Your house is on the market and nobody is biting. No offers for weeks. You need to move or already have moved. You need to sell or need income from the property in order to avoid financial problems.
Is renting out a good option?
Of course this depends on a number of different points. Here are some questions and answers that enable you to make a sound, educated decision:
Q: will the expected rent cover enough of my expenses?
A: It depends on your current mortgage. Calculate PITI (principal, interest, taxes and insurance) to know what it costs you per month to hold the property. Include a vacancy reserve and a repair reserve. Then add liability insurance (ask your insurance agent if this is already included or needs to be added on to your HO insurance policy). Ask a local rental agent or property manager for the amount in net rent plus all utilities you can reasonably expect. Be conservative with this expectation.
Q: will I find a tenant who is flexible in case I want to put it back on the market?
A: Possibly, but more likely it will be a huge pain to have the house back on the market with tenants in there, keeping it presentable, clean, odor free, available for showings on shorter notice than 24hrs in advance…
The tenant has little to no incentive other than being nice to accommodate showings as they come in. Rented houses rarely show really well and the harder a property is to show, the less buyers are looking at it. Most real estate agents do not like showing homes with tenants in them; they dislike the hassle of 24hr notice appointments etc.
Q: how long should I rent?
A: best is month to month but the higher end your house the harder it will be to find tenants that do not want a minimum stay like 6-12 months. It depends on the time of the year the lease will run out, how the market develops, etc. If you can rent for 6 months, not end the lease in the dead of winter and have the tenants reliably out before your relist, that might be your best option.
Q: is my property a good candidate to rent out?
A: The higher end a property is (and that includes smaller properties that have beautiful kitchens, baths and floors) the worse it is to rent out. Tenants use the house. They do not make long term plans in this property. They have no incentive to be perfect stewards of your property. In most cases this will be temporary accommodation for somebody who is either on some kind of temporary assignment or is looking to buy something else in the nearer future. Of course there are plenty of good tenants. Just adjust your expectations..
Q: Will I be able to sell easily when the tenants move out or will I have to make investments (again)?
A: in 99% of the cases be prepared to at least thoroughly clean, fix little things, maybe paint, clean carpets, wash windows, do touch ups. Be prepared to invest in landscaping, odor control etc.
Q: what extra expenses do I have to expect when I rent out?
A: Extra liability insurance, professional services like landscaping and cleaning, repairs that you would have done yourself but the tenant cannot (or should not).
Q: is it financially better to lower the price of my house and just sell or to rent out and wait?
A: Unless you are in dire straits and need to generate a price that will not be achieved unless the market takes a huge turn, for instance to pay off an existing mortgage, most likely yes. But of course that also depends on the amount your agent asks you to lower the price to. In general, statistics show that the longer a property is on the market the lower ultimately the sales price is. Starting out with a truly realistic sales price will most likely safe you a lot of time, effort, and yes, money. Nobody has a crystal ball. Yes, our prices are up from last year. But when you look at a house for now $250000 that would have sold for $240000 last year and that was rented at $1200 per month, what did the seller gain from waiting? He most likely (in average) paid $1800 in PITI, had to pay income tax on the income, had to repair and freshen up things when the tenant left…, so selling at $240000 last year would have been a wiser decision. The market for now does not make gigantic leaps upward.
Q: how long can I rent out without being subjected to capital gains tax when I sell?
A: Of the last 5 years before selling you can rent out a maximum of 3 years without being subjected to capital gains (thresholds $250000 for singles, $500000 for married couples).
Of course there are situations where renting out is the only feasible way to go. But if you are serious about selling, renting should be a last resort until all other ways to sell are exhausted.
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