Should I Rent My Former Home?Jun 9, 2006 Write an essay on this topic.
Popular Products in BooksThe Bottom Line Renting a home presents some challenges and risks but it can also provide a good source of positive cash flow.
I have lived in many places and in many different types of dwellings and I have experienced what it is like to pay rent, both for apartments and for houses. But a few years ago I got to discover what life is like on the other side when I decided to rent my property rather than sell it. I had plenty of experience as a tenant, but now I was going to learn some new lessons about property and the unique challenges and opportunities that a landlord experiences. Lets take a closer look at the decision to rent a home and what is involved in the making of a rental contract.
Should I Rent or Sell?:
When you own a home and plan to relocate, the first question you must ask is whether or not you should sell the property or rent it. For most people, renting doesnt even enter their thoughts. Selling the old property and using the gains to apply toward a new residence is the only option for many. Sometimes, this is borne out of necessity. Personal finances could dictate that the existing property be sold before a new one can be purchased because the gains from the sale might be necessary to make a down payment on new property. Other times, renting simply doesnt enter into most home owners vocabularies. Most of us dont even think about the possibility of renting. We list our property for sale, turn it over to a realtor, and then sit back and wait for an offer.
For those who have considered renting, some important questions need to be answered before taking the plunge. First, (going back to what was said above) is it financially feasible that you can rent your property rather than sell it? If the gains from the sale are critical to the purchase of another property than selling might be the only option. Also, some banks might be weary of extending credit for another mortgage. This depends on your personal credit history, debt ratio, and other factors. If your credit rating isnt very good or if you have excessive debt, some banks will refuse to grant a mortgage on a new property until the existing one is sold. A loan applicant can alleviate this situation to an extent if there are already tenants who have agreed to rent the original property and have signed a lease. But if debts are too high and/or credit rating is too low (or income is low, or various other negative factors come into play), then a bank might insist on the elimination of the first mortgage before a new mortgage will be granted.
Other factors in the decision to rent include salability of the property; potential cash flow income; and potential for price appreciation. If your property is in an economically depressed area, then selling might prove to be difficult and it might result in almost no gain or even a loss on the property. On the other extreme, it could be that the local housing market is red hot, prices are rising, and they are expected to continue rising for the foreseeable future. If this is true, then it might be wise to rent the property, retain ownership, and take advantage of the soaring real estate prices by selling at a later date.
If cash flow is your desire, then renting is often a good idea. It offers a monthly flow of cash which can add to ones monthly income, creating a financial cushion or supplement to a persons ordinary income. The existing mortgage, taxes, and insurance will have to be paid from this money each month but if these three items have a relatively low sum total, the difference could result in a substantial amount of positive monthly cash flow.
Lease Agreement Provisions:
So now you have made the decision to rent your home. What step should you take next? Finding tenants (if you havent already done so) is obviously critical to the success of your business venture, but the other important task is to write up a lease agreement to present to your tenants. It doesnt matter if you have actually secured a tenant yet or not- you can still write up the lease agreement beforehand with blank spaces where the name(s) will be filled in once you find a renter(s).
Here are some of the important components of a lease provision for residential property:
Description, Address, etc.- This is usually found at the beginning of a lease agreement. It describes the property for rent, its location, and the exact usage permitted for the property. This last point is an easy one to overlook, but it is important that your tenants know that the property is intended for use only as a place of residence (unless otherwise noted) and that the tenants must follow any local laws pertaining to zoning, ordinances, etc.
Lease Terms/Price- This part of the lease agreement outlines the terms of the lease; the cost per month; late fees (if applicable); penalties for early termination of lease; provisions for eviction; and the amount required for a security deposit.
Maintenance/Repairs- Here, the landlord needs to spell out the responsibilities for paying utilities, maintaining the landscaping, performing simple repairs, and making altercations to the property.
Assignment/Subletting- This explains whether or not the tenants are permitted to allow licensing the property for use by another party.
Renewal- This states the terms for renewal once the existing lease has come to an end. It typically states the same terms as before and notifies the tenants of the deadline to apply for a renewal.
Multiple copies of the lease agreement should me made and signed. It is a good idea to give your tenants a copy and keep one or two for your own records, stored in a safe place.
There are often other items specific to the property or specific to what is and is not allowed to take place in the rented property that need to be disclosed in a special provision. The most obvious of these is pets. Some people do not mind renting a property and allowing pets but insist on a pet deposit. Others do not want pets at all because of the potential for damage. This, and other special provisions, needs to be explained in this section of the lease.
