In this increasingly tough economy, people are not only having a tough time selling their homes in slow markets, they’re also having a tough time keeping their jobs.
That means there are families facing a dangerous squeeze. For those who have a chance to seek employment in other markets or simply want to move for any reason, they’re facing the prospect of their current home sitting empty while the lender still wants their monthly check.
No wonder why renting seems like a good solution. But before you make that decision, consider the pros and cons.
When homeowners suffer, renters usually catch a break. You’re not the only person who’s had this brilliant idea. As homes and condos sit empty in many markets, renters reap the rewards of supply and demand – landlords desperate for income might lower the prevailing market rent just to see some cash flow. The real estate bubble has stacked the deck against landlords in several ways. First, historically low interest rates and freewheeling mortgage lending that’s all but dried up today turned a lot of potential renters into buyers over the last few years. Second, the remaining renters in troubled housing markets now have more empty homes, condos and apartments to pick through. Before you make a move, analyze those “for rent” ads in your neighborhood to see if they’re longtime rental properties or housing just like yours that’s being dumped on the rental market because it won’t sell.
Are you prepared to be a landlord? The good news is that good tenants treat your property like gold; the bad news is that good tenants can be hard to find. Being a landlord is a job – never forget that. You need to freshen up the look of your property to make it attractive to renters, and you’ll need to understand local landlord/tenant law so you can have proper leases drawn up. You’ll need to meet tenants face-to-face and run credit and employment checks. That means time and money on the way in, and additional time, investment and potential headaches after your dream tenant moves in. They can damage your property (making it tough to sell later) or they may violate their lease agreement in a variety of ways including the worst option – delaying or ducking payment of rent. All of these situations are tough to deal with if you’re two blocks away – they’re a lot tougher to handle from another city or state. You might need to hire a property manager to handle tenant emergencies if you’re no longer close enough to do so.
How will it affect your home expenses? You will no longer get a homestead exemption and, as a result, your property will be taxed at a higher rate. In addition, the cost to insure your property is likely to increase because you’re not occupying the property. You should see your tax professional and possibly a CERTIFIED FINANCIAL PLANNER™ or another professional to get an overview of how such a commitment will affect your overall finances. It’s true that rental property can pay for itself in tax benefits related to expenses and depreciation, but that depends very much on market factors and your financial situation.
Renting could affect your borrowing power later. Converting a home from a primary residence to a rental property will also affect the new landlord’s ability to obtain mortgage financing to purchase their next primary residence. Mortgage lenders contribute only 75 percent of the rental income—documented on the lease agreement—to a borrower’s income, leaving the other 25 percent to account for repairs and maintenance. If the existing mortgage payment (principal and interest), property taxes and insurance exceed 75 percent of the rental income, the landlord’s debt-to-income ratio will be reduced. That will cut the landlord’s borrowing power for purchasing their next residence.
Don’t forget moving expenses. This may seem obvious, but it will definitely cost you to move out, and you need to check with your tax professional whether you’ll be able to deduct expenses for a job-related move or you’ll have to shoulder this burden yourself. The Internal Revenue Service requires you to meet a "distance test” to relocate to a new job – your new job must be at least 50 miles farther from your old home than your old job location was from your old home. There are other distance, time and employment requirements you should review at www.irs.gov.
2008 — This column is provided by the Financial Planning Association® (FPA®) of, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process.
Copyright © 2008 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through LPL Financial FINRA/SIPC.