get landlord insurance to cover your dwelling and equipment and protect you from liability if a tenant gets injured on your property. These insurance rates aren’t expensive, but you should research them and include the costs in your budget.
Deciding whether to sell or rent out your home can be a difficult choice. You can talk to a real estate agent about the local market and decide which is the best fit for you. PCSgrades has a network of top-rated real estate agents from around the country who are skilled in working with military families. Connect with our real estate agent network here.