Should you rent out your house?
It doesn't take much to go from just a plane old ordinary homeowner into a landlord. You just need to have a house – that is all. Maybe you do and you are thinking about whether it would be a good idea to rent the place out or to sell it. It can be a complicated decision to make. There are a lot of factors that go into making such a decision related to the market and to you personally.
As many as 5,373 Americans move every day, according to the U.S. Census Bureau. And these days, given the weak job market, many are relocating to find jobs in more attractive markets. According to a survey by the career Web site Monster.com, almost 50-percent of U.S. job seekers are willing to reallocate for employment. That’s quite a bit of job seekers.
In most cases, moving means having to sell one's home. After all, it's usually a necessary step in affording a new home. However, for various reasons some people choose to rent out their homes instead.
After all, some people know that they'll be leaving only for a year or two; perhaps while they pursue a graduate degree or take on a specific project at work. Sometimes the seller simply can't sell at a desirable price due to market conditions, so he or she chooses to hang on to the home until the market picks up.
A more likely scenario these days, however, is that the owner wants to hang on while property values continue to climb or ride out the down market. Others just want to keep their old home until they're confident they won't be coming back and then when they commit to a new area, they finally sell. Determining which type you are involves deep thinking about why you really want to move and why you want to rent out your home.
After all, maybe you have to move but want to keep your home and rent it out to make an extra buck. Or you have a change of fortune: you get married, receive an inheritance or buy a new house before you unload the old one.
While many people would love to have an extra house to worry about, owning even one rental property can be a major bother for a variety of reasons. You have to tear the problem apart and ask yourself, many questions:
- Is it worth holding onto this property?
- How will you feel about strangers moving into your home?
- Can you, juggle a real-estate rental while holding down a day job.
- Can you handle “the tenants from Hell?”
The answer to these questions depends partly on the market place itself, condition of the home, and partly on how you feel. The ideal type of place to rent out is in good repair, in a safe part of town and the mortgage is cheap or paid off. The more your home rental departs from this ideal, the more closely you should look at selling it if you can. Remember, you have to think of renting your home out as a business. If you don’t, you will fail. So to help you begin thinking about it as a business, we offer the following tips and areas for you to become familiar with prior to renting out your home.
Calculate the total cost
The total cost involves adding up everything in regards to keeping the place going. This includes mortgage payments, utilities, maintenance, yard work, repairs and any professional services you'll need, which could include property management, tax help and a legal consultations is required. If you're renting out your primary residence, you'll also have to decide whether to rent it furnished or unfurnished. If you leave furniture, be prepared for it to get beat up or show some wear at the very least. Any personal effects, such as electronics, rare items and anything else that might have sentimental value should go in a locked storage, either on-site or at a paid storage facility where you can access them later.
Estimate your rent price
A competitive rent price reflects prevailing rates, so simply adding up your cost of ownership won't do. Check newspaper ads, call property management agencies and look at online classified ads such as Craigslist.org or Realtor.com's to get a good handle on the price range for similar units in your locale. Visit a few to hone your research.
Compare the rent you think you can get with your costs
Casey Edwards, co-author of "The Complete Idiot's Guide to Being a Smart Landlord." and "The Complete Idiot's Guide to Making Money with Rental Properties," suggests working up two profit-and-loss statements: a best-case list and a more conservative one that includes all the things that could go wrong.
Even if the plan doesn't pencil out, there may be good reasons for hanging onto a rental that doesn't turn an immediate profit. Among them: tax-sheltered depreciation, the chance of a profit if property values appreciate, the need to hold a home for a family member to use later, the prospect of a worse loss incurred by selling immediately, or the simple desire to add to the value of your estate.
Screening applicants
Tenant screening is perhaps a landlord's most crucial task and you have to tread carefully. You may think your intuition is your best ally for this job, but there are two important reasons this isn't a good idea: It doesn't work and it’s illegal.
Data brokers
The Internet is full of data brokers. These are companies promising to perform credit checks or criminal-records searches. Keep in mind that this is an unregulated area. The accuracy of these big databases is not always a hundred percent, says Lillie Coney, associate director of the Electronic Privacy Information Center in Washington, D.C.
Lawsuits have been filed by tenants alleging to have been denied housing because of erroneous data-broker assessments. Landlords who use these screeners also are legally liable under fair-housing laws, she said.
Coney explains most landlords can get good results, instead, with an application form crafted with the help of a fair-housing attorney and diligently checking of each and every reference and piece of information that is provided on the form.
Rental Application
In terms of a rental application, here is what you need to include: full identity, rental history and credit picture. If you are going to perform a credit check, disclose that on the application and require applicants to sign a release agreeing to this. You can’t underestimate this area.
Other tips
Match the names of a tenant's previous landlords against assessors' records associated with the address and verify that they match. If they don't match, there may be a good reason and you should look into it. Also, make sure an applicant is not using a friend to pose as the former landlord for purposes of a recommendation. Some tenants will do just about anything to move on to the next apartment or home rental. If they have such a history, guard yourself.
