4 Things You Should Know Before You Rent Out Your Home

By
Real Estate Agent with Joe Manausa Real Estate 8508880888
https://activerain.com/droplet/4fs4

Every homeowner who wants to move has four different ways to go about it, and choosing to rent out your home is one that seems to be the default decision for those that fail in their attempts to first get the home sold.

For many it can be a wise decision, allowing them to turn a problem into a long-term investment vehicle. But for those homeowners who think they are going to rent out their home for a year or two and have their problems go away, a rude awakening looms in their future.

Home Owners Have Options

Home Seller Options

The purpose of today's post is to encourage homeowners who are planning on renting out their homes to do a thorough analysis before making the decision.

All property owners have 4 options when it comes time to move. They can:

  1. stay in the home
  2. sell the home to somebody else
  3. lease out the home (rent out your home)
  4. abandon the home

All other options are merely subsets of those listed above, and most homeowners would be wise to consider the ramifications of each choice.

Review Your Choices

It has been my experience that most homeowners who really do not have to move end up staying in the home until their situation changes. For most, this is a wise decision.

But for those homeowners who must move due to a major life change (new job, new family member, marital change, etc.), staying in the home is not really an option. They must make a choice on how they plan on getting rid of the home.

Historically, we would look at the fourth option (abandoning the home) for a very small minority of all homeowners, but times have changed. Considering that a third of the market is still involved in a distressed sale of some type, abandoning the home is still an option for many. In fact, if you are upside down in your home and absolutely must move, it is likely that some method of abandoning the home will be the smartest financial move you can make.

But for the majority of homeowners who are in a position that requires them to move, the decision will come down to selling the home versus leasing it out to somebody else.

Landlording To Others

Many homeowners who try to sell their home and fail assume that their only option is to rent out your home. In other words, after the home doesn't fail, the only option remaining is to lease it out to somebody else. This is not only a faulty conclusion, it is also a decision that most end up regretting.

They figure they can rent it out to somebody else for a year or two, then the market will move higher, and they can sell the home later. But there are some major hidden problems they do not see, and this is why their decision is flawed.

4 Things You Should Know Before You Rent Out Your Home

Choosing to get in the "rental property" business should only happen after a thorough analysis of the situation. Additionally, there are some things that I have gained through experience that you should consider in your analysis:

  1. Nobody will treat your home as well as you do; so expect to have to spend money on getting it ready to sell in the future - At a minimum, you can expect to replace the flooring and many appliances, as well at repaint the insides of the house. This costs several thousands of dollars and thus will require you to own the home for a longer period of time to recapture these costs. Do you really think you can lease the home out to somebody for a year or two, then spend several thousand dollars to sell it and come out making a profit?
  2. Perfect tenants are rare, expect vacancy, collection losses, and legal fees - What happens when the tenant moves in and stops paying rent? Do you really think you'll be the lucky landlord that get's the perfect tenant? What if they damage appliances, put holes in the wall, steal your ac units? While this sounds extreme, any investor will tell you that it happens at times.
  3. If you sell your home (in the future) to an investor, expect to get about 20% less than you would get from an owner-occupant - This is the major whammy in the group. Once you turn your home into a rental property, you give certain rights to the tenant. That means if you try to sell the home in the middle of the lease term, the new owner (who buys it from you) has to honor the terms of the lease. Thus, it is likely that you will only attract other investors to your home if you try to sell it during the term of the lease. Investors buy for profit, so they typically pay less than somebody buying to occupy the home as their residence. So if you wait for the end of the lease to sell your home, are you prepared to spend thousands of dollars to get it ready to sell, and then leave it vacant for half a year so the buyer can occupy it at closing?
  4. Expect your carrying costs on the property to move higher - Your property taxes will go up when you move out (once you lose your homestead exemption), and insurance for a rental property is not cheap either. Any expense that your require the tenant to make becomes a risk of loss in value. For example, what if the tenant is responsible for cleaning and maintaining a pool, what if they don't? How about the yard? If they let the yard go to seed, who is losing value? You are! Additionally, the amount of money you can expect to receive in rent is market-driven; make sure you understand supply and demand for home rentals similar to yours.

Tough Advice For Homeowners

When faced with a tough decision, many of us simply choose not to decide ... and of course, this is a decision in itself.

Don't be the homeowner who ends up leasing out a property simply because it did not sell. Seek counsel!

Owning a rental property is a fine solution for some people, but for many it is a costly mistake that takes years to resolve. Take the time to speak with a real estate expert in your local housing market when faced with a tough decision on your home, as there likely is a better way to go.

If you would like help in deciding whether or not to rent out your home in Tallahassee, just drop me a note and we can schedule a time to review your situation and help you make the best decision.

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Will Nesbitt 04/15/2014 12:13 AM
Topic:
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Rainer
119,433
Suzanne De Vita
RISMedia
Online Associate Editor

I think all of those HGTV shows paint an unrealistic picture of what it's like to rent your home. It's clearly not for everyone. Thanks for this, Joe!

Apr 15, 2014 03:10 AM #7
Rainmaker
1,560,731
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

There are pros and cons to anything involving moving and selling and/or renting.  I would take renting over abandonment any day.  

