To Rent, or Not To Rent?

After joining ActiveRain.com – a very popular blogging site for Real Estate professionals – I’ve found so many interesting blogs from my colleagues.  Discussions range from stories about client interactions, Realtor advice, tips for selling and buying your home, and just plain interesting stories about Realtor experiences.

I came across a blog discussing sellers renting their homes instead of selling.  Noticing this trend in my own market, I had to continue reading.  The information and insight was spot on and I would like to share with all my blog readers an interesting recap.

There are two major reasons sellers will typically end up renting instead of selling:

#1.  Urgency.  They need to sell quickly, but in a slower Real Estate market, this isn’t always achievable at the price the seller needs.  So to buy more time, they rent.

#2.  Price.  As we all know, home prices have taken a downward turn and sellers are not prepared to ‘give away their house’.

The idea is that in a year or two, the market will recover and then the seller can finally sell their home at the price that is reasonable to them.

As an insider to the Real Estate market, there are definitely dark corners I can shed light on that are commonly overlooked.  So consider the following before giving up on selling your house:

Buying Again:  Leaving equity behind in your house may prevent you from purchasing a new house.

Property Management:  Managing receipts, maintenance, repairs, emergencies, and other requirements associated with renting requires time, money, and effort.  You can choose to do it yourself or you can choose a property manager to do it for you.

Market recover or market bust:  It may take longer than you think for real estate prices to recover.  Right now, the economy remains weak.  Downward pressure on home values will continue for the foreseeable future.  Who can say how much longer…or steeper…prices will sink before an eventual upswing.  Once the market is on an upward trajectory, it will take years for priced to return to previous highs.

Depreciation:  While the IRS allows you to take depreciation as an expense against rental income, don’t think of ‘depreciation’ as only a tax deduction good for improving cash flow.  Since tenants are unlikely to treat your home as well as you would, physical depreciation is a very real aspect of turning your home over to tenants.

Capital gains tax:  If you rent your house for only two years, you can still sell your house and be exempt from paying IRS taxes on up to $250,000 of capital gain (when single) or $500,000 (when married).  However, the depreciation you took against rental income may have to be recaptured.  Be sure to consult your tax accountant.

Re-lease or try to sell again:  In this climate, you’ll find tenants quickly.  Once the first year’s lease is over, you’ll have to decide whether to continue renting your house or try selling.  Either way, you’ll have to invest in cleaning, painting, landscaping, replacing carpet, upgrading appliances, and making repairs before the next tenants or buyers move in.

Damage goods:  When you’re ready to sell, your house may be considered ‘damaged goods’.  Home buyers can immediately tell if a house has been lovingly cared for or simply lived in.  And they will take this into consideration when making offers.

Selling with tenants in place:  Let’s face it, tenants don’t care if you sell your house or not.  They don’t have a stake in the outcome.  They only know it disrupts their schedule.  They won’t keep the house as neat and clean as you would.  They won’t be as flexible to accommodate showing appointments as you would.  And they may hang around the house during showings, making homebuyers uncomfortable and eager to leave.  Once their lease is up, you’ll find yourself in a negative cash-flow position and may very well be forced to rent once more.

Rental merry-go-round:  After renting your house for what was supposed to be no more than a year or two…just until the market turned around…could turn into a long-term commitment.  You may get stuck on the rental merry-go-round, unable to jump off.  The window between leases will leave you with only a short time to list and sell your house.  Before you know it, you’ll be back on the rental merry-go-round, still waiting for the opportunity to unload a monumental burden.

Rental prices may go down:  Right now rental prices are what they are and they may be just fine for your needs.  But renting your house as a short-term solution may not be a long-term solution.  With so many homeowners turning to renting as an expedient to selling, tenants will have more homes to pick from.  In time, instead of facing a ‘Buyer’s Market’ on the selling end, you may very well face a ‘Renter’s Market’ on the rental end.  Such a circumstance would drive rents down year to year.  After factoring in rising insurance rates and property taxes, you may eventually find yourself in a negative cash-flow position.

Mortgage rates: Mortgage rates are the lowest they’ve been in recent history.  But they can’t stay low forever.  When the economy recovers, the Federal Reserve will start raising key interest rates.  Mortgage rates will climb in lockstep, making homeownership more expensive.  To make up for higher monthly costs, buyers will bargain that much harder, forcing prices down once again.

If you have a pressing need to move out and move on, and don’t want to be weighed down with renting your house, there is a way to sell quickly and still get full market value for your house.

Thank you Judy Chapman from Illinois for your insight on the rental market.