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CAN'T SELL YOUR HOME OR CONDO? Renting it Out an Option - But Not For Everyone!

TENANTS CAN OFFSET MORTGAGE COST, HELP MAINTAIN, MAKE FINANCING NEW HOME EASIER - BUT DO YOU WANT TO BE A LANDLORD?

"Since I can't seem to sell right now, should we rent out our home?"  Several of our sellers have asked us that question when their old home sits unsold, despite what appears to be correct pricing, and proper staging.  They might have a new house they wish to move to that they have already purchased, or will purchase soon.  And they are afraid of the possibility of making two mortgage payments each month.

Well, renting your old home to a tenant can solve some problems, but create others.

First of all, renting to a good, stable tenant generally requires a lease of at least one year.  Many renting short-term might not treat your place with the kid gloves necessary to sell it after they leave - although a growing number of short-term executive tenants are available in many locations.  Some owners offer less expensive rents to tenants who agree to keep the home in tip-top shape, show-able with little notice, and able to move out quickly once the house cells.

Check SitterCity.com to check for Professional House Sitter/Short-Term Tenant Availability in your area.  When I checked the site, there were over 6,000 house sitters available in the Chicago area.  Of course, you would need to screen carefully before hiring someone to sit your vacant home.

Often times, the rent you will be able to generate will not completely cover your monthly mortgage, tax, and insurance payments, especially if you purchased the home or condo recently, and put down little down payment.  Sellers renting out their old homes have to balance the negative cash flow and the tenant commitment to the possibility of two FULL mortgage payments if they keep their house vacant.

Also, the rent you receive on your old home is considered Gross Income by the IRS, although your Net Income is reduced by all costs maintaining your home - utilities, insurance, loan interest, and assessments (principal on your mortgage payment is NOT deductible nor can it be subtracted from your gross rental income, as it is building your own equity). 

Remember, as well, that many insurance companies may levy a considerable premium increase for vacant houses, and may challenge your claim in the event of a fire or other casualty if you hide the vacancy from them.

As a landlord, you have to take full responsibility for the mechanical elements of your home or condominium.  The toilet leaks - you have to fix it, or have a plumber come out to fix.  The heat goes out - they call you.  Cold air coming in under the door in the winter - you'll have to go to weatherproof it.  Many home leases require the tenant to do the snow shoveling, lawn care, and garden maintenance - but these requirements should be clearly spelled out when you lease.

Also, it is important to carefully screen potential home tenants - not just for stability and job history, but for creditworthiness.  Here, in Chicago, if your tenant gets behind in the rent, the eviction process can take over three months, depending on the time of the year.  It's also very hard to find a new tenant for most properties in our cold weather months of November through February.

Watch your lease terms as well.  Current tax law requires you to stay in your old home, as primary residence, for at least two out of the last five years to claim a capital gains exemption on it (check with your accountant or tax preparer for exact rules).    If the tenant stays for longer than the IRS allows, you may have to treat your old home as an investment property, and pay taxes and cost recovery on the gain, unless you complete a 1031 Tax Deferred Exchange when you eventually sell.

Fix up costs when you sell?  Although the likelihood of the tenant "completely trashing the place" is not high, you will most likely have to repaint, perhaps clean the carpet, refinish the hardwood floors, or repair an appliance or two when they move out.  Plan for these expenses when you eventually resell.

Does renting, and its risks and benefits, appeal to you?  If not, many professional Realtors, including our Team, in many cases, suggest you do what it takes to sell, and avoid rental - even if you have to lower your sales price more than you would like.   Your priorities, here, are most important.

Please visit Lew Sichelman's article in today's Chicago Tribune for further info.

DEAN MOSS & DEAN'S TEAM CHICAGO

Posted: Sunday, March 16, 2008 4:24 PM by Dean's Team

Comments

BlogChicagoHomes.com said:

Top of the Morning, to You - and Happy St. Patrick's Day! For many sellers having difficulty moving

# March 16, 2008 8:37 PM
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