Owners Converting Unsold Homes to Rental Property

Careful Consideration Needed Before Removing Homes from Sale Listings

In May and June, many sellers, who saw little buyer interest during the Spring market at the prices they were seeking, removed their homes from the market.  They feared home values had not stabilized or would not meet their expectations, and they anticipated the market would return stronger in 2-5 years.  Renters benefited, in the meantime, as many owners listed their homes for rent in the interim, increasing the rental inventory.  To get them rented quickly, though, owners wisely resorted to offering concessions (e.g., first month free, price reductions) because each month vacancy reduced overall income opportunity.

This strategy may or may not be successful in the long term, depending on the attributes and characteristics of the home, the neighborhood, comparable sales, nearby foreclosures, and regional economy.  There are many factors owners need to consider in transitioning a home from a primary residence to a rental property.  Among them are:

• Research the market for vacancies and comparable rentals and realistically assess your neighborhood's market rate for rent
• Check federal, state and local regulations - some require the owner to obtain a license and lead certifications
• Check your homeowners insurance coverage and convert to a rental housing policy
• Co-op, condo, or homeowners' association rules often limit the number of rental units
• Check with federal, state, and local authorities for landlord-tenant regulations
• Know your fair housing laws, lead paint regulations, and disclosure responsibilities
• Perform a thorough background and credit check on applicants
• Renting your home may adversely affect your ability to refinance the mortgage later, so determine whether to refinance before renting
• Consult your financial planner, lawyer, and tax advisor if you plan eventually to sell and take the federal capital gains exemption   
• Account for management fees, legal fees, vacancy periods, insurance, repairs, time, and monthly expenses including mortgage payment, property taxes, etc.
• Prepare for the unexpected: default rent payments, eviction procedures, damages and repairs, legal fees, etc.  These can easily wipe out any profit
• See www.irs.gov for IRS Publication 527 on Residential Rental Property
• Assess whether a property management professional should manage the property

- Hill Slowinski, serving clients in DC, MD, and VA