Should you rent your house rather than sell it?

REAL ESTATEAugust 18, 2012 

With the decline in residential property values, some people are renting out their houses rather than selling because they cannot sell for what they owe. They figure the market is bound to improve, and they can hold on by renting until the market rebounds and avoid taking a hit.

This may or may not be the best decision. Being a landlord involves much more than it appears.

Start off by deciding if you are cut out to be a landlord. Being a landlord is taking on a part-time job. Are you willing to give up some of your time to take care of repairs, interview tenants, collect rent, do the bookkeeping and so on?

Being a landlord requires cash reserves to cover the cost to carry the property when you have a vacancy, or the tenant does not pay the rent, or to pay for unanticipated maintenance. Do you have the money or borrowing ability to do this?

Can you in a polite and friendly way tell a tenant who is behind in rent and has just told you all their life problems that he still has to pay the rent? And if he does not, evict him?

Can you sleep at night with the added responsibility and risk?

You can hire property managers, but at a cost. While a property manager can get you one step away from direct management, you will pay a management fee, generally about 10 percent of the rent. If you are an absentee landlord living somewhere else, you don't have much of a choice.

Next, you need to run the numbers. Is renting out your house financially feasible? Start by researching the market to find out what you could get for rent? You need to go out and look at houses for rent.

Then with a cold eye that does not take into consideration all the hard work you've put into your house, what you paid for it, or how much you like it, estimate a realistic rental amount per month. Multiply that by 12 to get the annual rent you schedule. Next deduct about 5 percent to allow for vacancies to get the actual rent you plan to collect.

Now deduct expenses. If the tenant pays utilities, then you pay taxes, insurance and maintenance. Maintenance is tough to figure and depends on the age and condition of the house. Deduct any costs for property management. You need to include accounting costs for figuring your taxes and possibly legal expenses.

You may discover the house will rent with a negative cash flow, and you will have to provide some of your own money to cover all the costs. If so, you can compare this figure with how far below breakeven a sale would be. With this information, you can decide if you are better off to sell and take the hit now.

Contact a tax expert to find out how the tax laws apply to your specific situation. The laws vary depending on how long you lived in the house before renting and how long you rent it before selling and so forth.

To be a landlord you need to know the law for renting real estate. For Alaska property, read the Alaska Uniform Residential Landlord & Tenant Act (search under that name). This describes the legal rights and responsibilities for both landlords and tenants, such things as what you can do if the rent is not paid, what you can ask when interviewing tenants, how you handle security deposits and more.

Get a good interview form and procedure for screening tenants. Don't trust your gut on whether you want a prospective tenant. Know what factors are legal to consider when evaluating tenants.

Have a good rental agreement. Don't rely on handshakes or verbal agreements. Enforce the agreement and live up to your responsibilities. Be friendly with the tenant but remember, the tenant is your customer, not your friend.

Maintain good bookkeeping records. This means opening separate bank accounts for rentals; keep track of all income and expenses with receipts. You are going to need these for taxes and good management.

Periodically inspect the property to ensure that the tenant is taking good care of it and not violating the terms of the rental agreement. Maintain the property. That means putting money into the property to keep it in good condition.

There is lots of information on the web that can help. For this column I looked at a number of sites and found MSN Real Estate (realestate.msn.com/) and Investopedia.com to be particularly helpful.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His column appears every month in the Daily News.

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