Call more than one landlord
Call at least two addresses back, since a current landlord might want to get rid of a difficult tenant and be eager to paint them in good color. Earlier landlords feel no such motivation. Hey, the guy is already gone for better or worse. They should be more readily able to give you the low down.
Know the law
Landlord-tenant laws vary from state to state. Some states tilt toward landlords, others, California especially, toward tenants' rights. Some municipalities have requirements, too, and federal law governs things like fair treatment for tenants and Americans with Disabilities Act requirements. You need to become familiar with those regulations.
However, the law requires you treat everyone equally, so set your criteria for accepting or rejecting applicants and apply them uniformly. To do this, write down your policy and make sure it is available to all applicants.
What problems will count against a likely tenant in your mind? What things can you overlook? How will you deem tenants with a history of debt? Stick to your rules without exceptions. Those exceptions could come back to bite you if you decide to reject someone because of them.
If you do reject someone because of information you get from a screening service or data broker, be transparent and disclose to the applicant exactly what the problem was and how you learned of it. Perhaps you might give them a chance to explain the situation. Hey, everyone screws up at some point. Some people legitimately deserve second chances while others are probably on their eighth or tenth chance and should be given the boot.
Keep applications for several years so you can demonstrate, if necessary, that you have a policy for screening applicants and that you apply it fairly. When you discard old applications, shred them -- especially those with Social Security numbers and other personal information.
Security Deposits
Did you know that your state may require you to pay interest on a renter’s security deposit? Yes, so you better know what the deal is regarding them in your state. If someone rents from you for a period of four years, it could come as a surprise.
Maintenance
As for property maintenance, if you are handy, it will save you a lot of money. Just remember that there will come a time when you'll hit a problem you can't solve and so you will need the help of a contractor.
You'll also likely want to take a vacation at some point and will need last moment resources for your tenants can contact. Funny how it works but no sooner than you leave for the beach, the water pipe breaks. Try to plan ahead and anticipate problems. Before you need it, establish a relationship with a plumber, an electrician and a carpenter whom you can trust to jump in at a moment's notice. If you aren't handy, you'll want to be extremely nice to these people, since you will definitely need them some day.
Should you hire a property management company?
Being an absentee landlord is impossibly difficult unless you have someone to oversee the property. If you're willing to part with ten percent f the monthly rent, you could hire a property-management company to do it. Depending on your agreement, it could take care of everything related to the property — from putting it on the market and screening your tenants to collecting rent, maintaining the property and even taking care of your mortgage.
Should you decide to seek the services of a management company, go through your local chapter of the National Association for Residential Property Managers, which represents managers of single-family homes, or your city's Apartment Owners Association if you own an apartment?
When you add up the responsibilities, there's much to be said for hiring a professional management company. If you decide to go this route, it will cost you about 10-percent of the monthly rent collected. This percentage might be a smaller proportion for high-end properties with high rents.
Avoid outfits charging less than 8-percent, says one industry expert. Companies that lowball the management fee, might overcharge for maintenance or pay kickbacks to expensive contractors to make up the difference. Discover a management company that bills you only for what the repair contractor charges, says Griswold. Some questions to think about when it comes to a property management company.
- Exactly what services do you provide?
- What references can you give me?
- Do you offer 24-hour maintenance?
- Are you bonded (in case of theft or improper handling of money)?
- Do you have errors-and-omissions insurance (to cover negligence or mistakes)?
This list is by no means exhaustive. The point is to be thorough. If the give you any runaround, move on to the next company.
Handling money
Whoever manages your property, you'll need to keep rental-business records separate from your personal accounts and this can be tricky. That's easiest with financial software tool like Quicken or Microsoft Money. You want to see at a glance where the business stands financially and substantiate tax deductions in case of an audit.
Thankfully, you can deduct mortgage interest, property taxes and expenses related to the operation and rental of your unit. Additionally, professional services such as cleaning, painting, accountant, property manager and yard care are deductible. Supplies such as paint, equipment, lumber, appliances and travel in the service of caring for the property, are usually okay deductions as well.
Other rental tips
Now is the time to get off on the right foot in terms of renting out a home. Below are some practical considerations to help you get started in the right direction.
Dedicated Accounts
It's advisable to create dedicated savings and checking accounts for your rental business. If you own the property through an LLC, a separate account may be mandatory.
Automatic Bill Pay
If you're renting out what's been your primary residence, consider setting up automatic bill paying and not having bills or other financial papers sent to that address.
Set aside money
Put monthly contributions into an account for repairs, new appliances, maintenance and taxes. "If I need a new boiler or roof, it's nice to be able to pull out $10,000 that you have set aside for that purpose," says Edwards.
Keep records separate
Never mingle rental income with your personal funds. Learn the law in your state about handling tenants' deposits. Some states require a special escrow account. If not, keep the money in a separate savings account. "It's extremely important that landlords -- I don't care what state you're in -- don't treat it like it's your money," says Edwards.
