If you've moved to a new home but have not been successful at selling your old one, there may be an alternative to making a mortgage payment each month on a vacant house. Renting your home out is not likely to make you a millionaire, but it may allow you to cut costs while you wait out the real estate slowdown.
Before you put an advertisement in the paper renting out your home, make sure you understand what being a landlord entails. Financially, there are a number of pros and cons.
Pros and cons of becoming a landlord:
- Rental income can cover some or all of the mortgage payments, freeing you from having to dole out the entire amount each month. You might even make a profit if your monthly expense is low enough.
- You may be able to continue to build equity at the expense of the renter -- especially if your particular market is not affected or minimally affected by the slowdown. If your mortgage has been in existence for a number of years, more of the payment may be being applied to principal, so every payment is eating into the amount owed at a faster clip.
- Landlords gain tax advantages in addition to the regular deductions of mortgage interest and taxes.
- Mortgage payments must be made even when the rental property is uninhabited.
- Costly repairs and maintenance work cannot be delayed if it inconveniences the tenant.
- Disputes with tenants over tenant rights and unpaid rent could require legal representation and legal fees.
- State, local and federal statutes must be understood and followed, with failure to do so often resulting in fines.
- Business costs. As with any business endeavor, there are expenses you can expect upfront, such as renovations or repairs prior to a tenant's move-in date and advertising.
- Possible property management or Realtor fees. You'll have to consider how much contact you'll want to have with renters. A property management company, which typically charges between 3 percent and 10 percent of the rent, will act as an intermediary between you and your renters. Many real estate agents also handle rentals for a fee. A property manager can collect the rent, find and prescreen tenants and handle maintenance contracts as well. The National Association of Residential Property Managers has a database of property managers across the country.
Determining the rent
Prospective landlords should think long and hard about the costs involved, says Kathy Hertzog, president of LandlordAssociation.org. "We recommend that landlords budget 25 (percent) to 30 percent of the rent to put in a reserve for maintenance, repairs or just in case something big comes up."
That leaves 70 percent to 75 percent of the monthly rental income to cover the mortgage, taxes, insurance and possibly utilities if you're going to break even. But is that a price that tenants will be willing to pay?
Figuring out how much it will cost you to rent out the home is only the first step in coming up with a fee to charge. If you charge more than landlords of similar properties in your neighborhood, it will be difficult for you to find tenants. Check the newspaper listings to see what similar properties are going for, suggests Hertzog. Another option is to go to the Web site Rentometer, which provides the median rent for any address in the country.