6 Reality Checks For Accidental Landlords
12/19/2011If you want to sell your current home, but have little or no equity, you may have to come up with tens of thousands of dollars at the closing table to satisfy your loan. Or you could become an "accidental landlord" and rent out the house until the real estate market improves.
You'd have to deal with the expense and hassle of being a landlord, but may not need as much upfront cash, says Michael Baytoff, a real estate agent with Weichert Realtors in Bedminster, N.J.
Renting out a property could be a good deal for some owners, but they have to know what they're getting into, he says. "People should think carefully before they make a decision about selling at a loss or becoming a landlord, because either choice can be costly," Baytoff says.
Here are six reality checks before deciding whether to rent out your home.
You'll have to monitor cash flow
Homeowners should add up the costs for paying their existing mortgage as well as taxes and insurance, and compare that number to how much income they are likely to receive from renting out the property, says Joseph Montanaro, a Certified Financial Planner with USAA in San Antonio.
If cash flow is positive, then it makes it easier to decide to rent out your home, he says. If rental income exceeds expenses, you may have to report the surplus to the Internal Revenue Service as income, he says.
On the other hand, if you will lose a few hundred dollars each month and you don't know when the market will improve, it might be better to sell the property and take a loss, Montanaro says.
You may need an agent or manager
It takes proper screening to attract a good tenant, and it's easier to screen if you have a leasing agent working with you, Baytoff says. Homeowners should be prepared to pay the equivalent of a month's rent to a professional who will help find a tenant, he says.
For a property manager -- someone who collects rent payments and handles problems -- expect to pay a fee equal to about 10 percent of the monthly rent, he says.
The value of your home could decrease
Turning the home into a rental might make the value of the property go down, Montanaro says.
A tenant usually has little incentive to make sure a house looks good when a potential buyer comes to view it, says Katie Severance, author of "The Complete Idiot's Guide to Selling Your Home." "The house may not show as well as when you occupied it as a homeowner. And worse, the tenant may even speak ill of the property when a potential buyer comes to see it," she says.
To avoid this, Severance suggests giving tenants a reason to help. "You could offer to knock off $100 or $200 from the monthly rent if they let buyers see the home," she says. "Ask them to make sure the interior is clean and shows well. It would be worth every penny."
Leasing could delay a sale
If you eventually find a buyer for the property, you may have to wait until the lease is up before you can close the deal, Severance says. "A lease supersedes a sale. If you find an eligible buyer, you can't violate the terms of the rental agreement to kick out your tenant," she says.
One exception could be if the buyer wants to buy your home as an investment property. In that case, the buyer may then allow the tenant to remain in the property for the rest of the lease term, Severance says.
You'll have to switch insurance
If you move out of your home, you must notify your insurance agent. You'd likely have to buy a landlord policy, Montanaro says.
This type of insurance covers the house and could reimburse owners for lost rental income due to building damage. The policy can also reimburse legal fees and liability protection if a tenant were to become injured in the home, says Loretta Worters, a vice president with the Insurance Information Institute, a trade group in New York City.
"Landlord policies generally cost about 25 percent more than a standard homeowners policy because landlords need more protection than a typical homeowner," Worters says.
You may not be able to buy a new home
If you have a mortgage on your old home, it could affect your ability to get a mortgage on a new one after you move, Baytoff says, because debts would be high relative to income.
When homeowners' debt ratios are too high, they have a difficult time getting a mortgage on another home, even if they have rental income on the first property, he says.
And that means those owners must become renters.