Could you become an "accidential landlord"? Those who became homeowners during the pandemic — and those who refinanced at that time — have likely been enjoying a fabulously low interest rate on their mortgage ever since.
In fact, data from Goldman Sachs shows that 99% of borrowers at the beginning of 2023 had a mortgage rate lower than 6%. And, of those, nearly a third of people had a rate at or below 3%.
Mortgage rates this low are a huge money saver on your monthly bills. So it’s no wonder why homeowners are reluctant to let a <3% rate go, even if their current home no longer meets their needs.
For instance: perhaps you purchased a small condo in 2020 to get on the property ladder, but have now added a baby to your family. You need at least another bedroom, and ideally a second bathroom.
Or maybe you adopted a dog throughout the pandemic and now want a much bigger yard for Fido to run around in.
Maybe you refinanced to a 3% rate on your beautiful family home, but now you’re an empty nester who’d rather move to low-maintenance condo.
Circumstances change, but that 3% rate you secured isn’t going anywhere. So perhaps you wonder how you can hang onto it, and turn it into an investment, while you move onto the next chapter of your life?
Let’s discuss the pros and cons of renting out your existing home while you move on.
Pros Of Renting Out Your Home
- Steady Income Stream: Renting out can provide a consistent monthly income, helping to cover the mortgage and potentially generating extra cash.
- Property Value Appreciation: You continue to own an appreciating asset. Over time, the value of your property could increase, offering a substantial return on investment. This is particularly important in South Jersey, where home appreciation has far exceeded that of the country’s average.
- Tax Benefits: As a landlord, you might be eligible for tax deductions related to property maintenance, improvements, and even mortgage interest.
- Keeping That <3% Rate: An investment property with a <3% mortgage rate is almost certainly guaranteed to make you more money than a property with a >7% rate, because you’ll be pocketing more money at the end of each month when the bills are due.
Cons Of Renting Out Your Home
- Landlord Responsibilities: Being a landlord isn't a cakewalk. It involves property management, dealing with tenants, and handling maintenance and repair issues.
- Rental Market Fluctuations: The rental income isn't guaranteed. Market dynamics can affect rental prices and vacancy rates. Can you afford to pay the mortgage on both your rental property and the home you move to if you can’t find a tenant straightaway?
- Potential for Property Damage: Tenants might not treat your property with the same care as you would, leading to wear and tear or damage.
Case Study: Meet the Fullers
Jackson & Maggie Fuller, a couple in South Jersey, faced a difficult decision: they purchased their 2 bedroom, 1 bathroom single family home in 2021, securing themselves a fantastically-low interest rate of 3.2% for their 30 year mortgage.
The home was great, albeit a little small.
But they were buying at the peak of the pandemic-homebuying-market: when buyers were absolutely desperate to secure themselves a home as rents soared, and squished apartment-living became unbearable during lockdowns.
Jackson & Maggie loved their home when they bought it, but when Baby #1 arrived just a year later, they’d already outgrown it and were ready to upsize.
They accepted the fact they’d never acquire another 3% interest rate on their next home. But to get rid of their first home with that rate felt like throwing money away!
Maggie’s parents suggested they hang onto the 2b1b home and rent it out to tenants. After several months’ research and consulting with a local real estate professional, Jackson & Maggie decided to rent out their home.
They hired a property management company to ease their new burden of landlord duties, meaning they could take a really hands-off approach when it came to finding tenants and dealing with maintenance.
Due to their low monthly mortgage payment with only 3% interest rate, the rental income they gained from their new tenants covered their monthly bills, and even supplied them with $550 extra every single month, which they funnelled into a high interest savings account.
They were able to move onto a larger property offering so much more space, and felt assured they were contributing towards a fruitful retirement later on in life, knowing they’d invested in property.
Could You See Yourself Doing This?
Renting out your current home can be a smart financial move, especially if you have a low interest rate. In a market where interest rates fluctuate, holding onto that low rate can feel like a financial anchor in uncertain waters.
However, it's crucial to weigh the pros and cons and consider factors like your willingness to manage property and tenant issues. Is this a savvy financial move or a potential headache in disguise?
Consulting with a real estate expert can provide personalized advice based on your situation… you don’t need to make this decision without a pro by your side!
