Should I Rent Out My House? A Guide to Investing in Real Estate

There is a whole new generation of investors is seeing the value in real estate but aren’t educating themselves before taking the plunge. A house is a huge, life-changing purchase so it is important to do the research prior to buying.

Robert Kiyosaki in his best-selling book Rich Dad Poor Dad, spends a lot of time talking about real estate as an investment vehicle. His strategy is to invest for positive cash flow as opposed to capital gains. Positive cash flow means you bring in more rental income than it costs you to have the house. Capital gains are the profit that you’d gain if you sold your house for more than you bought it for.

Buying and holding a house in hopes that the market will go up can be as risky as making an uneducated purchase in the stock market or gambling. Rather than taking this approach Rich Dad recommends that you do the math and ensure that after all expenses you are making money each month on the rental income. This way even if the home value goes down, you are still generating passive income.

Let’s look at an example...

As of this morning a local property management company stated I could rent out my house for between $1200-1450 per month. They charge 9% of the rental income plus a one-time setup fee of $250. The monthly mortgage is $1135.

Key Factors:
9% Management Cost
$1200-1450 per month rental income
$250 initial set up fee (Divide this by 12 to get $21 per month in expenses)
$1135 Monthly Mortgage Payment

With these factors we can now see how much I would need to rent my house for in order to make a positive cash flow. We remove all of the emotional decisions from this equation and just do the math.

I used 3 different figures based on the estimate from the rental company. 1200 on the low end, 1450 at the high end, and 1325 to split the difference in the middle.

$1200 @ 9% = $108 + 21 = $129   (expenses)
$1200 (rent) - $108 (expenses) = $1092 (Rental income before mortgage)
$1092 - $1135 (Mortgage) = -43
 

$1325 @ 9% = $120 + 21 = $141   (expenses)
$1325 (rent) - $141 (expenses) = $1184 (Rental income before mortgage)
$1184 - $1135 (Mortgage) = 46

 

$1450 @ 9% = $130.50 + 21 = $152  (expenses)
$1450 (rent) - $152 (expenses) = $1298 (Rental income before mortgage)
$1298 - $1135 (Mortgage) = 163
 

If my house were rented for $1200 per month, I would lose $43 per month. This is not a good investment. At $1325 I would make $46 per month. At $1450 I would make $163 per month but that is at the absolute high end.

So how do we use this data to make a decision whether or not to rent your house?

If you are at negative cash flow, it doesn’t make sense to rent the house as you are losing money. This is not an investment, it is a money pit. You will need to come up with an alternative solution. Potentially you could rent out by the room to tenants for higher prices than you’d get for the house as a whole, or bypass the management and do it yourself, however now you are adding several variables into the mix such as your time.

Caution On Waiting for Capital Gains:

You may be sitting on a property that has a negative cash flow just waiting for the market to recover. The real estate market does appear to be going up as more and more people are buying houses, however do not be fooled. The economic state of our country has not improved. Nothing has changed for the better to improve our financial situation; in fact it is the opposite because we continue to print money that we cannot pay for therefore devaluing our own currency. This model cannot withstand forever, so hedge yourself for the worst and hope for the best.

Additional Resources:

- Read Rich Dad Poor Dad
- Pick up a copy of the board game called “Cash Flow.” This will allow you to practice your real estate skills and make mistakes before your actual money is on the line. The game is expensive but you can usually find a used copy on eBay for an affordable price.