Should I Rent My Home Until Prices Go Up?

With the housing market in the doldrums, many homeowners are becoming relucant landlords. Is renting out your home a good way to ride out a bad market?

There are a number of issues you may wish to consider before you decide to become a landlord. Many of these issues are complicated and personal, but you may want to ask yourself a few basic questions before proceeding.

Question #1: Will the monthly rental cover your mortgage payment? If it does, it may make sense to rent your home now and hold out for a higher price in the future, but there are other real considerations.

Is your neighborhood or town in decline? If so, home prices will likely never return to 2005 levels. Will your existing insurance cover a tenant in the property and will your premium costs increase? Do you have the time or temperment to become a landlord? If not, can you afford the 10% fee a property mananger would charge? Can you cover the mortgage and your normal expenses, if the property sits vacant or rents decrease? Do you have additional cash reserve for repairs and maintanence? A good rule of thumb to determine the costs of repairs and vacancies is 10% of the monthly rental. Do you plan to sell the home within 5 years? If so, ask your CPA about the capital gains tax exemption for owner occupied dwellings and how renting your home now may effect future taxes owed? IRS code mandiates that you must live in your home for 2 of the last 5 years to exclude your future gains from tax.

If the monthly rental will not cover your mortgage payment, consider all the above, AND...

Ask yourself how much you will have to subsidize the payments each month and for how long. Keep in mind that if home prices ever increase to previous levels, it will take a long time. For the near future know that the market is still correcting and home prices will continue to decrease for at least another year. After we reach the bottom, prices will remain flat for at least another year before any price inflation will be realized. As a rule of thumb, run the numbers for 5 years to determine how much you cash you will be laying out. Now, how much would the house price need to increase for you to break even. Do you feel that is a realistic possibility?

Whether you should become a landlord is a complicated question. Even if the numbers work on paper, there are so many variables that are difficult to nail down. Do your research and be very realistic. Being a landlord is a tough job by any definition. If you are going to take it on, make sure it pays. If it doesn't, sell now, cut your losses and move on.

For questions about the market, property managment or to share your story, email tommi@infotube.net I have actively been in the real estate business for 25 years and I welcome your input.