It’s no secret that many homes today are worth less than the mortgage owed against them. Rather than sell at a loss, some homeowners are choosing to rent the home and continue to pay the mortgage. The Wall Street Journal calls them “reluctant landlords.”
Reasons to rent
You have to move but are having a hard time selling your home. Renting your home might allow you to wait out the market until selling conditions in your area improve. Don’t plan, though, on sitting out a full recovery of your home’s highest value. In many cases, that’s not likely to happen.
Your home is paid off or your mortgage balance is low. Renting your home can create a steady stream of income. This could be a great way to supplement your retirement income.
You think you’d like to move back into the home one day in the future. Renting the home could enable you to hold onto it, even while you live elsewhere.
You can’t afford the mortgage payment. Some individuals with high mortgage payments can rent another home for significantly less money and use the difference, along with the rent collected from the tenant, to cover the mortgage payment. Mortgage arrears are thus avoided.
Words of caution
Expenses will rise. Tenants are generally harder on a home than owner-occupants. You’ll be responsible for repairs and maintenance, and you’re likely to find yourself paying for repairs that wouldn’t have been necessary had you continued to live in the home yourself. Other costs to prepare for include insurance, taxes and property management fees.
Evictions can be difficult. In many states, evictions are extremely difficult under any conditions. Find out what the laws in your state are and be prepared to ride out a few months with no rental income in a worst-case scenario.
You’ll lose certain tax benefits upon the sale of the home. The current capital gains tax laws require you to occupy the home for at least two of the last five years. As a rental, the home will be considered an investment property for tax purposes.
Cover your bases
Put money aside every month for repairs. You’ll need it.
Hire a property manager if you move away. By renting your home, you’re letting someone else have possession of one of the most valuable assets you’ll ever own. Don’t risk disaster by ignoring the place after you’ve gone. If you’re not in close proximity, expect to pay a fee equal to 5 to 12 percent of the rent for a professional property manager to keep an eye on things and handle any problems or questions that arise during the normal course of tenancy. Consider hiring someone to check on and tend to the yard as well, so that yours doesn’t become the only home on the block hiding behind five-foot weeds or old cars on cinder blocks.
Screen prospective tenants thoroughly. Even if you do, you might have problems down the road. But checking for past evictions and current employment will narrow the field and should help you get off on the right foot.
Use a written rental agreement. Even for friends and family, you need to have the entire rental agreement in writing and signed by all adults. Download a free template (Google will lead you to dozens to choose from), and customize it with any terms that are critical to you.
Don’t leave behind anything you value. Even if items are identified and agreements are made, things get damaged, stolen, misused. If it’s important to you, just take it with you.
Treat great tenants well. If you’re lucky enough to find a tenant who treats your home as lovingly as you did, who pays the rent on time, who mows the lawn and sweeps the patio – repay that behavior with favorable terms for as long as possible. There’s no rule that says you must raise the rent every year.