If You Can't Sell It, Why Not Rent Your Home?
Expert explains how homeowners can turn their unsold properties into rental income
As seen in By Luke Mullins
The nation's painful housing bust has put sellers in a serious lurch. To get their properties sold, many sellers will have to make sharp reductions to their asking prices—a necessary evil that can rob the investment of its return. But Danielle Babb has a different idea. In her book, The Accidental Landlord, Babb describes how homeowners can ride out the turbulent market by converting their homes into rental properties. In a recent interview with U.S. News, Babb outlined the benefits of renting, explained how homeowners can determine if it's right for them, and even offered advice on how to avoid lousy tenants.
Some excerpts from the interview:
What are the benefits of renting out your home if you can't sell it?
There are many benefits, including the ability to ride out the market and potentially not lose money on a home. It generally isn't in a homeowner's best interest to sell at the bottom of a market—unless they have an unusual financial circumstance, such as immediate retirement or illness. Secondly, renting offers the ability to take a tax deduction if there is any rental loss. Moreover, landlords have the ability to move back into the home. In other words, if you're not sure that you will like Texas and want to move there, you can always move back to your Florida home if you don't like it.
When would it make the most sense for a homeowner who is unable to sell his home to rent it out?
If you are in the military, renting is a great option. Military personnel often have to move rapidly for deployment, but they cannot sell the home with 10 months' inventory on the books for any reasonable price. Secondly, if you need to move quickly to take a job but don't want to sell your home in a down market, renting is a great alternative. If your home isn't worth what you owe, you might be able to modify the loan to change the principle balance and rent it out to ride out the market.
But isn't it possible the home would spend as much time languishing on the rental market as it did on the home sales market?
Not likely. Rental markets are generally strong; Harvard studies support it. In fact, condos faired better this year than single-family residences.... In areas where there are a lot of foreclosures, those people need rentals units to live in. And in areas where the market is still strong—like Texas—there are people who cannot get a loan to buy a home, so they need rental properties as well.
How would homeowners determine if they should rent out their home?
They need to run a long-term, break-even analysis. To do this, add up association fees, nonowner-occupied landlord insurance, mortgage payments—that's principle and interest—property taxes and maintenance. Then determine the approximate rent by examining rates for similar properties on craigslist or Rentometer. When you've compiled this information, subtract the costs from the rent.
Next, estimate how much the home will appreciate over the time period that you will be renting it. This can be difficult to do in today's market. But homeowners can get a sense of the outlook by going to RealtyTrac.com and studying its list of home prices and how they have appreciated. The ultimate goal is to determine if renting makes sense financially.
What qualities does a homeowner need to be a successful landlord?
First, homeowners need to be able to separate themselves from their property—emotionally and financially. Particularly if they have lived in the house before, they may feel attached. Second, homeowners need to feel comfortable letting someone else live in a property they own—with a deposit covering potential damages. Tenants have a right to privacy that landlords must respect. They must also act quickly on repairs, particularly those that impact living quality. In addition, they need to be able to say "no" to both potentially bad tenants and to "nice to have" additions that aren't really repairs but upgrades.
What are the biggest drawbacks of renting your property?
One big drawback is the potential for bad renters—but if homeowners SCREEN very well they won't necessarily have this issue. Another is the potential for the renter to skip out on rent. Homeowners also face the possibility of running into a "perpetual tenant" who knows how to work the system. Such a tenant might, for example, pay a deposit and then live in the house for 60 days rent free while the landlord files eviction paperwork. The stress of having to fix frequent issues—particularly in an older house—can be another drawback. (That's why it's a smart idea to have a handyman that lives close to the property that you can regularly call on.)
What's the first thing homeowners should do once they realize they want to rent their home?
After they have figured out an appropriate monthly rent, begin advertising and getting their applicant screening process down. I use The Landlord Protection Agency's (LPA) screening process and worksheet.
How can a homeowner attract prospective renters?
Advertise in free areas to start and make sure that the price is right. An overpriced home will quickly be eliminated by potential renters. Consider using craigslist or homes-for-rent websites, or put flyers in the local grocery store. You can even have a "for rent" open house as you'd do to sell—be sure a lease sign is in the front yard. If you still don't get a renter, consider using an agent to get it into the MLS or using an MLS-only service online which gets the lease into the system for agents to find.
What should you look for—or try to avoid—in a potential tenant?
Look for tenants with a good rental history. Phone past landlords! Ask the previous landlord every question in the tenant screening list on the LPA's site to verify that what they are telling you is valid and correct. I look for small things. Do they take care of their car? If not, they may not take care of my house, either. Look for a stable job, stable income, not being behind on bills. You can have them consent to a credit check and run it on the LPA's site, too.
Will homeowners need to get additional insurance if they rent out their property?
They should convert their policy to a landlord policy. Generally about $5,000 of "stuff" inside the home owned by the landlord—like appliances—is covered. Some people need umbrella policies if they have a lot of other assets at risk in a slip-and fall-situation, fire, etc. They must demand and put it in writing that their tenant gets tenant insurance—renters insurance—to cover their own goods inside the home. And if you're in a flood area, you still have to have flood insurance.
What are the tax consequences of renting property? How is the income taxed?
Each person should consult an accountant because the consequences vary drastically state by state.