I own a house that I live in- should I move out and rent it out?

[mattimus]

Hi everyone! Here are the details:

I own a fully paid off home worth about $200k. It's within two miles of my workplace (so I usually walk/bike), and I'm renting out a room to a co-worker for $400/month. If I move out, I could rent the house for about $1,500/month, but I'd need to find my own room to rent, which would cost $300-$400 in this area, and would certainly not be as close to my job.

So as it stands, I make $400/month and have virtually no car expenses.
Option 2 would mean I make ~$1000 month ($1,500 - $400 (rent for my new room) - ~$100 (traveling expenses)), AND I would get many tax deductions for property maintenance instead of paying for it all out of pocket like I do now.

Am I missing something here? Is there any (financial) reason I shouldn't move out and rent room in another house?

[George the original one]

Financially, I think the only risks are vacancies and potentially increased home damages.

[mattimus]

Thanks for the reply George. My house is in a rapidly growing suburb in Texas, I don't think I'd have any trouble finding renters. Property damage is a very real concern of course, but I think it's an acceptable risk.

I think this is the right move to make, but I just wanted to look around and see if there was a good argument for staying put. Thanks!

[vexed87]

Risk of vacancies can be mitigated by chosing a rental property or other living arrangement with flexible conditions, if you can move back in to your home if there is a vacancies >1 month you won't lose much. WRT home damage, isn't that what a deposit is for? Make it sufficient enough to deter people who would otherwise choose to abuse your property. I.e. equivalent of 3 months rent if you can get away with it.

[cmonkey]

Considering it's paid off, that extra $1,100 could be put to good use and make even more for you in the long run. As others stated vacancies are the main issue, but since its paid off I would think it would not impact as much since you have no mortgage payment, just taxes. Build up a small fund with rent money and call it a "vacancy fund" in the even you can't find a renter for a while.

We have pondered doing the same thing when we FI, renting out our current homestead and moving somewhere else. We would be several hours away from our renters though so we aren't set on this.

[SimpleLife]

3 months rent for a deposit is a bit high, I think you will have difficulty finding anyone willing to pay $4,500 for a deposit on a 200k house, but Vex is on to s good deterrent.

Just screen your tenants carefully. People with bad credit or evictions have nothing to lose. I get people with evictions and all kinds of other issues emailing me for my rentals. They are passed over. Have not had an issue to date. I run a comprehensive background check AND visit them where they live now before signing a lease, to see how they live and whether they damage things.

[SimpleLife]

I would try it. Do a month to month lease. This way you can end the arrangement quickly. If it doesn't workout, basically even the cost of moving was paid for with the first months rent.

Also, I'd factor in 20% for maintenace and vacancies and adjust your profit calculations. It doesn't seem like you factored in insurance or property taxes either...

I estimate your actual profit to be $600 a month. I have rental properties and have been a landlord for, almost 3 years. Not a bad gig so far.

[mattimus]

Thanks so much for the answers, I appreciate ya'll taking the time. I think I'll move ahead with renting the property out after Christmas!

[pukingRainbows]

If you ever decide to sell the house, this choice may have repercussions.
Where I live, the taxation that results from selling your principal residence is very different than if it were to be considered an investment property.

[SimpleLife]

Yeah, that's a federal thing primarily. If you live in the house for 2 out of 5 years during the sale period (it does not need to be consecutive), you can sell without capital gains tax. This applies only to residences you lived in first. If you rented it out first and then moved on, there is a pro rated tax since it was initially an investment property.

In all cases, there is a depreciation recapture tax. Unless you do a 10-31 exchange.

[jooles]

A friend of mine who has rental properties told me about a strategy he uses when interviewing prospective new tenants and I thought it was genius. Once he is down to the short-list of applicants he visits them each at their home unannounced. He rules out anyone who lives with chaos surrounding them. He only selects renters who keep their current place the way he'd like them to keep his property.