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Don't Sell Your Home, Rent It!

Written by Jaymi Naciri on Wednesday, 09 July 2014 10:50 am
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You've got some equity in your home and the itch to move up to something bigger, so it's just a matter of time until your house goes on the market, right?

But are you sure that's the best option? What if you could get that bigger, better house without getting rid of your existing house and make some passive income at the same time?

"When your current home no longer suits you, selling it is a popular option. But in some cases, turning it into a rental home might make more sense," said House Logic.

Among the "factors to consider:

Your financial situation
Local market conditions for rental homes
Your future housing plans
Your tolerance for being a landlord
State and federal income taxes
Current and projected home prices”

Determining if your financial situation can support hanging onto your home is the first key step. You'll want to talk to a financial professional to go over your savings, your credit, and your equity in your existing home. If you have the money for a down payment on the new home you want without using the equity in your home - great!

If you don't need all the equity in your home for your down payment, you might be able to take out a home equity loan or refinance into an investor loan and use the loan proceeds as your down payment, and still make your home a rental," said House Logic.

Of course, if you go this route, make sure the new house payment on the old house is still low enough that it can be covered by your renter, and then some.

"With mortgage payments to contend with and a tough competition, you may be able to profit $200 to $400 per month on a property," said Forbes. "That's $4,800 a year. With volume, you may be able to increase that per-property profit.

Added Invest Four More: "Obviously the more cash flow the better, but awesome cash flowing properties don't exactly grow on trees. It really is a personal decision on how high of returns are needed to justify spending a lot of cash on a rental property. Some people would be happy with 15 percent, 10 percent or even five percent returns on their cash. Much of this determination will depend on your financial stability. Do you have an emergency fund? Do you have cash reserves for each rental property? Is $100 a month enough or do you need $200 or $500 to build up your cash?"

If your main goal is to hold onto the home as a family legacy or to help pay for retirement, lower monthly cash flow might be OK - as long as you can cover your mortgage and monthly expenses. This might also be true if you are in an area where projected growth over the next several years is expected to positively impact home prices.

Another advantage to renting instead of selling is that you may be able to get out of doing expensive renovations. Chances are renters won't jump at the chance to live with crumbling floors, peeling walls, or moldy wet areas. But if you were considering expensive updates like a new kitchen to get your house ready to sell, you may be able to put them off and do only what is necessary to make the place clean and livable. "

Renters, more so than buyers, can be willing to overlook outdated home fixtures because renters know they're just passing through your home, not owning it," said House Logic. "If you don't have the money to invest in improvements and your home's fixtures scream 1970s (and not in a good, retro chic way), renting may be the better choice."

If you are considering renting your home, here are a few more things you may need to know or do, courtesy of Bob Vila:

Research your local laws. "For some areas, you may have to have a business license if you want to rent your home."

Look into equal housing opportunity laws.

Do your research "on what similar houses are renting for, much like you'd look at comparative properties when figuring out an asking price for sales."

Consider the insurance. "You will pay more for insurance on a home you're renting out, despite the fact that you're not insuring the contents, only the structure."

Perform "due diligence in checking out the person or people you'll be entrusting your home to."

Consider "outsourcing some of the rental screening process…to a rental management company. A management company can also be useful once the renter is in place. "Management companies will usually take a portion of each month's rent in exchange for handling the screening, rent collection, repairs and other day-to-day landlord management aspects."

Think about a home warranty program. "A home warranty program prevents a huge out-of-pocket expense when it happens."

Never "do business based on a handshake and a spoken agreement. Getting a good lease is very, very important for both novice and experienced landlords."

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4 comments

  • Comment Link Amy Murawski Friday, 18 July 2014 1:53 pm posted by Amy Murawski

    This is not good advice at all, why Bob Vila is giving real estate advice is a mystery to me. This could backfire in so many ways it is not even funny. This article should not be here. I would never suggest this as an option to my enemy, let alone a client.
    There is no such thing as quick money; especially in real estate.

    I also agree with Hank Miller's post, it is a job and suggesting that a single owner hire a management company is just stupid. This misleading article should be removed.

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  • Comment Link Vincent Wednesday, 16 July 2014 9:58 am posted by Vincent

    No matter selling your home, or renting one, there is a company called Elite Connect "theeliteconnect.com" that help you finding agents for free in you area. It is a good service.

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  • Comment Link Gina Pimentel Thursday, 10 July 2014 12:27 pm posted by Gina Pimentel

    In some instances, the house may be underwater and Renting, although not the favored approach of many NON-Landlord types, the only avenue to go if a relocation without a relo package is offered or they have a position with security clearance that may be jeopardized by going through a Short Sale that has a negative impact on one's credit score and worthiness should it be a bank charge off or Deficiency Judgment. which will impact the charge off on their credit.

    Another drawback with renting is obtaining new lending on the next house. If the owner holds the property as an investment, lenders want to see two (2) years rental history for that principal property, including a Lease and separate Escrow account for the security. The income will not be credited as an asset to the owner and as borrower's they will have to evidence ability to carry both mortgages.

    Just FYI.

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  • Comment Link Hank Miller Thursday, 10 July 2014 11:41 am posted by Hank Miller

    It's this type of article that leads people to walk off a financial cliff. Renting a home is a job, so is collecting rents, repairing damages, attending to issues....most people have no idea what's involved. Suggesting that this be outsourced is also dumb - add to expense? When all is said and down very few owners turned landlords survive.

    Oh, and you still have to sell sooner or later...AFTER repairs and updating. AND you have to hope he market improves so you can actually sell.

    NAR and other realtor mouthpieces have been shown to be misleading when it comes to the "recovery"; how about leveling with the public and telling them what they need to hear instead of nonsense?

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