Real Estate Hacks: Should You Rent Your Property While Waiting for a Market Change?
“Location, location, location” may be the unofficial slogan of the real estate world, but “timing is everything” is a close second. Factors like seasonality, interest rates, and market conditions all affect the outcome of your buying/selling journey, and waiting for a time when the majority of these factors are working in your favor could be a smart move in the long run. With the current volatility of mortgage interest rates and high prices, many homeowners contemplating a move are grappling with the decision of whether to buy a new home now or wait for the market to shift. If you’re currently stuck in limbo, you might be considering a strategy where you move into a temporary rental property and rent out your current property to tenants. But is this approach a wise one? Let’s break down the key factors to consider.
1. Assessing the Current Market Conditions
Before diving into the pros and cons of renting out your property, it's important to understand the current real estate market conditions. In Colorado, the market can be particularly volatile due to its attractive location, economic growth, and lifestyle appeal. Interest rates, housing inventory, and local economic conditions all play a role in shaping market trends.
According to REColorado’s June 2024 market update, our local market is gaining inventory—in the first half of the year, 15% more new listings were brought to market compared to that time frame last year. More inventory tends to mean that prices stabilize and buyer activity increases, but in Colorado, potential homebuyers are remaining cautious. If local home prices are outside your budget right now, and you expect them to drop in the future, renting out your property and waiting for a better market could be a savvy path to take.
2. Rental Responsibilities
With the average one-bedroom rental costing nearly $1,700 per month in Denver, renting out your property might mean you can use rent payments to cover your full mortgage cost and then some. But being a landlord comes with significant responsibilities and maintenance costs that aren’t possible for everyone. Here’s what to consider:
Maintenance, Damage, and Repairs: Just because new people are living in your home, doesn’t mean it’s not your home. As a landlord, you’ll be responsible for maintaining the property. This can involve unexpected repairs and ongoing upkeep costs that might not have been present when you were living in the home. Unless you hit the tenant lottery, you also need to prepare for your tenants to treat your space like a rental—meaning they might not take as great of care of it as you did.
Property Management: If you’re not planning to manage the rental yourself, you’ll need to hire a property management company. This can eat into your rental income—property management companies typically take 8-12% of the rent cost—but for many landlords, delegating upkeep, monthly payments, and tenant searches to a property management company is totally worth it.
Tax Implications: Rental income is taxable, and there are specific tax regulations you’ll need to navigate. In most instances, the tax rate on rental income is based on federal standards, which is 20% or less, but It’s a good idea to consult with a tax advisor to understand how renting out your property will impact your tax situation.
Local Laws: As of January 1, 2024, single-family homeowners in Denver need a license from the city to operate a residential rental property for 30 days or more. This new license is granted to landlords after their home passes an in-depth inspection and meets the city’s safety and sanitation standards.
If you’re ideal neighborhood is in Denver, contact Iron Works Realty to make the moves you’ve always wanted.
3. Test Driving Your Dream Neighborhood
If you’re buying a new car, chances are you want to test-drive it first. So why not test drive a new neighborhood? Living in a rental while waiting for the market to cool opens up the opportunity to do so. Here are some things to think about:
Neighborhood Compatibility: Renting in the area you’re interested in eventually buying in allows you to experience the neighborhood first-hand. After a few months of renting, you might realize it’s the perfect fit and be the first to see for-sale signs going up around you. Or you might realize that although you love the friendly neighbors and charming architecture, the commute to the office is much longer than you anticipated. Assessing the day-to-day factors in the neighborhood can help you determine whether it’s truly the right fit for you and your lifestyle.
Rental Market Conditions: Make sure to evaluate the rental market in your desired area before going all in. High demand for rentals could mean higher costs, which may impact your overall budget and dip into your savings for a future down payment.
Lease Terms: If you do decide to rent, thoroughly read your lease and then read it again. If you’re waiting for the market to change, you’ll want flexibility in your rental agreement in case your timeline shifts. Signing onto a month-to-month or six-month lease might be more beneficial than locking into a full year.
Making the Decision that is Best for You
Renting out your property while waiting for the market to change can be a viable strategy, but it requires careful consideration of financial, logistical, and personal factors. By evaluating your current situation, understanding the market conditions, and planning for potential challenges, you can make a decision that best aligns with your long-term goals. Remember, the real estate market is ever-evolving, and staying informed and adaptable will help you navigate the complexities and find success in your property endeavors.
For personalized advice and guidance tailored to your unique situation, don’t hesitate to reach out to the experts at Iron Works Realty. We’re here to help you make informed decisions and achieve your real estate goals.
