When people decide to buy a new house and move away from Austin, many assume the best course is to sell their current home. This certainly makes sense for a lot of them. Most of us don’t have a ready reason to own two residences simultaneously, and the proceeds from your first home sale can fund the down payment on your new one.
However, there’s another option for some homeowners: convert the home into a rental property. The basic idea is to retain ownership of the house and prepare it for a renter with various upgrades and improvements.
From there, you can collect rental income (in excess of your monthly expenses, is the hope) and continue benefitting from property appreciation. There are some important caveats to making this strategy work, however.
The Benefits of Rental Property
Start with a close look at the benefits of owning a rental property in Austin. Assuming you can afford to buy a new house while continuing to make payments on the old one, this can put you in an excellent, financially advantageous situation.
The primary benefit is monthly rental income. Let’s say you’re currently paying $1,500 per month on the mortgage for your home.
In a good part of the city, you might be able to get $2,000 in monthly rent. After setting aside $200 per month for maintenance and another $100 for potential emergency repairs, that still gives you $200 a month in recurring profit, or $2,400 per year.
On top of that, as property values rise, you’ll stand to reap further benefits. For example, let’s say during your 20-year status as owner, the price of the property increases from $200,000 to $350,000.
That’s a total profit of $150,000, plus all the money you make along the way in rental income.
The High-Level Strategy
So how can you make this happen? Here’s a glance at the high-level strategy:
- Calculate. Before you finalize your decision, you should grasp the numbers. How much is it going to cost to continue owning this property? How much will upgrades and improvements entail? What about repairs and ongoing maintenance? And, very important, how much do people pay to rent properties like this one in a neighborhood like this? You’ll need to estimate conservatively to assess whether it makes financial sense to rent this property to a potential tenant.
- Save. The biggest challenge is saving up a new down payment for your next home. Traditionally, this money would come from the sale of your old one, assuming you have ample equity in it. You may have to wait a few months, or even a few years, to save up enough to make this work.
- Move. When you’re ready, you’ll buy the new house and move into it. This will give you a chance to inspect your old home and make upgrades. Since it will be empty at this point, it should be easy to effect these changes.
- Upgrade. Some upgrades make financial sense, because they make the property more attractive to potential tenants and justify a higher rental fee. Others will do little more than cost you money. Make sure to fix any glaring issues with the property and invest in curb appeal where possible; small, quick, and inexpensive fixes can have a surprisingly large impact.
- Market. Once the property’s fit to be rented, you can start to market it. It’s a good idea to hire a professional photographer to present your property in the best possible light. After that, you’ll want to list it with as many services as possible to maximize exposure – and try to get some referrals as well.
- Screen. Your property will likely attract several applicants, so take the time to screen your prospective tenants. Secure their credit scores, job history, current income, and other factors to ensure the people can afford to live there.
- Maintain. From there, you’re responsible for maintaining the property and building your relationship with the tenants. If you’re a good landlord, attentive and responsive to your tenants’ requests, your income will be more consistent.
Of course, this can be a lot of work for anyone – especially someone with limited experience in property management. That’s why it’s a sharp idea to work with a property management company.
The right one can help you at every stage of the process, from determining whether your home is marketable to tenants to addressing the ongoing maintenance and repair needs of the site. For a small percentage of your gross rental income, you can make your property management strategy completely hands-free.
Is It Better to Sell or Convert to a Rental?
Of course, the advantages of rental property aren’t guaranteed. It may, in fact, be better for you simply to sell the property.
If you’re not sure, study the following variables:
- Location. Where is your home located? Some neighborhoods are more desirable for tenants than others, and some are more profitable. The numbers may or may not make sense, depending on where you live.
- Upfront costs. You’ll also have to consider the upfront costs of your new home purchase. If you don’t have the capital to secure a down payment on the new property, you may be compelled to sell your old home to finance the purchase.
- Risk tolerance. Your risk tolerance will also play a role in the decision. Keeping up with two properties entails a bit of a risk, especially if you don’t have a prospective tenant lined up for your old home. Can you absorb a few months of losses?
- Monthly profitability. How much cash can this property generate? Is that enough to meet your regular expenses?
- Long-term goals. What are your long-term financial goals and what other investments do you currently hold? Do you have a target date for retirement?
Are you ready to convert your existing house into a rental property? It will be much easier if you have a team of experts on your side to help.
If you’re ready to rent out your property in the Austin area, contact Green Residential today!