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Rent Your Home and Let the Tenant Pay the Mortgage

Peter Warden
Rent your home

Credit Sesame discusses how to rent your home and let the tenant pay the mortgage.

Should You Rent Your Home?

Getting someone else to pay your mortgage sounds like a no-brainer. That’s what should be happening when you rent your home to a tenant. You’re still the home’s owner, so you retain all the advantages of homeownership. But you may be able to duck the costs. Most importantly, you reap all the rewards of rising property prices.

Are you sold on the idea? Before you make a final decision, there are some drawbacks to consider.

How to Rent Your Home Right

Perhaps the most common mistake among those who rent out their homes is to fail to take the step seriously enough. Too many rely on a bit of mental arithmetic: ” I pay x for my mortgage. I can probably get $x + y in rent. That means I’ll make a profit. Let’s go! Unfortunately, being a landlord isn’t that simple. You need to factor in all inevitable or likely costs, including:

  1. Repairs and maintenance. If you do those yourself, you can save money. But do you have the time? Bringing in professionals for every job is costly.
  2. Vacancy periods. Unless you’re very lucky, tenants will move on at some pointe and you may have have months where there’s zero income between tenants. The Federal Reserve Bank of St. Louis put the national rental vacancy rate at 5.8% in the first quarter of 2022. But it was 11.1% in the third quarter of 2009. The latter equates to more than 1.33 rental-income-free months a year.
  3. Cleaning and maintenance between tenants. New tenants paying market rents expect a pristine home. You may have to clean and perhaps decorate between tenancies.
  4. Chasing rent. Even good tenants can sometimes be late paying your rent. Meanwhile, you still have to pay your mortgage. Do you have sufficient funds in reserve to do this?
  5. Deadbeat tenants. A bad tenant might not pay rent for months. For you, that’s zero income and the prospect of paying for an eviction. Worse, that tenant may deliberately damage the home before skipping town, leaving you with repair bills.
  6. Background checks. You may be able to filter out the worst prospective tenants by paying for background checks.
  7. Marketing. When a tenant gives notice, you may have to pay a rental agent (or market the home yourself) to find a replacement.
  8. Yard maintenance. If your home is on a large plot and you cannot pass on yard maintenance to the tenant, you could be looking at hours a week across most of the year.
  9. Higher homeowners insurance premiums. These are common when you rent your home out. Don’t avoid telling your insurer or you could void your policy.

These can add up to significant time, effort and cost for you. The more you do yourself, the lower those costs need to be. But do you have the time and skills? If not, you’ll have to pay someone else to do the tasks you can’t manage.

Tax breaks

It’s not all bad news financially when you rent your home out. And legal website NOLO lists the Top Ten Tax Deductions for Landlords, which can make a real difference to the viability of your rental plans. Always check with a tax professional before taking action.

You’re going into business

Even if you rent out only one home, being a landlord is a business. New Mexico real estate agent Coleen Dearing told the HomeLight website:

Owning rental property is a business, and it has to be approached as a business investment. You have to have the right personality to do it; it’s not for people who are not risk-tolerant.

The best way to reduce your risk is to write a business plan, including spreadsheets that project your income and outgoings as a landlord for the next three to five years. Be sure your figures are realistic. Some create two spreadsheets: one that makes optimistic assumptions about revenues and costs, and a second that makes pessimistic assumptions.

A business plan provides a framework that helps you think about the future. And you should be asking yourself:

  1. How’s my local residential sales market? How much might you make as your home appreciates in value
  2. How’s my local residential rental market? Supply and demand will determine the rent you can get and the ease with which you can attract new tenants. In most parts of the country, rents have been rising strongly for several years. But does that apply where your home is?
  3. What might change that could affect those markets? Is your home in a small town with one major employer? What happens if it goes bust or relocates? How likely is a global, national or local recession?

You can find most of the data you’re likely to need online. Speak to local real estate agents, too.

SWOT away

A good way to structure those thoughts is in a SWOT analysis. SWOT is an acronym and stands for:

  • Strengths. What’s inherently strong about your plan? Perhaps your home is especially attractive, or you have the time and skills to do most of a landlord’s work yourself
  • Weaknesses. What’s inherently weak about your plan? Perhaps your home is in a bad state, or you have a crack den next door. Or maybe every home improvement project you’ve undertaken has been a disaster, and you’ll need to call in a professional to replace every washer and clean every gutter
  • Opportunities. What external forces that you don’t control could make your plan even better? Are home prices and rentals likely to rise? Will the economy continue to boom? Will high inflation send rents rocketing while your main outgoing (your mortgage payments) hold steady because you have a fixed-rate mortgage?
  • Threats. What external forces that you don’t control could make your plan worse? What happens if a national or local recession sends rents tumbling? Could high inflation send your non-mortgage costs sky high?

Writing down those and other strengths, weaknesses, opportunities and threats helps you take a realistic view of what you might face. That enables you to make realistic assumptions when you’re running your numbers.

Barriers

A couple of issues could stymie your plans to rent your home before they get off the ground. So, before you go too far, check:

  1. Your mortgage agreement. Many say you must inform your lender before renting out your home. You may well get permission, but there could be financial penalties that you need to build into your costs
  2. Your homeowners’ association (HOA) rule book. Naturally, this only applies if you live in an area governed by an HOA. But, if you do, many have rules preventing renting. Don’t shrug this off. NOLO warns, “Most HOAs are empowered to enforce the development’s regulations by assessing fines and penalties for rule violations.”

If you trip up badly over either of those, you may not be able to rent your home out.

Rent your home and reap rewards

It can be a great idea to rent your home and let the tenant pay your mortgage. Just do your homework and rent it right.

If you’re thinking of getting into real estate, check out Six Reasons to Own Your Own Home.


Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Published June 8, 2022
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