YOUR HOME, CONDO WON'T SELL? CONSIDERING RENTING IT OUT? Read This First!
MONTHLY RENT CAN COVER HOME EXPENSES, BUT YOU MUST ACCEPT RISK, RESPONSIBILITY!
In the recent weakened housing market here in Chicago, and in our nearby suburbs, several sellers have asked us if they should rent out their home, rather than selling it at a discounted price.
For some, the answer is "YES!" But not for everyone!
To be sure, there are some advantages to renting out a property that is not selling.
If you've already moved from your old home or condo, your rent amount will help offset the expenses of an otherwise vacant home. These costs include not only your mortgage payment, but also your homeowner's insurance, assessments if a condo, and utility bills.
In some parts of the country, homeowners insurance companies may challenge claims made against a home that is vacant - if an a tragic fire or other casualty occurs.
Homeowners who rent to others can also continue to enjoy equity appreciation of their rental home or condo, and enjoy this equity later upon selling the home. This may be a consideration in many parts of Chicago, where property appreciation is currently stalled.
The IRS allows owners of rental property, not their Primary Residence, to deduct operating and maintenance expenses on their rentals. In some cases, capital depreciation can become a tax deduction as well. (Check with your accountant or tax professional here, however - if you have a renter for more than three out of the last five years, you could lose your ability to waive Capital Gains on your home when you eventually sell it).
But, all is not always so easy!
Landlords still have to pay the full mortgage payment, assessment, property tax, and insurance bills in full when due. Even if the tenant doesn't pay you, or you have a vacancy for a month or two - you still have to pay!
Should the furnace fail, or the toilet leak - YOU'RE the one who has to fix them, or you have to send someone who can. Budget for maintenance and emergency expenses - often during expensive, non-business hours.
Some tenants might be harder on your home than you were as a live-in owner. When you do decide to sell later, plan on budgeting for re-painting and necessary repairs.
Landlord/tenant disputes could result in every-month headaches, and even steep legal fees - in addition to lost rent. Also, local Tenants' Right Ordinances need be complied with; Chicago, for example, requires interest be paid on security deposits, and these deposits be segregated into special accounts. The City of Chicago also has special rules for Late Payment Fees, minimum heating temperature standards, and reimbursement for repairs the tenant has to make.
Real Estate Professionals or Property Managers also charge Management Fees - usually between 5 and 10 percent of the monthly rental amount.
If tenants are sloppy, they could hamper your ability to sell the home or condo until they leave. Often, there is far more incentive for you, as an owner and a seller, to keep the house pristine for showings, than there is for a renter living in your place only temporarily. To address this potential problem, many landlords write an early termination clause into their leases, or, in some cases, provide incentives for top housekeeping in advance of showings to potential home buyers.
Sometimes, however, short-term leases attract a lower-caliber, more transient tenant, willing to move in a few months, or with short notice. Be careful to balance here!
How to calculate a monthly rental amount?
In an ideal world, you would calculate your monthly carrying costs for the home, including mortgage payment, insurance, and taxes, then add a contingency for maintenance and repairs, unexpected emergencies, and possible vacancy. However, the local market might consider this "logical" amount too high!
Renting to Subsidized Tenants (HUD Section 8 or similar local programs can provide guarantees of monthly rent payments, but these programs require certain compliance standards for your property). These need be investigated and addressed before a landlord can advertise for Subsidized Tenants.
Ultimately, your house or condo will only rent for what the market will bear. In some cases, that will create a negative cash flow each month. Even a low to moderate negative cash flow, however, would be a far better option than extended vacancy.
Our Team has had considerable experience in renting personal and investment real estate - call us anytime for guidance in this often-challenging situation.
Tamara Holmes, of Bankrate.com, goes into more detail in her June 2nd article in the Chicago Sun-Times.
DEAN MOSS & DEAN'S TEAM CHICAGO
