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Should You Rent Your Home?

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In this housing market, many homeowners are becoming unwilling landlords: choosing to rent their homes instead of selling because falling real estate prices make that unprofitable at best right now — and impossible at worst. The problem is, renting your home is no easy task — legally, financially and emotionally.

Depending on when you bought the property and the size of your mortgage payment, for example, you may have to consider swallow a losses month after month by collecting less in rent than you owe the bank. You may “luck out” with ever-demanding tenants who make you change their light bulbs and unclog the bathtub every two weeks. Or worse, they could just stop paying rent and turn your home into a wreck.

Don’t run just yet, though. Horror stories aside, renting out your home could not only work out for you, but also allow you to save some cash, your home and your credit in the process. Here’s who can make it work — and how.

Rent in lieu of foreclosure

Let’s start with the worst-case scenario: in today’s economy, many individuals and families face losing their homes to foreclosure. Whatever the reason — job loss, an extended illness or any other unforeseen financial emergency — renting out the place, even at a lower price than the current mortgage payment, might actually make financial sense.

Ideally, the rent you collect would be enough to cover the mortgage and everyone — bank, homeowner and renter alike — would live happily ever after. In real life, that isn’t very likely, especially if the property was bought during the housing boom. But that doesn’t mean it’s impossible to make it work.

Consider this example: say your current mortgage payment is $2,000 a month, an amount you cannot afford given your cash flow. You could rent out the place for $1,200 a month, but that leaves you paying $800 out of pocket each month for the privilege of moving out of your home. However, if you can find a less expensive property to rent yourself, say, for $800 a month, your total out-of-pocket costs would add up to $1,600 a month. That’s a $400 monthly savings right there.

Do the math based on your individual options and if it works out to something you could afford, you could be saving your home (to sell when the market improves or until your own financial situation recovers and you could move back in) and preserving your good credit in the meantime.

Rent to relocate

Families who can’t sell their previous home after relocating and purchasing a new home (or renting one) should also consider renting out their place rather than losing it to the bank. Can’t collect enough rent to cover your mortgage payment? Try to rent a place yourself for an amount equal to the rent you collect. This way, your cash flow will remain the same, even as you live elsewhere. And if you can rent for less, you’s earn some extra cash — or at least enough to cover maintenance expenses on your own rental property.

Considerations

Not everyone is cut out to be a landlord, of course. That requires a skill set that is an eclectic mix of business acumen and social skills. You need to understand how to calculate a fair and equitable rental rate that attracts tenants, while still leaving room for profit — or covering your existing expenses.

Being a good judge of character is a good quality, but not always as accurate as a background check. Things might go wrong – renters may be late on rent, appliances may quit working on a seemingly routine basis and property maintenance will be an ongoing job. Can you afford to pay the mortgage if a renter misses a rent payment or expenses related to replacing a furnace eat away your profit?

Proceed with caution

If you don’t feel comfortable dealing with prospective renters, collecting past due rent and fielding complaints, hiring a property management company to oversee the details is a smart business move.

Property management companies can help you rent your property and keep you on the right side of the law when it comes to landlord and tenant rights. For individuals who choose to rent out their previous home after relocating, a property management company is especially helpful. They can keep an eye on things and take care of problems that aren’t easily resolved when you aren’t in the same state, or country. Keep in mind, however, that the service will cost you, typically 5% to 10% of the rent paid by the tenant.

Don’t forget Uncle Sam

Talk to your accountant (if you have one) before you rent your house and factor the tax implications within the financial picture. How will losing the mortgage interest deduction impact your tax bill, for example? Will the property management expenses you incur be enough to offset the rental income — or will you be hit with an unexpected tax bill come April 15?  You shouldn’t dive into the rental business without evaluating the tax implications.

Becoming a landlord can be a win-win situation if you proceed with caution and understand the risks associated with the business. Like with any other investment, do your homework and evaluate your options before jumping in.

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