Renting Out Your Home May Not Lead To The Passive Income You Expect

By Mark Gilman

Home values have not dropped the way many predicted in mid-2022, and inventory is still low in many markets. So the trend of people renting out their homes to cash in seems like a reasonable risk-reward, right? Maybe not.

As someone who has owned multiple home rental properties over the years, I discovered firsthand the perils of being a landlord. And I can’t imagine the added angst associated with renting out your principal residence. Several scenarios could play out, and few will bring you the revenue you think you’ll receive. Being a landlord is not on the long list of passive income opportunities and is anything but passive.

Start with vetting potential tenants. I’ve seen complicated sports parlays with better odds of picking a winner. You can throw all the credit checks at them — these aren’t free, by the way — and demand as much rental and job history as you’d like, but until that person is in your house, you have no idea what kind of tenant they’ll be. And because you just lived there a few days ago, remember that these people are living in YOUR home.

I met a guy a few years ago who had purchased a number of low-income properties and refurbished them to get them ready to rent. I asked him about his own vetting process, and he told me something I’ll never forget. “I look in their cars in the driveway,” he said. “If their car is dirty, beat up and full of trash, so will my rental be once they’re in it.” Brilliant. And frightening.

Then there’s the issue of repairs. I was making, on average, around $300 a month per rental property (I had three). In six months, I had to replace a garage door opener, a hot water heater, a furnace, an oven and was forced to retile a crumbling ceramic kitchen floor. Needless to say, my profits disappeared and went into the red in a matter of days. All of these things could potentially go bad in your home, depending on the year it was built and how your renters treat the property.
If you’re trying to Airbnb your home, you are subject to a ton of new community covenants and zoning ordinances, many that now prohibit it. Think about it — would you want to live next to an Airbnb? Some communities are even asking that homeowners pay for licenses before they can go into the short-term rental business and pay additional taxes on top of it.

I’m not telling you not to try to take advantage of this new trend of turning your home into a rental. I’m just warning you that you’ve got to do the math, figure out if you have the time and be open to the possibility that you may be turning your home over to someone who doesn’t appreciate it the way you do. And with interest rates sky-high and a lack of home inventory, where will you live?
 
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