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A Guide for Involuntary Landlords

Rachel Koning BealsU.S. News & World ReportApril 18, 2012

Can’t sell your home and have to rent it out? The pros offer a few tipsA spotty housing market has turned some would-be home sellers into temporary landlords because they can’t unload their house as quickly as they need to or at the price they want.

The demands of keeping up with their day jobs and the difficulty of managing the property from across town or out of state (or the expense of hiring a manager) add to the complexity. Renting out a property may not be ideal, but neither is leaving it empty for too long.”It all comes down to perception for buyers, who understand that vacant homes can suffer from a wide variety of ills due to neglect and deferred maintenance,” said agents with Prudential Shimmering Sands Realty in Panama City, Fla., on their blog.Think turning into a temporary landlord might help you? Educate yourself before jumping in.

For starters, there are big-picture considerations. There’s more rental competition because of a soft home-selling market in most locations. To start the year, there were 2.43 million homes for sale, a 6.4-month supply at the current sales pace, according to the National Association of Realtors. But there’s also potentially stronger demand for rentals because tougher mortgage standards and a stubbornly high (if improving) unemployment rate prevent some people from buying. Overall, more would-be buyers may be willing to rent if they remain uncertain about the health of the economy.

Collecting rent to offset the mortgage payment on an unsold home can be vital to your monthly finances, especially if you’ve taken on a loan for the new place. While renting out your home, it may be possible to continue to build equity, depending on how quickly market conditions turn. The S&P/Case-Shiller Home Price Index, a closely followed measure of the U.S. residential housing market, suggests that housing prices may be bottoming out this spring. (It’s a good idea to keep your expectations realistic as market performance often varies region by region; remember, there was a reason the home didn’t sell on your preferred timeline in the first place.)

Tax considerations. There can be favorable tax advantages for landlords on top of mortgage-interest deductions such as deducting the cost of repairs, property management services, and even qualified travel related to tending to the rental property. Keep in mind, however, that you’ll be on the hook for property taxes on your unsold listing.

Sellers are allowed to exclude as much as $250,000 of profit ($500,000 for couples) from capital gains taxes as long as they’ve lived in their home for two out of the five years leading up to the sale. That gives sellers three years to unload the property from the time they move out. Of course, selling at a loss negates the need to claim capital gains.

One option, although perhaps not the first choice, is to donate the home for a set length of time to a nonprofit that needs office space, for instance. You won’t make as much as you would renting it out, but you will potentially avoid an unoccupied home that falls victim to neglect. You could get a tax deduction for the charitable donation, and you’ll get the satisfaction of helping out a worthy cause.

Go-slow sale. Some sellers may go for a rent-to-buy option on their home. This is attractive to a buyer who’s not quite ready to jump into a long-term commitment or needs this go-slow financing option because he or she is having difficulty securing traditional financing. Time and attention are still required at the old property and a seller will be locked in at today’s lower housing prices.

According to Bob Floss, principal and agent with Bob Floss & Son Realty, in Countryside, Ill., outside of Chicago, rent-to-own can be a win-win because it means the two parties are more closely aligned with risk.

Rent-to-own brings an interested buyer into the mix (even if on a delayed basis). Sellers may be more likely to get full asking price. Plus, there’s an incentive for the renters to take good care of a property they’ll eventually own. In some cases, the buyer/renter pays the seller an option deposit. This money is vested interest in the home and will be fully credited toward the sale.

Others may be willing to put up a greater commitment. The parties should include a bank, attorney, or financial planner in these negotiations in the early stages to eliminate ambiguity. A documented portion of the rent payments may go toward the eventual down payment. For instance, on a home where the rent is upwards of $3,000 a month, $1,000 might be earmarked for the down payment.

Still think playing landlord is for you? The Landlord Association, the National Association of Realtors, and other real estate sources contributed to this list of considerations:

— First, are you able to rent out the property? If you’re part of a homeowners association, there may be restrictions preventing you from renting out your condo or home to another party.

— When determining rent, include mortgage payments, insurance, taxes, utilities, repairs, and the services of a property management company if you decide to use one. Check out prevailing rental rates in your area so that you’re competitive. Keep in mind that you may need to factor in the amount of time the home could be uninhabited. Each quarter, the U.S. Census Bureau issues quarterly rental vacancies. Nationally, if the rental vacancy rate is near 10 percent, for instance, you may need to knock off 1.2 months from expected annual rent. Plan to set aside 25 to 30 percent of the rent for maintenance, repairs, and other unexpected expenses.– Follow the Fair Housing Administration Act when you screen prospective tenants. A discrimination lawsuit is extremely costly and completely avoidable. Give everyone an equal chance to rent your property, regardless of their race, religion, or beliefs. You have the right to run a credit check and talk to references, but you must apply your screening equally. Floss, the Chicago-area agent and property manager, says he offers to bring information and paperwork to the current residence of a prospective renter so that he can get a sense of their housekeeping and maintenance habits. And he always calls references.– A visit may be the best time to address whether pets will be making the move and if a deposit is necessary to cover their potential damage to wood floors or other assets.

— Protect yourself and keep an open mind. Take a careful look at the circumstances that drove a prospective renter out of the housing market, such as a foreclosure. But depending on income and other factors, these folks might make for good rental candidates, says Floss. Divorce or other circumstances often push someone out of a home unexpectedly–not necessarily financial hardship. Meanwhile, some people walk out of a foreclosure with hardship cash that could be turned into a few months of rent with an option to buy.

— For rental situations other than rent-to-own, Floss recommends trying to limit the deal to a month-to-month lease (your rental charge will likely have to reflect the short-term nature of the contract.) Floss says if tenants delay or skip rent payments and eviction proceedings follow, this can take a long time to resolve, depending on state rules. Dealing with evicting a tenant while trying to sell a home should be avoided.

— Get everything in writing. This means everything from a rental application to a code of conduct. If a tenant needs to have something fixed in their dwelling, ask for the request in writing in addition to telling you on the phone or in person. This will help you with income-tax deductions and create a history for each tenant.

— Get insured. Make sure you have the maximum amount of rental insurance, property liability insurance, and any other type of insurance that may be required in your state. This can help protect you from devastating losses.

— You’re responsible for providing a clean and secure residence. This will help you with property liability and keep your rental property looking its best. Depending on the location, extra security measures can help keep your tenants safe and may even lower your insurance premiums.

— Make prompt repairs, especially to furnaces and other necessary appliances and fixtures. Think about it: Could you live without running water for three days?

— Follow your state’s guidelines for entry into a rented dwelling. Most states require at least a 24-hour notice before a tenant is required to allow their landlord to enter their rented dwelling. There’s no incentive for your renters to have the house in showing condition, but communication can go a long way toward improving the relationship. Have a formal, written agreement about showing the house with rules that benefit both parties. If the tenant doesn’t want you to show it on Sundays, consider honoring that request if they agree to step out with a day’s notice other times.

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