If you own your home but your current situation doesn't allow you to afford the payments and you can’t find a less expensive place to live, you may be concerned about losing your property. There are a number of reasons why you'd find yourself in a situation like this, including a slowdown in the economy, changing family dynamics, retirement, or even special circumstances.
The impact of the COVID-19 pandemic and the subsequent financial disruption devastated many homeowners. According to the Mortgage Bankers Association's (MBA) National Delinquency Survey, the mortgage loan delinquency rate on one-to-four-unit residential properties during Q4-2020 decreased to a seasonally adjusted rate of 4.65% of all outstanding loans.
That leaves few options for homeowners on the verge of default. But you can flip the script by renting your home and earn cash while you still retain the title to your home. Is it doable? Sure. Is it easy? Like most big-picture financial housing decisions, not really. But if you know what you’re doing, make sure you plan ahead, and make the right decisions on who lives in your house—and for how much. Figuring out the right rent-your-home scenario may work out for you and your tenant.
- Being a homeowner can be rewarding, but can also be a financial headache with property taxes, mortgage payments, utility bills, and unforeseen repairs.
- If you find yourself falling behind on your payments, consider renting your house temporarily to help cover the costs before moving back into your home.
- Finding an ideal tenant can be the most difficult part, as many renters want more permanence.
- For shorter-term rentals, Airbnb and other home-sharing services can provide access for weekenders to help you cover your costs.
- You may have an easier time renting out your home if it is in a desirable location like near an ocean or the mountains.
High Rental Property Demand
Contrary to what you may think, there’s probably more demand for renting your home than you may think. More renters seek traditional family homes instead of crowded apartments in dense urban areas since the pandemic began. According to the U.S. Census Bureau, the national rental vacancy rate in the first quarter of 2022 was 5.8% compared to 5.6% from the previous quarter.
As demand for affordable housing rises and more people are allowed to continue working remotely, there is a higher demand for rental properties. This is especially true as the supply of housing stock continues to drop in many parts of the U.S. Homeowner vacancy rate during Q1-2022 was 0.8%.
If you own a home by the shore, the mountains, or in a good neighborhood in a popular city or other desirable location, you may find you get competing offers on your home.
Reasons to Lease Out Your Home
So how do you start your home landlord makeover? By deciding whether or not you need to rent your home in the first place. If you end up doing so, you'll need to figure out how to get the job done quickly and efficiently.
Ask yourself this very important question: Do you need to rent your home? The reasons for renting aren’t all that many, but they are important. For instance:
- You need to sell your home, but for some reason, you can’t.
- You are moving away, but only temporarily, and plan on moving back in a year or two.
- You’re an empty nester who wants to downsize and save your family home for your children.
Before renting out your home, make sure you have a place to live once it is rented out. Talk to family and friends, or hunt down bargain hotel stays (if you take part in a short-term rental market) to ensure you don't end up without a roof over your head.
Short-Term Rentals and Pricing
“If you are in a situation where you are unable to make timely payments on your mortgage, you may consider renting out your home for a period of time,” says Samantha Reeves, an executive broker for Veterans United Home Loans. “This may be a good option when two factors are present: Your home would rent for at or more than your mortgage payment, and you were able to find an affordable place to stay.”
According to Reeves, consult a real estate agent or property management company to take a look at comparable rentals in your area to determine how much to charge your tenant(s).
“If you are only looking to rent out the property until you can sell it, you need to ensure the rental contract specifically covers this provision in detail, explaining notice to the renter and a reasonable time frame for moving,” she advises.
Alternatively, Reeves says you could sell the property to an investor, and the renter could stay in the home for the length of the rental agreement with an opportunity to contract with the investor at the end of the rental period.
Landing an Ideal Tenant
The most important step likely is to attract a great tenant to your home, one who pays rent on time, keeps the property clean, and doesn’t attract trouble like parties, drugs, unruly pets, and overcrowding. Start spreading the net by asking friends, family, or co-workers for leads to a reliable tenant.
Run an Ad
Put an ad in your local paper(s) and Craigslist. Make sure you describe the property in as much detail as possible, including the location, surrounding amenities, number of rooms, bathrooms, facilities (laundry, air conditioning, etc.), access to public transit and shopping, appliances, and storage. Be sure to include photos as well. Include your monthly rental fee and list if you’re paying for services like utilities, water, and trash removal. It's also important to highlight the length of the term, whether it's short- or long-term. Be sure to let applicants know you’ll be running a credit check, which should save you the time of dealing with renters with bad credit histories.
Create a thorough rental application form, which spells out exactly what you need to know, including:
- Previous landlords and contact information and reasons for leaving previous rental units
- Personal references
- Names of proposed occupants
- Social Security number (for the credit check)
- Criminal record
Run a Credit Check and Check References
You can either hire a reputable rental agency to run a credit check for you (they’ll charge you the equivalent of one month’s rent for helping you rent your home) or you can run the credit check yourself.