Apr 15, 2014 03:16 AM #8
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Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Joe, it's also important to be aware of legal issues in the jurisdiction where the home is located.  More and more local governments are imposing landlord/tenant regulations that are not exactly landlord friendly.  Some places, like San Francisco and Washington, DC are notorious, making it very difficult and expensive to evict a tenant, even a really bad one.  

Apr 15, 2014 03:58 AM #9
Rainmaker
1,518,712
Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Fifteen Years Experience in Brevard County

Landlording is not what is is all chalked up to...easy money, perfect tenants!

Apr 15, 2014 04:57 AM #10
Rainmaker
196,309
Karen Mathers - REALTOR®
Keller Williams Vero Beach - Vero Beach, FL
When it Matters, Choose Mathers! 772-532-3221

A landlord is not an easy hat to wear.  You are still responsible for all of the home repairs, taxes, etc. and the scary part is not all tenants will be quick to call when a repairs needs to be made and could get worse and increase the costs of the repair.  

Apr 15, 2014 04:57 AM #11
Rainmaker
1,180,565
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Carla, I'm surprised to see you make a blanket statement "I would take renting over abandonment any day.  " What if you owned 50% more on the property than it was worth, it would negative cash flow, and not have equity for 15 more years? Is that a situation where you might consider abandonment?

Apr 15, 2014 05:00 AM #12
Rainer
228,857
Jill Winchel
Royal Shell Real Estate - Koffman & Associates - Cape Coral, FL
We make it easy. You make it home.

Great post, Joe, with viable options for sellers. We've had several calls from sellers who tried to sell a few years ago, but couldn't, so they rented and now want to sell. They're hoping the market has improved enough for them to just break even. They're tired of renting and want to get rid of the home. 

Apr 15, 2014 05:16 AM #13
Rainmaker
111,605
William "Bill" and Karen Farragher
EXIT Blue Water Realty, Matawan, NJ 07747 - Matawan, NJ
SFR

We wound up renting out the first house we bought(1983), because the market had shifted and we would have lost money if we sold. We had a family in there for 13 years when we finally sold it. We were lucky, we also owned other property with tenants and can tell you some stories. We have since divested all properties that involve tenants, too much headaches for this guy. 

Great Post, landlording isn't for everyone. 

Apr 15, 2014 06:03 AM #14
Rainmaker
539,402
John Mosier
Realty ONE Group Mountain Desert - Prescott, AZ
Prescott's Patriot Agent 928 533-8142

Very informative and well-written post. The ramifications of renting one's home vary widely from state to state and city to city. What may work out well in AZ would not be good advice at all in CA.

Apr 15, 2014 06:04 AM #15
Rainer
220,151
Suzanne Otto
Six Twenty Designs - Lansdale, PA
Your Montgomery County PA home stager

Great post Joe! There's more to it than just leasing out your home. And it makes it that much harder if you live far away. It's hard to manage that situation from a distance. 

Apr 15, 2014 07:22 AM #16
Rainmaker
3,135,081
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

This was a great post. So many homeowners have no idea that it's not just a matter of a Craig's List ad for a tenant and all is well.

Apr 15, 2014 07:37 AM #17
Rainer
25,312
Brandon Vukelich
BV Real Estate - Auburn, WA
Exceptional Service. Stellar Results.

I hope more potential landlords will read this post.  We do property management and have our share of "accidental" landlords.  They think the home should look the same or better after tenants have lived there a few years and they return to live in the property.  Ughh!

Apr 15, 2014 07:53 AM #18
Rainer
48,525
David Noce
Annapolis, MD
Professionalism and Dedication to my clients

Great tips and some very useful information. Thanks for sharing!

Apr 15, 2014 09:41 AM #19
Rainer
482,918
Chandler Real Estate Liz Harris, MBA
Liz Harris Realty - Chandler, AZ
#ChandlerRealEstateAgent

Another interesting day in April and...  another activerain post that made me think!  Enjoyed this one today.  Take care :-) .... Liz

Apr 15, 2014 10:18 AM #20
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Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Joe, this makes all the sense! At times, the 'move-up' buyers just think of one thing - renting it out - without even realizing the consequences of leasing it to someone!

Apr 15, 2014 01:19 PM #21
Rainmaker
2,772,745
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Or they can get a makover a bit :)

 

Love and light,

Laura

Apr 15, 2014 04:16 PM #22
Rainmaker
2,772,745
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Although I agree with Praful as well!

Apr 15, 2014 04:17 PM #23
Rainer
191,102
Sarah Lynn Jaskowski
Williamsville, NY
House. Home. Today.

I'm so glad I came across this!  I have a seller that she just can't get what she needs financially right now by us selling her home.  She has been leaning on renting it.  I may just talk her into staying a year or two now.  Thanks for sharing!

Apr 15, 2014 10:52 PM #24
Rainmaker
2,464,719
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

good subject post well explained and useful to get the awareness going...thank you

Apr 15, 2014 11:40 PM #25
Rainmaker
800,292
Kevin Mackessy
Blue Olive Properties, LLC - Highlands Ranch, CO
Dedicated. Qualified. Local.

If you are considering renting your home, always do your research for local property managers.  They can take care of your investment, better than you can yourself if you have had no experience with that practice.  

Apr 16, 2014 06:27 AM #26
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