America's sluggish home economy has put buyers in a better position than ever and this had led many homeowners to opt for renting their property, rather than take an insurmountable loss. It's a complex decision, with many factors to consider. Below are a few tips to help you decide if you can make money renting your property. (If you're looking to rent a vacation home but don't know where to start, you're not alone. Check out Tips For Renting A Vacation House.)

IN PICTURES: Financing For First-Time Homebuyers

Know Your Mortgage
The type of mortgage you have impacts the viability of renting your home. If you aren't sure of your mortgage, look at closing documents from when you purchased the home or contact your home lender.

If you have a fixed-rate mortgage, your monthly payments will be relatively consistent for the life of the loan, changing only due to taxes or insurance. This certainty provides a baseline to determine the minimum monthly rent needed to cover the cost of your monthly mortgage.

Adjustable-rate mortgages (ARMs) make the renting process trickier. By nature, ARMs fluctuate, which will change your rate and monthly payments. There are many types of ARMs, but the general rule is that the first number in the mortgage name refers to the number of years the loan rate is fixed.

For example, if you have a 5/1 ARM and you bought the home last year, you know your monthly payment and the minimum amount you need to charge for rent and still cover those payments for four years. But when you hit five years, your monthly mortgage payment will change and the rent needed will follow suit. This is important to keep in mind when you are leasing the property over a period of time.

Property Management
Of course the objective in renting your property is to bring in the most possible income and accrue the lowest possible expenses. If you are a do-it-yourselfer and can commit to providing your tenants ongoing maintenance and service when those 3am emergencies arise, you can save money by acting as your own property manager.

For those who don't have either the handyman skills or tolerance for the hassle, you will have to outsource the duties to a property manager. These fees are typically 10% of the monthly rent. You'll need to consider this expense when determining if you can really make money by renting. (Find out how to profit from your property when the housing market dips. Read Can't Sell Your Home? Rent It.)

Tax Implications
Taxes bring opportunities and headaches to the rental equation. On the good side, mortgage interest, property taxes, expenses incurred in operating and renting your property (even depreciation) are all tax deductible. However, your rental income is taxable.

You also need to consider capital gains taxes and when you will eventually want to sell. If you have lived in your home for two out of five years when you sell, your capital gains are tax-free up to specified limits. So, if your intention in renting is to simply "ride out the market" for a year or two, the implications are minimal.

But, if you rent for three years and beyond, you forego your exemption and once you do sell, any gains are taxable. There is one option if you exceed the two-year window. If you are willing to stop renting and move back into your property for two years prior to selling, you will again qualify for the capital gains exemption.

Of course, the tax matters associated with renting present another potential cost. If you are uncomfortable with the regulations, you should hire a CPA to assist you in navigating the tax issues.

IN PICTURES: 5 Simple Ways To Invest In Real Estate

Insurance
Renting can provide slight breaks on your homeowners insurance, in that you can transfer your existing homeowners insurance into rental property insurance once your tenant moves in. This coverage protects your physical property but not the contents. Your renters are responsible for their own insurance to cover their belongings. Generally, this switch will cost about 20% less than a homeowners policy.

The Bottom Line
Of course, value is based on what the market will bear. As always with real estate, location is one of the most prominent factors. Proximity to downtown, college campuses, major employers and sought-after school systems will all increase your ability to command a premium rent, while easing your tenant search and reducing tenant turnover. (When a housing crisis strikes, the big winners are often the renters. To learn more, refer to Take Advantage Of A Housing Crisis - Rent!)

For the latest financial news, see Water Cooler Finance: History's Biggest Rogue Trading Scandal.

Related Articles
  1. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  2. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  3. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  4. Investing

    Why We’re Bearish On U.S. Housing

    Hedgeye analyst Josh Steiner discusses the reasons behind our decision to go from bullish to bearish on the U.S. housing market.
  5. Investing Basics

    How to Get More Yield From Your Investments

    Yield seeking investors can boost the amount of income their investments generate through tweaking their portfolio of stocks and bonds.
  6. Retirement

    Dollar Shave Club Review: Is It Worth It?

    Learn about the business model of the Dollar Shave Club, and find out whether the razor subscription company is a worthwhile investment.
  7. Term

    The Implications of Nonfarm Payroll

    The nonfarm payroll is a key economic indicator that’s closely monitored by analysts and investors around the world.
  8. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  9. Real Estate

    4 Real Estate Plays for Income Seekers in 2016 (CCI, HCN)

    Discover four real estate investment trusts that have favorable business developments and provide attractive dividend yields for income-seeking investors.
  10. Investing Basics

    Understanding Real Estate

    Real estate is an encompassing term that refers to land, the buildings on that land, and its natural resources, such as crops and minerals.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  3. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  4. Does renters insurance cover water damage?

    An all-perils renters insurance policy does cover water damage, less the deductible, to personal property if the damage is ... Read Full Answer >>
  5. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  6. Does renters insurance cover storage units?

    An all-perils renters insurance policy provides coverage for the contents of storage units. Most policies limit the amount ... Read Full Answer >>
Trading Center