Not your ordinary real estate investor, unintentional landlords are becoming one of the fastest-growing group of real estate investors in a "post-bubble America"
Real estate prices are market driven and subject to the forces of supply and demand. Given the prospect of selling into a declining market, renting may be a viable alternative to taking a financial hit.
On the flip side, the rental market appears to be robust and according to the National Association of Realtors (NAR), rents were up 4.1 percent in 2006.
Nevertheless there is more to being a landlord then the numbers bear out and it is a job in every sense, from establishing a rental price to finding and screening prospective tenants.
Renting Versus Selling
To determine which option makes sense, you need to know what your home will likely sell for. For a ballpark figure consider going to a home-valuation site like Domania.com or better yet, contact us or a local real estate broker for a Comparative Market Analysis (CMA) or for an appraiser referrals.
Word of warning... Prepare yourself since an appraisal will likely fall short of your expectations... Especially if you expect to sell for what a neighbor did 2 or 3 years ago.
In that case you have two choices: Take what the market will bear (perhaps at a loss) or rent and hope to do better when market conditions improve.
(1) Can you cover the cost? Research the rental market in your locale and compare with your carrying costs, which include mortgage payments, taxes, insurance and maintenance. Unless you occupy the insured property, expect higher insurance costs. You should add another 5 to 10 percent for unexpected maintenance and vacancy costs. Hire a property manager and your costs increase by another 10 percent!
(2) Do you need the equity? If yes, you're probably not a landlord candidate since you'd have to finance your down payment with a bridge loan or a home-equity loan.
(3) Are you confident values will increase? What you charge for rent is important, but so is the upside for home prices in your market. If your costs exceed your rental income a significant uptick in your market could make the numbers work.
(4) Income tax considerations... Rent for more than three years and you endanger an important capital gains tax exemption!
(5) Can you stomach the risk? What if your house sits vacant for months on end?... Or worse, you get a renter who doesn't pay?
(6) Do you have the time? Since you didn't set out to be a landlord, you likely have a full-time job. If you have a responsible tenant, managing the property may not take much time, but even small tasks can crop up at inconvenient times.
Take heart, in spite of the difficult market we're experiencing, real estate is an ideal "long term investment" offering leverage, minimum volatility and tax advantages no other vehicle can offer!
Thank you for your interest and the privilege of serving you!
With our highest regard,
Wayne and Lynda Gomillion
"The Pinehurst Home Team"
"The friendship and referrals of those we serve is the foundation of our success."
Member of the Real Estate Intelligence Network