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

    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.
  2. Entrepreneurship

    Top 10 Features Of a Profitable Rental Property

    Find out which factors you should weigh when searching for income-producing real estate.
  3. Home & Auto

    Tips For The Prospective Landlord

    Investing in rental property can generate serious income, but there's more to it than collecting rent.
  4. 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.
  5. Credit & Loans

    New Rules May Make It Easier to Get a Mortgage

    Fannie Mae and Freddie Mac have come to terms with lenders on how to solve mortgage disputes. This could be good news for people with lower credit ratings.
  6. Retirement

    Best Mortgage Companies Friendly to Retirees

    If you’re no longer in the workforce and need a loan to buy a home, which companies are the most welcoming? Plus, good news about qualifying for a loan.
  7. Credit & Loans

    Don't Get Overcharged for Your Mortgage

    Don't pay more for a mortgage than necessary. Here’s a quick look at the different categories and how to be sure you're getting the best deal.
  8. Credit & Loans

    What is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  9. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  10. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  3. Do FHA loans require escrow accounts?

    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
  4. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  5. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  6. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center