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.
- 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.
Other factors to consider include the location of the property and the number of tenants who are renting it. If the property is near public transportation or near a college or university, for example, you may be able to charge more than if the same property were located at a distance from places deemed valuable by tenants.
For homeowners who are new to becoming landlords, the U.S. Department of Housing and Urban Development’s housing choice voucher program might be a good way to go. Section 8 vouchers are for low-income families, and public housing authorities pay part of the rent while the tenant pays the rest.
“The program is through HUD and they do a lot of pretenant screening,” says Hertzog. Because the program is subsidized, you’re also more likely to get your money on time, Hertzog adds. If you want to rent to Section 8 voucher holders, contact your local Housing Authority or go to HUD’s Web site.
Figuring your profit
Once you come up with your rental amount, crunch the numbers to see if you’ll come out ahead. Add up the yearly cost of the rent and then subtract all of your expenses, which include the mortgage payments, insurance, taxes, utilities, repairs and the services of a property management company, if you decide to use one. Also factor in the amount of time the home will be uninhabited. Nationally, the rental vacancy rate is near 10 percent, according to real estate market research firm Danter Company, so knock off 1.2 months of rent in your calculations. At that point, you’ll see whether renting your home will be profitable.
Even if you aren’t going to make a huge profit, there may be other reasons to rent out your home, particularly if you’re having problems selling it. The tax deductions you get may improve your overall financial situation, since you can deduct the cost of repairs, property management services and even travel that is related to the rental property.
There’s also the issue of timing. If your home has recently lost value, you may be able to recoup some of your losses by holding onto it until the real estate market turns around. But be prepared for a long wait, says Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers. “I think we’ll see a slow recovery to the housing market — slower than normal — and it will extend well into 2009,” he says.
If you’re concerned that renting your home out will hamper your chances to sell quickly if an opportunity arises, you can cut some of your risk by offering short-term leases, or advertising for tenants who would prefer not to be locked into a long-term lease.
“You can decide who you advertise to,” says Hertzog. “That’s one way you can maintain some control.”