A homeowner who is able to sell a property at the asking price has the potential to reap a profit, but what happens when an individual is having trouble unloading a property? In this case, it might make more sense for the homeowner to keep the home, but rent it out to cover the bills. (To read more about selling your home during a downturn, see Selling Your Home In A Down Market and Closing A Real Estate Deal In A Bad Housing Market.)

But wait. If you're considering renting out a property rather than getting rid of it, know that this isn't a quick-fix option. There are benefits to becoming a landlord, but there are also a number of very costly pitfalls. Read on to find out when it pays to rent out your property and how you can cash in.

The Benefits of Renting Your Abode
There are a number of reasons why a homeowner may prefer to rent out his or her home:

  1. A Sluggish Economy: In a sluggish local economy, the odds that the homeowner will receive a bid close to the asking price are not likely. Renting out the home will provide the homeowner with supplemental income, while also providing some time in which housing prices may rebound. This would allow the homeowner to get a better price for the house when he or she finally does sell.
  2. Property Upgrades: If the property could use some improvements before it is sold, renting it out could provide the time and income to do this. Repairs are generally tax-deductible for rental property owners.
  3. Life Upgrades: Homeowners that own their homes outright (their mortgages are already paid off) may find that renting out a home in a slow real estate market can provide financing for another venture.
  4. Market Timing: A homeowner might want to rent while holding out for a higher profit on the sale of the home. Suppose an owner would like to sell his home and could do so now for a small profit. But he thinks that six months down the line, the demand for property could increase dramatically, resulting in a higher selling price. In this instance, renting out the home for those months may help cover some or all of the mortgage and taxes, while providing the homeowner with a chance to sell at those later numbers.

In these instances, a renter provides income to cover the homeowner's mortgage while the property is being worked on, or until the economic cloud lifts. This way, the homeowner can reap the benefits both of renting and of selling the property. (Other than garnering extra income, there are some tax benefits to renting your house as well. Read Tax Deductions For Rental Property Owners to learn more.)

The Drawbacks of Being a Landlord
Renting a home isn't always as simple or as glorious as it sounds. In fact, there may be a few sticking points to consider. (Read Top 10 Features Of A Profitable Rental Property to find out what factors you should weigh when deciding to rent your house.)

Some examples of renting negatives include:

  • Having strangers in your home. Many people don't feel comfortable about this, and it will generally add stress to their lives.
  • Being a full-fledged landlord isn't always an easy task. There will be regular maintenance that needs to be done on the property, and you (as the owner) are responsible for it.
  • Some renters may not pay their rent on a timely basis - or at all - leaving you covering costs and payments in their absence.
  • Property taxes tend to rise over the years, which could have an impact on profit.

Renting Your Home in Five Steps
Despite the added work and stress, you may still want to bring on some renters. If so, let's take a look at a few tips that should help make the process easier and more profitable.

  1. Study the Market: Check local newspapers and with local realtors to see what comparable homes/properties are renting for in the neighborhood. This should help you establish a fair rental price.
  2. Prep the Home: Renters may not take care of the home or its furnishings; therefore, the owner might consider removing breakables and personal items so as to avoid damage and potential arguments.
  3. Find a Renter: Consider advertising in local newspapers, in the brochures and bulletins found in supermarkets, and on website classifieds. The idea is to try to get as many people to view the rental details as possible, so that you are left choosing your renter, rather than having to go with the only renter who expresses interest in your place.
  4. Interview: Consider meeting with the potential renter rather than simply dealing over the phone. Knowing who will inhabit your home may put your mind at ease and help you weed out unsuitable candidates.
  5. Spell Out the Deal: You should consider contacting an attorney (particularly one that specializes in real estate) to help see you through the rental transaction. The lawyer should be able to provide or help draft a rental agreement/contract. Consider any stipulations you want in the paperwork (like late fees, lease terms, payment due dates, etc.) and make sure that the attorney includes those items.

Bottom Line
When a homeowner is having trouble selling his or her home, there are some cases where it may make sense to simply rent out the property while waiting for conditions to change. However, when doing so, owners should do their homework and check going rental rates, prep the home for renters, and make sure they have a binding legal contract.

(Investing in rental property can generate serious income, but be sure to read Tips For The Prospective Landlord to learn some more tips for making the process easier.

Related Articles
  1. Home & Auto

    Tips For The Prospective Landlord

    Investing in rental property can generate serious income, but there's more to it than collecting rent.
  2. Entrepreneurship

    Top 10 Features Of A Profitable Rental Property

    Find out what factors you should weigh when searching for income-producing real estate.
  3. Taxes

    Tax Deductions For Rental Property Owners

    Besides creating ongoing income and capital appreciation, real estate provides deductions that can reduce the income tax on your profits.
  4. Home & Auto

    Simple Ways To Invest In Real Estate

    Owning property isn't always easy, but there are plenty of perks. Find out how to buy in.
  5. Economics

    Who is a Lessor?

    A lessor is the owner of an asset that is leased.
  6. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  7. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  8. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  9. Investing Basics

    3 Alternative Investments the Ultra-Rich Usually Own

    Learn about the ultra rich and what normally comprises their net worth; understand the top three alternative investments usually owned by the ultra rich.
  10. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  4. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  5. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  6. What are examples of typical leasehold improvements?

    Typical leasehold improvements include partitioning a large, open space into smaller, more structured areas such as dressing ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!