How to rent your hard-to-sell home
In this gloomy real estate market it may be difficult, if not impossible, to sell your home anytime soon.
For families who absolutely must move because of a job or personal reasons, renting your home might be the short-term answer.
You'll make enough money to pay the mortgage and your home will be more secure than if it's vacant. Think of it as a way to buy time until home prices and sales can rebound.
Look at how Karen and Greg Evans turned a home that they knew would be tough to sell at a profit into a lucrative rental property.
But, as with marriage, the decision to become a landlord is not something to enter into lightly. It's a lot of work with many potential problems.
Our 8 steps for renting your hard-to-sell home will walk you through the process:
Step 1. Hire a real estate lawyer to create a limited liability corporate (LLC) to own your rental property.
That protects all of your other assets if tenants or someone who's injured on the property sue.
Step 2. Ask your lawyer or accountant how this will affect your taxes.
Rental income is taxable and some states revoke the homestead exemption on your property taxes if a house is no longer owner-occupied.
You can depreciate a rental property, which can offset your property-tax gain, but be aware of depreciation recapture, in which depreciation allowances are taxed, upon sale, as capital gains.
Step 3. Buy a new insurance policy to cover the home.
Most homeowners' policies don't cover rental property.
You'll need a special policy that will not only protect your home, but your new status as a landlord. Talk to several independent brokers who specialize in investment properties and get multiple quotes.
Expect this coverage to cost more than your old policy. But if you interview a few candidates and choose a specialist, you can prevent your premiums from doubling.
Step 4. Decide whether you'll need to hire a property management company.
If you're moving away you'll need a dependable relative or management company to monitor and maintain your home.
"Small headaches can become larger headaches pretty darn quick," said Derek Crager, founder of property management company Crager-Bartels in Plainfield, Ind. "A drip that nobody takes care of (can) turn into a rotten floor."
Management companies will handle everything from screening prospective tenants to collecting rents and providing handymen for maintenance.
A standard monthly fee is 10% of the monthly rent, Crager says. You should be sure to find out if companies you're considering charge extra for billing or special visits to the property. These small extra charges can add up.
Step 5. Establish a realistic rental rate.
Ideally, the rent should cover all your fixed costs: mortgage, insurance, taxes, legal costs and property management fees.
After you've come up with a figure, check with real estate agents and look at newspaper ads to make sure you're asking about the same as comparable homes in your area.
If you're a little high, you can be a bit more flexible than most landlords. You're only in this for a short while and covering 90% of your costs is a lot better than having the house sit empty.
Step 6. Decide how long you'll want to rent your home.
One year makes a lot of sense. That's long enough to attract a good tenant and plenty of time for the real estate market to improve.
If home sales are still sluggish, you've developed a good relationship with the renter and are breaking even financially, you can always renew the lease for another 12 months or go to a month-to-month agreement.
You should also consider what time of the year the lease will be up. If a 12-month lease would lapse in late fall or early winter, consider an 18-month contract that would allow you to put your home up for sale in the busier spring and summer selling seasons.
Step 7. Get an application and lease that conforms to all state and local laws.
You can obtain an application form online or from your lawyer. Just make sure it includes a release that allows you to obtain their credit information.
Lease agreements customized for your area can also come from your attorney, management company or local landlord associations.
Some states, for example, allow owners to collect and hold the first and last month's rent plus a security deposit while others only allow owners to charge the first month's rent and a security deposit before tenants move in.
You've got to get all of that right.
Step 8. Find the best possible tenant.
A real estate attorney (or agent) can also advise you on how to find desirable tenants, including where to advertise and what to look for on the application.
"For most people, your home is your most valuable investment. You don't want to treat it cavalierly," said Barry Rosenbloom, partner at Ottenheimer, Teplinsky, and Rosenbloom LLC, a real estate law firm in Buffalo Grove, Ill.
Web sites like Craigslist have also become popular and effective ways of matching landlords and tenants. Rosenbloom says you've just got to be willing to do the legwork, which includes running a credit check and calling references.
Be advised: You cannot discriminate on the basis of race, sex, religion or sexual orientation. You can, however, choose tenants based on their income and credit histories.
The two key questions to ask yourself are: Can they pay? Will they take care of my property?
For example, you shouldn't rule out someone who's just lost their home to foreclosure -- maybe a home right in your neighborhood.
These potential tenants have terrible credit, but they may also have a reasonable explanation, steady income and strong desire to start over and make a good home for their families.