As home values continue to tank, and cautious buyers continue to sit on the sidelines, a growing number of financially pinched homeowners — reluctant to sell their home at a loss — are choosing instead to rent their properties. Others are becoming accidental landlords because of a job opportunity that requires them to move before they can sell (after all, given the glut of properties on the market, it can take years to unload a home). Is becoming a landlord for you? Some considerations:
Crunch the numbers
Calculate your carrying costs: your mortgage payments, taxes and insurance. Compare that number to how much income your are expecting to receive from renting out your place. Would you come out ahead? Ideally, the rent should be at least 125 percent of your mortgage payments to make it a sensible option.
Price it right
Just as you would look at comps if you were trying to sell, take a look at what comparable homes (comparable in terms of size, location, amenities, etc.) are going for. This is where Zillow’s Rent Zestimates can come in handy; you’ll find estimated rent prices on nearly 100 million U.S homes. And don’t get greedy! Overpricing will result in your home sitting vacant, and vacancy is costly.
Find the right tenant
Finding a solid, reliable tenant is nothing short of challenging, particularly since the economic downturn has left some responsible people with blemished credit reports. You want someone who is gainfully employed (Have they been at their job at least a few years?), has a good reputation (Have they moved around from one place to the next? Ever been evicted?), pays their bills on time, and has a reliable income stream. Never mind your gut instinct: you really have to treat the entire process like a job interview, getting all the relevant information in writing — from former landlord information, personal and professional references, and more.
Know the tax consequences
While you probably know that rental income is taxable (Rent for 15 days or more, and you must report this income on Schedule E), and that there are numerous deductions on expenses and depreciation, here’s something you might not know: If you rent your place out for three years or more and then sell, you forfeit a valuable tax break ($500,000 in capital gains tax-free to married couples filing jointly; $250,000 in tax-free gains for singles). Rent your house for a year or two and you’ll still be eligible for this exemption, providing you’ve lived there — in your primary residence — for at least two of the past five years.
Don’t underestimate your responsibilities
Becoming a landlord might sound like a great idea but you have to have both time and the inclination (not to mention, the right temperament). In other words: you have to have it in you! That means being prepared to handle everything from complaints, maintenance issues, and even legal issues such as eviction (which could easily cost you several thousand dollars). Not for you? A property management company will happily handle these responsibilities on your behalf, but it’ll cost you about 10 percent to 15 percent of the monthly rent.
Change your insurance
You’ll need a landlord’s policy. This insurance covers the house and could reimburse you for lost rental income due to building damage. The policy — which can cost about 25 percent more than a standard homeowner’s policy — can also reimburse legal fees and liability protection if a tenant were to become injured in the home.
Plan for unplanned expenses
Your place might need a fresh coat of paint; the tenant might want a new screen door; the roof might need to be repaired. All those things you may have put off as a homeowner you will need to take care of as a landlord. And you’ll need to do it in a timely manner. On the flip side, your tenant may trash your place, costing you hundreds, if not thousands of dollars in repair costs.