Documents / Downpayment / Lenders / Purchase / Qualifying / Refinance / Rental Properties

Considering turning your home into a rental?

Are you ready to move into a new home but need to decide what to do with your current residence? There are a few options, sell it or keep it and rent it out? In order to make an informed decision, I believe there are a number of factors to take into consideration and I encourage you to take a look at the tips below to determine if renting out your property is the ideal option for you.

Downpayment

If you are thinking of keeping the home though don’t readily have a downpayment on hand for a new home purchase, you will need to come up with an alternative downpayment source. This could be a gift from an immediate family member, unsecured borrowing from a line of credit or secured borrowing such as doing a refinance of your current property.

Qualifying

When you’re qualifying for a new property purchase, your existing property carrying costs will have to be factored into your debt ratios. Your new lender will confirm rental income via lease agreement or market rent as assessed by a licensed appraiser and do be advised the lenders all seem to calculate rental income differently. I am saying if you don’t qualify with one lender you may very well qualify with a different one.

Important Factors

Let’s get serious about owning a rental property; it’s not always a walk in the park as there are a few critical decisions that need to be made before you dive in. Real estate can be a great income earning investment, though it can also be a money pit if entered into irresponsibly. The best way to avoid any surprises is education and preparation. Below are just a few of the questions you should be addressing before you commit to renting out your home.

Who will manage the property and the tenants?

I believe many who are considering getting into the rental market most often overlook this. The goal is to maximize positive monthly cash flow and the costs associated with the management and upkeep of that property are very important as they can eat up a chunk of that change! If you are a do-it-yourself kind of person that can commit to providing your tenants ongoing and timely service at 3 AM, then self-managing could save you some money. However, for those that prefer to sleep through the night, you might want to outsource the typical duties of a property manager and these duties include repairs, key help, rent collection and more. Most property management fees vary depending on how many units you have and the services you require. .

Are there going to be significant tax implications?

I highly suggest consulting an accounting professional for more information on the tax implications of owning a rental property. Bad news first is your surplus rental income is taxable. Good news is most of the rental property expenses are tax deductible. Mortgage interest, property taxes and expenses incurred by renting the property can all reduce your tax bill a bit. However, if you are renting your property out under a short-term plan and plan to sell right away, you need to consider ALL costs incurred to determine if the rental route is worthwhile. Basically, if you sell your rental property and make a profit, those surplus funds are taxable. That being said, there are some exceptions on capital gains and your accounting professional can give provide you with more details. 

Insurance

Perhaps you may want to inquire with your existing homeowner insurance policy holder about obtaining rental property insurance coverage as they already know you. Your new tenants will only be responsible for insuring their own belongings if they wish as you will be arranging the insurance for the physical property.

Do you know how much your property costs a month?

The mortgage rate and term you have can affect the financial success of renting your home. If you have a fixed rate mortgage, your monthly payments will remain the same for the length of your term. This is good as it provides a consistent benchmark figure to determine the monthly rental amount you need to charge in order to cover your monthly costs. A variable rate mortgage could make the determination process a bit trickier as variable rate mortgage payments are subject to change. Ensure you have considered an interest rate hike when deciding what rental amount you will charge and in addition to the mortgage payment, there are property taxes and home insurance costs to take into consideration. Do factor a cash flow cushion into your rental amount to accommodate any type of an increase in your monthly costs.

What amount of rent can be charged?

I think location is one of the more important factors to consider when determining potential rental income. Proximity to downtown, schools and parks in addition to the condition of the property all have to be considered when deciding what rental amount you can charge. With favorable conditions, you can command a higher rent amount and be choosier with tenants. Keep in mind even though Alberta has good rental rates vs property values, you are still subject to market conditions. Make sure the rent amount you charge is comparable to similar properties in your neighborhood and if you determine you need to charge rent that is higher than normal for your area, you need to then decide if it makes financial sense to turn your owner occupied property into a rental.

If you have mortgage questions, contact The Mortgagegirl at 780.433.8412 or info@mortgagegirl.ca. Stay in the loop by following on Twitter @mortgagegirlca.

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3 thoughts on “Considering turning your home into a rental?

  1. Pingback: How to buy and sell at the same time |

  2. Pingback: How To protect yourself from mortgage fraud |

  3. Pingback: How to successfully sell & buy a home at the same time |

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