How to Know if Your Home Makes a Bad Rental

Nobody is perfect and everybody makes mistakes. Unfortunately in life, some mistakes are more expensive than others; however, every single one will contain a different, but valuable lesson.

This is a line that runs true in many people: “I want to buy a bigger/better house for myself/my family and I am thinking about keeping the house that I currently own and renting it out. After all, that is how real estate investors earn their big bucks, right?”

Actually, the majority of the time, this is a terrible idea.

While it is absolutely wonderful that these people are playing with the concept of rental properties, the majority of people just don’t know how to make the numbers work. This is where I come in. There is a large number of lessons that are essential for people to learn if they want to make rental properties one of the means to invest in their futures.

Renting is a Business

Differing from the stock market, which showcases shares in a business, a rental property itself is pretty much its own business. The main idea behind running a business is to make a profit. Hence, it is essential that the rental income that you get can cover all the costs such as insurance, property management, capital repairs, ongoing maintenance, mortgage payments and property taxes etc. If you have no money after everything else is paid for, then this property isn’t a good rental.

One of the main problems is this: if you originally bought the property to personally reside in, then you probably overpaid for it. This is likely due to the fact that you bought this based on how much you could afford, and how much you really wanted it rather than a cold, statistically based business decision. Hence, when you begin to look at the market rents for your home, you may discover that the expenses of the property exceed the expected rental income.

Rent as a Means of Investing

Many investors make the mistake of putting far too much of their own precious time and money into the property. They can do this by either a) placing a deposit that is extremely high, just so that they can have the rent cover the difference in the mortgage plus other expenses, or b) constantly using their own money to make up the difference. However, think about it, if you were to buy some shares from the stock market, would you consider continuing to dump your money into that same investment every single month just so that you can keep it?

It’s highly doubtful.

Rent for Your Future

If the reason you want a rental is so that you can make some income for your retirement, it is highly important that you look at how much income you actually make from a single rental. Using the total rental income that you collect annually, subtract all costs (except for mortgage payments), and you will be able to find out exactly how much gross income your property could be making annually once the mortgage is paid off. However, do not forget that if you are taking this money as income, you will need to pay taxes on it.