If you use an agency, vet it first with the Better Business Bureau (BBB) to see if there is a history of landlord complaints about the firm. If you run the credit check yourself, go straight to one of the three major consumer credit rating companies (Experian, TransUnion, and Equifax) or turn to a tenant screening service.
Do not sign on the bottom line until you have talked to previous landlords and employers. Validate employment dates and confirm that the tenant has a history of steady, on-time payments.
Set Reasonable But Firm Lease Terms
Always work with a lease and know that laws vary from state to state. When creating your rental agreement, make sure to include the following items:
- Lease term: A month-to-month lease works best if you want to eventually sell your property. If selling is not your goal, aim for a year-long lease.
- Security deposit: First and last month’s rent is advised.
- Rental due date: First of the month is advised to ensure you can make your mortgage payment.
- Repair responsibilities: Spell out who will pay for repairs, such as appliances, plumbing, light fixtures, etc.
- Landscaping: Determine who will pay for routine property maintenance, such as trash hauling or lawn care.
- List of tenants: The names of each tenant living in your home.
- Good conduct clause: A list of behavior requirements, including noise levels, neighborly conduct, and smoking.
- Pet policies: Pets may cause disruption or damage. While you may advertise a no-pet policy, you cannot deny housing to anyone who requires a support animal. You can't ask for details about someone's disability but you are able to ask for proof that the animal is prescribed by a medical professional. And remember, you may be able to charge a damage deposit for the animal but you can't charge pet rent.
- Eviction terms: List the reasons for which you’d evict the tenant, such as not paying the rent or damaging the property.
Housing discrimination is illegal. Everyone has the right to fair housing, which means you cannot deny housing to anyone based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age. When you write your ad, describe the rental property—not the tenant. Avoid language like "adults only," "perfect for students," or "require someone with working income." Statements like these can be deemed discriminatory and you may be subject to fines.
After You Lease the Home
While your home is occupied, you can build a savings program to catch up on your mortgage payments with the extra rental income you have coming in and start on an aggressive debt-reduction plan. If you're renting out your home because you need the cash, now is the time to stop using your credit card, create a tight budget, and take on part-time work, if needed.
Consider sharing a living space with a roommate or family member. Alternatively, you could rent a small apartment or condo, depending on your budget. If you're retired or telecommute for your job (another big trend over the past half-decade), consider moving to a less-expensive city or town or to a state like Florida or Texas that has no income taxes.
For even shorter leases, Airbnb (ABNB) is an online marketplace that connects people who want to rent out their homes with people looking for accommodations in that locale. It currently covers 100,000 cities and 220 countries worldwide. Airbnb hosts can choose to rent out their entire property or just a bedroom or two and share the space with visitors.
For hosts, participating in Airbnb is a way to earn some income from their property, but with the risk, the guest might damage it. For guests, the advantage can be relatively inexpensive accommodations, but with the risk that the property won't be as appealing as the listing made it seem.
The growing sharing economy offers ways to make extra income that wasn’t available even a few years ago. Many of these opportunities require you to be comfortable navigating unclear local laws, sharing your most valuable possessions with strangers, and taking on additional legal liability. Airbnb is no exception, but if you’re willing to take on the risks, you could make thousands of extra dollars a year.
Do I Need to Check With My Lender Before Leasing Out My Home?
Some financial institutions require that you live in your home for at least 12 months before you rent it out to anyone else. Others place limits on how the property can be used—they may only give you a mortgage for an owner-occupied property. Check your mortgage agreement to see if there are any restrictions or contact your lender directly if you are unsure of how to proceed.
How Do I Write an Ad for My Rental?
There are a few rules to follow if you want to write the perfect ad that will generate a lot of interest. Stick to the basics about the property itself with details like the rental amount, the lease terms (short- or long-term), the number of bedrooms and bathrooms, appliances, facilities (gym, pool, laundry), and neighboring amenities. Does the area have walking trails? Is your property in a bustling city center? Is the property accessible? These are other details you may want to add.
Be sure to post your ad in a few different places, such as Craigslist, a Facebook page, or a local rental page. And don't forget, photos can boost your ad to the top of people's lists.
Stay away from any language that may be deemed discriminatory, such as a preference for a certain group.
What Are the Tax Implications for Leasing Out My Home?
Any money you earn from your rental must be reported to the Internal Revenue Service (IRS) as ordinary income. Amounts are inputted on your annual tax return using Schedule E. Keep in mind that renting out your home can increase your gross income, which means your tax liability may increase.
The Bottom Line
Renting your own home can work out fine if you choose the right tenant. You’ll keep your home, have someone else pay for it (or at least most of the home), and you can leverage the lease to move back in when you like. That’s a good deal, but only if you follow through on the tips listed above.