If you have to move because of work, health, family, or any of the many other situations requiring relocation, and for any number of reasons you don’t want to sell your current residence, there may be some alternatives for you. There is one that’s often a first consideration.
Become a landlord.
While many people believe this is a fairly simple option, it depends greatly on your location and how long you intend to rent. In some ways, renting out your home can be a happy solution to your sales woes. However, there’s a great deal to know about being a landlord before you jump in.
Your homeowner’s insurance must be changed to one which specifically covers landlords/rental properties. According to the Insurance Information Institute, “Landlord policies generally cost about 25% more than a standard homeowners policy because landlords need more protection than a typical homeowner.”
The cost of property management could potentially eat up a large portion of the rent income. If you move to another part of the country, having someone on hand to take care of any issues from clogged drains to routine maintenance and to deadbeat tenants is a must. A property manager will generally cost about 10% of the monthly rent.
Your tax situation may change when you become a landlord. One potential tax worry is a possible loss of the capital gains tax exemption. If you live in your home for two of the five years prior to the sale of your home, you do not have to pay taxes on up to $250,000 of profit ($500,000 for married couples) from the sale of your home. However, if you end up renting out your home for more than three years after your move and then sell for a profit, you may owe taxes on that profit.
Claiming a Capital Loss
A flip side to the concerns about the loss of the capital gains tax exemption is that renting your home and then selling it at a loss means that you can claim the capital loss against your income. That can be a huge tax break and it’s often a great idea for sellers in a down market to rent out their home before selling, as they can actually recoup some of their loss through taxes.
In addition to claiming your capital loss against your income, there are other tax breaks available to homeowners who rent out their homes while they are landlords. Landlords can deduct virtually any expense related to the maintenance and marketing of their rental home, such as insurance premiums, repairs, advertising costs, landscaping services, property management services, mortgage interest, and even travel expenses related to the rental.
Setting Your Rental Rate
What is an appropriate charge for rent? You must determine typical rents for your neighborhood. Even if there are few rental properties where you live, you can still develop a reasonable rate. Talk to realtors and property managers to learn about rates, and search for similar rentals online. Craigslist, Rentometer, and Rent.com are also good resources to check.
You also must consider vacancy rates to get an idea of how much money to expect over a year of renting. Most advice suggests planning for 10 and a half months of occupancy per year – or 10% vacancy during the time that you are renting. Even if you find that the amount of rent you could charge (minus the associated carrying costs and vacancy rate) would not be enough to cover your monthly mortgage bill, it still may make sense to rent out your home, rather than attempt to carry the mortgage by yourself.
One of the toughest aspects of renting out your home is finding reliable tenants. You need to make sure you advertise in highly visible locations. Rental sites like Rent.com and Craigslist, as well as on social networking sites like Facebook, are good. Also, consider local relocation firms, HR departments, local universities, and the old-fashioned sign in your yard.
Once you have applicants, put them through a screening process. Boilerplate applications and lease agreements are online, but make sure to ask your potential tenants about their income, employment history, and rental history – and call all of their references.
You can request their Social Security numbers to run background and credit checks through several websites. These checks have a nominal fee (around $25), but could spare you countless headaches.
They are professionals at Deon Cannon Realty and they are here to serve your real estate needs. Call them at (404) 630-2985 and they’ll work with you right now to develop a strong and sensible plan to sell your home or find the one that’s absolutely perfect for you.