Renting property is a new venture for me and it is one I hadnt really considered in the past. I have been on the lessee side of the equation many times in the past but I had never been the lessor of a property until a couple of years ago when I decided to rent a property rather than wait any longer for it to be sold. Unlike others who make a conscious decision about renting, I was thrust into the job of a landlord without planning for it. The reason was because the property I was trying to sell would not sell. And after six months of waiting and waiting, I got tired (not to mention financially strapped) of paying a mortgage for a house I wasnt living in. I decided to place an ad in the newspaper to rent this house and I was surprised at the number of people who inquired. I talked to a few of them and finally agreed to rent the home to a middle- aged couple in their forties who had no kids at home. This seemed like a safe bet, since the couple appeared to be responsible and well- established.
Even though I trusted the couple I rented to, I was still careful to get some references. This is something every owner should do, even if the rental in question is a single home and not a multi- unit dwelling. I got hold of two former renters for my tenants and confirmed their rental payment records. They seemed to be pretty good with only a couple of minor flaws (some payments made a few days past the deadline, which isnt too bad). This made me feel safe enough to go ahead and work out the terms of a lease agreement with this couple.
Lease terms on a house can be anything the two parties can agree to. When I made my initial lease, I set the terms at one year because I didnt want to take any chances on having an empty house with no cash flow for at least one full year. I wanted to lock my tenants into a full year so I insisted on this as part of the deal. After the first year was up, we negotiated on a new lease with more options. This time around, I gave the tenants a few choices. They could sign another full- year lease for X dollars; a six month lease for X dollars plus 20; or a three month lease for X dollars plus 40. If they wanted, they could also rent on a month to month basis and pay X dollars plus 60. It is important that the owner insist on more money per month when offering shorter and shorter lease terms because with a shorter lease term, there is more risk on the part of the owner. With a longer lease, the risk is less and therefore the tenant deserves a lower rate. This reduced rate also acts as incentive to the tenants to sign a longer lease, which is typically what the owner wants under most circumstances.
One of the important decisions that must be made when renting property is the amount to charge for a security deposit. For most owners, the amount for the deposit is set at one months rent and this money (along with one full month of rent) must be received before the tenants can move in. Some owners insist on larger security deposits for greater safety. The best thing to do is to tie the amount of the security deposit to the provisions for eviction. If your lease agreement states that eviction will take place after the rent is more than 30 days past due, then a single month of deposit money should be sufficient. If the agreement says that eviction will not take place until the rent is 60 days past due, then the security deposit needs to be twice as large for maximum safety on the part of the owner. With two months rent as a security deposit, a tenant who is 60 days past due on the rent will forfeit the entire deposit to cover the past due rent. This minimizes the risk for the owner. Of course, some owners would say that even more money is needed in the deposit because of the possibility that the tenants could damage the home. Everyone is different, and the only thing that matters is that the owner and renter agree and that the terms are clearly defined in the rental agreement.
Rental properties are nice for the cash flow they provide and for the tax advantages they offer. Often, rental property can be depreciated over time, lowering the taxable income and sometimes resulting in no net taxable income at all. Of course, depreciation has nothing to do with real cash flow so it represents a tax savings boon to the home owner. Depreciation is used by many business owners but the nice thing about depreciation from the perspective of a home owner is that, even though depreciation is supposed to represent the dollar value of wear and tear on a piece of property, homes almost always appreciate in value. This makes rental property very attractive because it means that you can not only create a monthly source of income, you can also depreciate and pay little or no taxes on the income and sell the property at a later date when you will most likely make a gain.
Rental properties offer great advantages but like all business ventures, there are some risks and disadvantages as well. First, there is the fact of maintenance. Roofs have to be replaced, gutters cleaned, appliances repaired (assumed they are included in the rental property) and other routine maintenance performed. Of course, these maintenance items are tax deductible (It is important to keep receipts of all expenses so that they can be written off of ones taxes during tax season) but they can still cause financial strain on the part of the owner, especially if something very expensive has to be replaced, like a roof. Then, there is the possibility that the property could sit vacant (either because of non- paying tenants or because of lack of new renters) and become a cash flow drain rather than a cash flow enhancer. This is probably the greatest worry of all with most owners and it is one that needs to be given careful consideration. What if your property does sit vacant for several months? Will you still be able to cover the mortgage? How many months will you be able to cover? Is your property located in a desirable area where new renters will be easy to find? At what point will you no longer be able to cover the mortgage on the property and risk having it go into default? How far will you be willing to go to prevent default? Will you consider cashing in some of your investments to pay the mortgage on the rental? These, and other questions like them, need to be answered as honestly as possible before the decision to become a landlord has become final.
Renting property can be financially rewarding but it can also cause great financial strain and stress, especially if tenants fail to pay the rent (that issue will be covered on a later Epinion). It is a viable alternative to consider when one is deciding to sell property but it is imperative to weigh all the pros and cons before making this important decision. The extra cash flow is great but there is always that outside chance that your tenants will not pay; the property will sit vacant for many months; or a major repair will require a large financial outlay. These, and other issues like them, stress the importance of being prepared when it comes to renting property. Conditions can take a sudden turn for the worse and you need to have a plan of action in place to answer any financial threat or challenge.
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