If your state requires interest paid on tenants' deposits, learn how and when to calculate it, then decide if you'll pay the tenant monthly or let it accumulate until you return the deposit.
Dealing with dead beats
You finally rent out your place to receive a call from the neighbor next door that your tenants are partying until 5 in the morning, the music blaring and things are getting broken. Maybe the tenants are fighting every hour of the day and disturbing the peace? Now what?
The prospect of evicting a tenant is something that causes a landlord’s stomach to knot in a ball. Do the screening correctly and you should be safe but still, even with the most thorough screening, sometimes appearances can be deceiving and you get a bad apple. If you must evict, you may not want to do it yourself. Many experts recommend an attorney who specializes in the area of tenant eviction.
Consult the attorney if a tenant gets even one month late on rent and follow the guidance you're given, since laws are quite specific about your obligations at this point and professionalism is crucial. "The bottom line is, you have to be able to smile, take a deep breath, walk up to the individual who maybe has not paid you two months rent, be polite and friendly and treat them like a customer," Edwards says. You should have an eviction in process at this point, and you can explain that this is not personal, that you'd like to keep them as a tenant and all they need do is pay up.
Tax issues when you sell
The U.S. Government provides a generous tax break for those who've lived in their home for at least two of the past five years. Generally, married couples filing jointly can earn up to $500,000 in capital gains tax-free, while singles can enjoy $250,000 in tax-free gains.
Tax issues when you rent out
Becoming a landlord also offers some handsome tax perks. While rental income is taxed as ordinary income, your tax bill could easily be eliminated thanks to the numerous deductions on expenses and depreciation. There is, however, one major exception: If you eventually sell the house and qualify for the capital-gains tax exemption discussed earlier, you'll be taxed on the amount you depreciate, which could make renting out your home considerably less attractive. You just have to keep this all in mind at tax time.
Can you afford to rent?
A lot of homeowners simply can’t afford to rent out their first house because they need the money gained from selling it to move into their next home or relocate somewhere across the country.
When you rent your home, you also have to be prepared for the worst. For instance, who will pay the mortgage if the place is empty for a couple of months and you were depending on the monthly rent to pay the mortgage. Worse, what would happen if the tenants quit paying? Know that if you have to evict tenants it could cost you thousands of dollars not mention a lot of your time.
You have to ask yourself If you are willing to put up with those sorts of problems and if they are worth the hassle.
Is the house likely to appreciate?
If you expect prices in your area to soar markedly over a three-year time span, you may want to rent it out, says one expert. But keep in mind that, historically speaking, real estate tends to appreciate at the rate of inflation, so even if property values have risen in your neighborhood during the past few years, that doesn't mean they'll continue to do so in the future.
Look at the house as an investment. Think of them as part of your overall portfolio. Ask yourself: Are you diversified enough? If the majority of your net worth would be tied up in your two houses, you need more diversification. If that is the case, you could be better off selling the house and investing the profit, says one expert.
Is it a hot market for rentals or sales?
Sometimes the market is better for sellers than for landlords. You are advised to call your local board of realtors or a real-estate agent and have them appraise the house. The idea is to get “numbers” pertaining to the home as a rental and for the home as a sale. Typically, it makes sense to rent the house out only if it's in a relatively stable market. Income from rent should cover your mortgage and other related expenses.
What if you want to move back in a few years?
If you want to return to the same area years from now, you could be priced out of the market if you sell your house when the market is down. It would therefore make sense to rent it out if you plan on coming back.
Can you live with strangers in your beloved house?
One of the most important issues is how you feel about the property. If you're very attached to it, then you might feel like the tenants have taken over your beloved home when you rent it out to them. What if they even damage it? It can be very hard to rent out a home and come back to it to find out someone has trashed it. This may be especially true if you leave your furniture behind. You have to remember in the end, your home is no longer your home but part of your business. Sometimes business can be tough.
Are You Cut Out to Be a Landlord?
Becoming a landlord isn't for the faint of heart and is not something that comes easy to a lot of folks. What happens if a pipe breaks out and you're out of state when it happens? What happens if a tenant falls down the steps because the guardrail was loose? What happens if the water main breaks in the middle of the night? What happens if the hot water tank goes when it is 10-degrees outside? What will you do when you get a bogus check from them?
If landlord duties are keeping you awake at night, if a bad tenant is taking the fun away, if you must raid your savings to support it then renting out your home might not be for you. Rental property is a business, and if it's not a business you like, let it go and concentrate on work you really enjoy.
On the other hand, renting your home can be rewarding both as a business and personally as you are helping provide a home for people to live in. The home will still appreciate and will still be there if you ever decide to move back in.
Whatever the reason, it's important to have a healthy grasp of the financial issues at play when weighing this decision to rent or sell your home. We hope our guide helped make that task easier.
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