3 Factors to Consider Before Becoming a Landlord
Love it or hate it, military relocation is a fact of life we all must face as we serve or support those who do. Sometimes, the quintessential dilemma, “Should we buy or rent?” is solved easily, particularly if you’re stationed in a duty assignment you love or are considering as a prime retirement location. The decision to buy is an easy one.
And sometimes, buying is simply a stronger financial position for your family and offers a better value than shelling out thousands each year in rent.
Yet, serve long enough in the military, and you are bound to PCS. If you’ve purchased a home, you’ll likely be considering whether it makes sense to rent the home out and become a landlord or sell it as you face a military move. Undoubtedly, it can be a challenging choice.
If you do find that you're strongly considering becoming a landlord, there are a handful of factors to consider before you make the plunge.
3 Factors to Consider Before Becoming a Landlord
1) Releasing the Emotional Attachment to Your Home
A major hurdle for many would-be landlords is the ability to release the emotional attachment tied to your home, as it will no longer be “your” home. While the mortgage may be yours, the day-to-day living, new memories, new seasons (and sometimes new damages), will be from someone else’s family. Your tenant’s.
Our homes are the refuge from the stresses of the outside world, our safe space where we can decompress, laugh, live, and love with our own friends and family. For some, the thought of releasing that sanctuary to a tenant can be too much to bear, and create an unending source of worrisome stress.
Additionally, if you’ve invested significant renovations into the property (like custom upgrades), consider the difficulty you may encounter if these elements are damaged, from either tenant negligence or simple wear and tear from tenant turnover, and end up needing replaced.
2) Adequate Finances for Two Households
Once you elect to convert your existing home into a rental property, you will be exposing yourself to some financial risk. In addition, you will still need to secure housing at your new duty location, meaning you will effectively be managing finances to maintain two households.
Ideally, the rental price point is enough to cover your monthly mortgage and perhaps even provide a small savings cushion that can be built up over time. However, realize that market rates can greatly influence how much tenants are willing to pay in rent.
Set your rental price too high, and the home will remain vacant as tenants pass on your property to find one more in line with what the market will bear. Your rental price cannot be set exclusively on what your monthly mortgage payment is, as you may owe more than your home can actually command in fair market rents.
If your monthly mortgage fits comfortably within your existing budget or you are able to stretch monthly funds, maintaining two households might be a realistic option and set you up for wealth-building. But, if funds are already tight, attempting to take on a rental situation carries the risk of quickly turning into a financial hardship.
3) The Realities of Maintaining a Rental Property
Successfully maintaining a rental property can be challenging, and it is worth investing the time to assess and mentally prepare a strategy that you’ll need to maintain the property. At a minimum, the following three factors will need to be considered.
No matter what state your rental home is in, some form of Landlord/Tenant Law will apply. As a landlord, when you screen tenant applications, you must adhere to fair housing laws and non-discriminatory policies, tenant rights to privacy, eviction procedures if needed, and banking regulations that govern how security deposits must be held.
Method of Property Management (Self-managed or professional)
As you begin thinking about being a landlord, will you hire a property manager or self-manage? Hiring a professional property manager may be worth it for the housing law and tenant screening expertise alone. But, that expertise does come at a price, as a property manager will take a percentage of gross rents (8 to 10% is the industry standard).
However, if you find yourself balking at the idea of handing over a percentage of collected rent, realistically prepare for the expertise you’ll need to gain to become your own property manager. (Get more helpful info in Becoming Your Own Property Manager)
New Level of Taxation and Income Reporting Requirements
For taxation purposes, the IRS delineates sources of income, both to calculate taxes owed and allowable deductions. It is important to realize that if you are considering becoming a landlord, you are required to report all sources of income – including rental income.
Additionally, if the home happens to be in a state that levies state income tax upon its residents, realize you may now be responsible for additional state income taxes and required to file a state income tax return. These additional reporting and filing requirements may be burdensome enough that an accountant might become necessary to help prepare your taxes.
Many service members have made the decision to become landlords, accumulating multiple properties as their careers and PCS moves progress. With due diligence and determination, it is quite possible to create wealth through both home equity and rental cash flows...and master the skills needed to turn a home into a profitable rental investment.
The key in this transition is realizing that once you make the decision to become a landlord, and collect that first rental check – you have effectively become a small business owner. You will have new responsibilities and must adhere to applicable laws and taxes, keep up with any maintenance and repairs needed to safely house tenants in the property, switch insurance policies from a homeowners policy to rental coverage, and determine property management and tenant turnover processes.
Of all the challenges that accompany a military lifestyle, one of our community’s greatest strengths is that you are not alone. Learn from other military families who’ve successfully taken the plunge and become landlords and download MilitaryByOwner's FREE Landlord Tenant e-book.
Did you know? There is a wealth of information available at MilitaryByOwner! Get actionable resources and advice from real estate experts and other military families to help guide you to the right real estate decision for your family.