Monday, July 16, 2012

The Pros and Cons of Renting Your Home on the Market

When my friend Christina’s husband accepted a job out of state, they knew they’d be moving. Soon. With all their furniture. One of the Realtors they spoke with suggested renting out their 4-bedroom home instead of selling it.

They talked to a property manager, worked the numbers, and discovered that the rent they could reasonably expect would cover the cost of the home’s mortgage, insurance, taxes, professional property management, and maintenance.

So, they became landlords, and made their move. For now, they’ve become renters themselves. Meanwhile, they’re saving up, and learning the “lay of the land” in their new city, in preparation for the day when they can buy again.

Does this approach make sense? Yes, for some people.

The rental market is still very healthy. Many people who have lost their homes to foreclosures, and people who have difficulty obtaining credit are now renting.    

So, what are the advantages and disadvantages of renting your home while you wait for a better market to sell it?

On the Plus Side...

Get On With Your Life. You’re able to move without waiting. In Christina's case, her husband’s company helped with moving expenses, and even paid the mortgage until a tenant moved in, which didn’t take long. Even if you don’t have such a sweet deal, you could collect a security deposit and one month’s rent as soon as you have a committed renter.

Just Pack and Clean. You don’t have to keep your home picture perfect while you wait for a buyer. Tenants are more forgiving, and don’t expect to see a staged home. They aren’t plunking down a huge investment and going into debt. As long as your home is clean and everything works, you’re golden.

You can leave an empty, unstaged house behind. If it's clean, and it's priced right, it will rent!  

Leave the Closing Table with Cash, Not Debt. Rather than settle for less than what you want for your home, you can wait for the real estate market to improve. If your home value has decreased and you are upside down with your mortgage renting might make sense.

Test the Waters. Have you ever moved into a new town and later wished you had moved into a different neighborhood? It takes time to learn a locale. Not every realtor knows the best schools, the politics, the perks and problems, and where your favorite haunts will be. Perhaps you’re moving and still don’t have an employer in your new town. It makes sense to know where you’ll work before you invest in a home.

Vacant Homes Go Downhill. With a renter in your home, the home can pay for itself and be cared for. A good lease stipulates that the tenant be responsible for things like lawn care. A tenant should also be required to pay utility bills. A home that has electricity, heating and cooling, and running water, is preferable to a shut down property. Neighbors like it, and vandalism is less likely

You Have a Landlord to Call. Being a homeowner is demanding. By comparison, being a tenant is easy. When the dishwasher malfunctions, when the chimney needs cleaning, when the garage door doesn’t close right, when shingles blow off the roof, you’re not the one to pay the repair person.   

On the Other Hand...

Show Me The Money. Moving takes cash in hand or cheap credit. Most American homeowners don’t have enough money in the bank to relocate without the profit that comes from a home sale. Especially if they are moving to look for work. This might be your situation.  

It Feels Like A Step Backwards. True, being a renter can seem like financial backpedaling. Chances are your new rental home won’t be your dream home. But not always. In Christina’s case, she likes her rental better than the home she left behind!

Could it be that living in an apartment complex temporarily will feel like a vacation?  
Markets Turn Around Slowly. It may be years before your home reaches the point where you can command a decent selling price. Meanwhile, the property needs to be managed and maintained.

Good Tenants Are Scarce. I’ve been a landlady for almost 20 years, so I can tell you that it’s almost impossible to tell what kind of tenant a person will be.

I ask prospective tenants to bring me printouts of their credit reports. I telephone their employers and previous landlords. I assess their appearance, their language, their children’s behavior. I casually glance in their cars to see if they are neat. I even search online (yes, even Facebook) for any information I can gather.

In the end, it’s still a gamble. It’s rare that a renter takes care of a home the way a homeowner would. (My apologies to those of you who are perfect tenants and you probably know who you are.)

Bank of America sees the value of keeping homeowners in their homes as renters rather than foreclosing on them. It's a win/win situation. 

Costs Can Go Up. When you have a good tenant, you don’t want to lose him by increasing his rent. But taxes and insurance costs can rise. You can get hit with heavy maintenance, like a furnace that floods in a hurricane, appliances that need replacing, or other costs not covered by insurance, security or your savings.

It’s always a delicate balance deciding between the benefits of raising rent, and risking a vacancy that could cost you more than you’ll gain.

Real estate investing books like this one can
teach you how to be a successful landlord.  
Property Management Is Iffy. Just like finding a good tenant, finding a property management team is difficult.

My experience is that property managers like properties to run on their own, and are reluctant to hassle tenants who are not doing their share.

Find me a company called Tough Love Property Management, and I might sign up, but meanwhile, I’ll manage my own properties because I’m a hands-on kind of gal. That’s difficult to do when you live elsewhere.

If you live close enough to your rental property to manage it yourself, you need to get up to speed on regulations and smart procedures. It's a business that needs to be run like a business, a profitable and lawful one.  

Homes Age. Just like like cars and unlike wines, homes get older and show signs of age. Those new appliances, the fluffy carpeting, the newly painted walls -- they don't look as perky as they did before a tenant spent a few years living in your home.

Although the property itself may hold its value, when it's time to get serious about selling, you'll probably need to repair and update some features. 

Tenants Have Rights. Every landlord and former landlord has horror stories about tenants from hell who have done more damage than the security deposit can cover. Typically, the eviction process favors tenants. And it takes months. Months when you are not collecting rental income.

Rather than a lease, I use a month-to-month rental agreement that can be terminated by either landlord or tenant with 30 days notice. Leases protect tenants more than they protect property owners.

Some smart landlords I know have discovered that, rather than begin an eviction process, it's often faster and less costly to pay a problem tenant a few hundred dollars to get gone.

It's Not For Sale. Although some folks keep their real estate listing active, and put a renter in the house, I don't see this as a smart move. A renter doesn't have much motivation to maintain a staged home, keeping it show-ready, clean, organized, and decorated to please buyers. In fact, once the property sells, the renter gets booted.

Taking down the for sale sign does mean that potential buyers won't know about your property.  

The Summary: Whether you wait for a buyer, or decide to put a renter in your home depends on your circumstances. The criteria will include how rushed you are, how flush you are, how far away you're moving, what the local rental market is like, what your mortgage and other costs are, whether you already have employment, whether you can get financial assistance from an employer, and whether you have reliable home management people.

And guess what. Christina's tenants are talking to her about buying the house.

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