If You Can't Sell Your Home Should You Rent It Out?

If You Can't Sell Your Home Should You Rent It Out?

The Chicago Tribune ran a story on Friday about reluctant landlords who decide to rent out homes that they can't sell (There's actually no such thing as a home you can't sell. You can always sell it but you may not like the price you get.) and it's worth reading by anyone facing this decision. And I know from my own discussions with potential sellers that more and more homeowners are becoming reluctant landlords every day. It's what I call the other shadow inventory because someday these homes are going to go back on the market. According to the Tribune story:

The rental market has seen a flood of formerly owner-occupied homes, according to Harvard's Joint Center for Housing Studies. In 2009, almost one-fourth of single-family detached rentals were owner-occupied two years earlier.

Usually homeowners become reluctant landlords when they need to move on but don't like the price they can get for their home and one or more of the following is true:

  • They don't want to do a short sale or they can't qualify for one
  • They can't or don't want to write a huge check at closing
  • They believe the housing market will come back soon
  • They believe that in renting their home out they will not lose too much money or even slightly profit every month

Of course, the first order of business is to ensure that you are making a rational decision about waiting to sell your home. Most people don't and they just end up delaying the inevitable. Part of that decision process is to properly evaluate the economics. Is it better to write a check now for $20,000 or lose $2,000 per year? That's equivalent to borrowing $20,000 at 10% per year. Is it better to sell now and pocket $30,000 (regardless of how much you will "lose" vs. what you paid) or make $1,000 per year on the rental? That's equivalent to earning 3.3% per year on what's left of your investment.

Some reluctant landlords have really regretted their decision:

Anne Healy's year as a landlord was so frustrating that she put her St. Paul, Minn., house back on the market and recently sold it — for $50,000 less than an offer she turned down last year....."First, their tenant said she had one dog, then moved in with two large ones. The wear-and-tear they put on the house was painful for Healy, who had lovingly restored it room by room. "When we left, the house had never looked better," she said. But after the tenants moved in, every time Healy saw the house, it looked worse.....By the end of the lease, Healy was hounding the tenant to pay her rent, and she'd stopped paying her utility bills.

Yep. Better keep that nail gun handy just in case you get that tenant from hell:

Comments

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  • You should rent it out only if there is a positive benefit. You may lose money each month, but if you get to buy that dream step-up house, then it might be worth it.

    Most reluctant landlords I know do so because it buys them time. Sure they may end up paying more in PITI than simply writing a check for that $20K or more, but its spread out over time so those of us who don't have an extra $20K burning a hole in our bank account can hope that the small amount we pay down our existing mortgage and the ever so slight appreciation our property might get help mimimize the shortfall.

  • In reply to darkangel:

    That brings up a good point that I should have made. When calculating your gain or loss on a monthly basis you have to make sure you don't view your entire mortgage payment as a cost. Only the interest portion is.

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    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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