If Your Home Is Not Selling, Think About Renting

You're selling your house, or at least trying to. The real estate market has not yet bottomed out. The house has already lost a third of its value. Getting any equity out of the property is a questionable proposition at this point. Six months ago you probably balked at the idea of coming away with little to show in the way of profit. Now, selling it for less than you owe on the mortgage is the thought that is keeping you awake at night. How could this happen and what should you do about it? What can you do about it?

If you haven't considered renting your property instead of selling it, this may be the time to list the pros and cons of renting. Depending on why you want to sell your house in the first place could be a significant factor in your decision. If you are selling because your economic circumstances have changed and you can no longer afford the mortgage payments, that certainly cuts into your list of pros. If you are selling because a new job or a transfer requires you to relocate, your options will be somewhat broader. The number of years you have owned the property and its location are also factors to take into account. And finally, the condition of your property is also important.

First, you need to figure out how much you can charge for rent and what kind of renters you want. A home located in a good neighborhood and that is in good repair allows you to charge more than a property located in a dicey neighborhood and that may be run down. Keep in mind that wherever your home is located, municipal and state laws require you to do repairs, regardless of their cost, in order to make the home livable. You can't expect tenants to live in questionable circumstances because you do not have the money for repairs.

Landlord associations often recommend to new landlords that they reserve between 25 and 30 percent of the rent to cover unanticipated repairs. That means the number you need to work with in determining if renting is possible for you is about 70 to 75 percent of the rental income.

Once you have arrived at a rent amount and the cost of repairs, if any, you'll know if you can cover the mortgage and associated upkeep expenses, including taxes. If the rent income will cover these costs, that is a pro. If it won't cover your costs, that doesn't automatically mean it goes on the con side. The difference may be small enough that it doesn't matter. If it's a big number, then it probably does become a con. Remember, you have to cover your new rent as well as your mortgage each month.

Do you want to rent to a family, or will you consider renting to a group that may not be related? Families tend to be more stable. But if you live in an area that has a large, young and single population, for example near a college, you may be able to charge a somewhat higher rent if the tenants are students.

You also need to consider whether or not you need a management company to watch over your property. If you are not relocating, you can serve as your own manager. If you are relocating, it may be worthwhile to pay the 3 to 10 percent a management company is likely to charge.

As a landlord you also need to keep in mind that you may not have 12 month occupancy. According to landlord association statistics, most properties are occupied on average just under 11 months each year. That doesn't sound insurmountable, but you have to take into account that possibility as well as the bank's requirement that you make 12 mortgage payments each year.

There are tax advantages for landlords in addition to the normal mortgage interest and taxes. In addition, if you have owned the property for many years, these new tax advantages will go well with the higher principal to interest mortgage deductions each month. You will pay less taxes and the principal on your mortgage will be getting paid down quite nicely.

Once you have gathered all the facts and figures, making the sell vs. rent decision may not be easier, but it will be clearer. It may not be the best time to have to vacate your home whether it is for economic or relocation reasons. But with the right approach, some solid research and a bit of luck, it doesn't have to be a financial disaster.

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