There is an important secret many homeowners, who decide to rent their home, do not know or consider. It is simple but can be the difference in wealth building or losing money. The simple secret is that the decision to rent should be a long-term one in order to enjoy the wealth building returns.
Many homeowners who decide to rent their homes do not experience a profit on the collection of rent. This is usually due to the economics that result from the typical highly mortgaged home. The homeowner, turned landlord, may have a mortgage payment that is high compared to the value of the home. Cash flow from a tenant helps to offset the expenditures associated with continuing to own the property. Cash flow from a tenant can make a significant dent in your monthly mortgage payment. A tenant can also lower risk factors associated with a vacant home. Homeowners who choose to rent ultimately enjoy lower risk, while having a source of funds that pays the mortgage and creates equity over time. There are also tax benefits available. A professional property manager makes this investment easy for an owner.
If your home won’t sell, maybe now is the time to consider other options. One simple option is to hire a manager to rent the home. Over time, by continuing to hold this asset, you will have a cash flow annuity to supplement your income. For example, one of our clients needed to move to a larger home and made the decision to rent their current home. The home is a lovely, suburban home, with a $2,000 per month mortgage payment. The mortgage includes an escrow payment for taxes and insurance. The home leased for a little over $2000. All of the owners expenses, except for maintenance, were paid through the rent. The mortgage had seven years left on its original 15 year term. The home now has a tenant that has been there for five years. The mortgage was paid off last year and our client enjoys a monthly annuity payment while owning this $250,000 home debt free. Those first seven years were not always easy. One year the roof needed to be replaced, substantially eating into the owner’s savings. Another year some major tree removal projects were necessary, again paid by the owner. Yet, over time, what a wonderful asset this has become for the owner! If they had sold it, they would have had equity of about $180,000 and not incurred those expenses. Instead, the tenants paid off the mortgage, the home continues to appreciate, and the owners receive a nice cash payment monthly.
The idea that big money can be made quickly permeates much of society. As you learn the basis of people’s wealth, it is decisions like this one that help make people secure and possibly wealthy. When reviewed based on monthly cash flow, the return on this home was insignificant and often negative. What is sometimes forgotten is that the owner’s mortgage was paid by the renter. The owner also enjoyed tax deductions for the maintenance and repairs while also depreciating the home. The owner had to use an accountant to determine how much of those deductions they could take annually, but the cash flow was always sheltered from taxes. When the mortgage was paid, the owner had a nice bump in monthly income while still holding the appreciating asset.
This is what we call “wealth building”.