Rent Now, Sell Later
Local housing market stalled? Consider becoming a temporary landlord.
The slump in home prices coupled with the plethora of For Sale signs add up to a double whammy for anyone who has to sell a home. Richard Rogers, an executive with Travelers Insurance, put his home in Overland Park, Kan., in suburban Kansas City, on the market last summer, when he was transferred to Hartford, Conn. The timing could not have been worse: Home sales were ebbing fast, and his $225,000, four-bedroom, two-and-a-half-bath house sat for two months with no bites.
That's when Rogers asked Home Rental Services, a local property-management company, to help him rent the house. Within a few days, the firm had found a doctor who was moving to the city with his family. He signed a two-year lease, with the first year's rent set at $1,700 per month. Rogers is nearly breaking even on his expenses, including his mortgage payment and the commission the management company charges (10% of the rent). When the lease expires, he will try to sell again.
Does it make sense? Renting your home until the market turns around can be a good financial move, if you don't need the equity right away to buy another home. One option for cash-challenged buyers who keep the old house as a rental is to get a no- or low-down-payment mortgage. To help you qualify for a new loan, lenders usually count 75% of the rent payments as long as you have a one-year lease.
But before you decide to become a temporary landlord, crunch the numbers to see if the rent will cover your mortgage and other expenses. How much rent should you expect? For a quick read on the market, check the rental listings in the classifieds or at www.craigslist.org. Major expenses include the cost of a property-management company, unexpected repair bills and insurance.
Before tenants move in, you'll need to buy fire insurance that covers the structure and contents of the rental property. You won't need more liability coverage, but you'll need to extend your current homeowners liability insurance to cover two properties, which may cost as little as $15. If you're going to be a renter yourself before buying your next home, you can buy a renters policy that will cover liability on both places.
On the plus side, you'll be entitled to tax breaks, including depreciation (you can write off a portion of your home's cost basis, or the price you paid, each year over 27 and a half years), plus deductions for maintenance and repairs (see IRS Publication 527, Residential Rental Property). And it's important to time the rental to preserve your exclusion from capital-gains tax on any appreciation in the home at the time you sell. If you lived in the home for two years out of the previous five, you can exclude $250,000 of profit if you file a single return and $500,000 if you file jointly.
The monthly rent check probably won't cover your expenses if you bought in a hot market with a minimal down payment during the recent run-up in prices, says Ron Thompson, of Windermere Property Management NW, in Seattle. If the numbers don't add up, you'll have to decide whether to take the hit a little each month or all at once by accepting a reduced price for your home. To keep your options open, simultaneously try to sell and rent your home.
Pay a pro? Unless you want to become a landlord, hire a property manager. For a fee of 6% to 12% of the rent, a property manager will find and screen a tenant, negotiate the lease, collect the security deposit, take the tenant's 2 a.m. distress calls and ensure that you adhere to a raft of landlord-tenant laws. (To get up to speed on the issues, consult Every Landlord's Legal Guide, $45, by Nolo Press.) You may be able to find a property manager through your real estate agent, or search for a local member of the National Association of Residential Property Managers.