How To Rent Your Home So You Can Pay Your Mortgage
If you own your home, but temporarily can’t afford the payments, and can’t a find cheaper place to live, you’re likely worried about losing your home.
The good news is that only about 5% of Americans were delinquent on their mortgage payments in 2013, compared to 30% in mid-2012. But that still represents millions of homeowners who can’t cover their mortgage obligation, can’t refinance (Fannie Mae says only 28% of delinquent homeowners have even tried to refinance in the past three years, given their less-than-stellar credit situation.)
(For more information on buying a home, see: A Guide to Buying a House in the U.S.)
That leaves few options for behind-on-their payments homeowners.
But you can flip the script by renting your own home, and earn cash while you still retain the title to your own 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, plan ahead, and make the right decisions on who lives in your house (and for how much), a “rent your home” scenario can work out fine, for you and your tenant.
For starters, there’s likely more demand for renting your home than you might think.
According to recent data from the MacArthur Foundation, 77% of Americans still believe the U.S. is in an economic crisis, and 61% say that renters can be just as happy as homeowners, as it pertains to the American Dream.
Another 57% of U.S. consumers say “buying has become less appealing,” and 54% say that “renting has become more appealing” than it was before.
Where to Begin
So how do you start your home landlord makeover? By deciding whether or not you need to rent your home in the first place. And if so, how to get the job done quickly and efficiently:
Do you really need to rent your home? – The reasons for renting your home aren’t all that many, but they are important:
- You need to sell your home, but for some reason you can’t.
- You are moving away, but only temporarily (for a new job, for example) but plan on moving back to the area in a year or two.
- You’re an empty nester who wants to downsize, but want to save your family home for your children someday.
"One in five of our members move every year. In today's real estate market, we know it's more difficult for our members to sell their homes," says Christopher Villa, senior product manager for rental home insurance for United Services Automobile Association (USAA).
"When members can't sell and decide to rent their home out, it's vital that they take action to educate themselves on property management basics," he adds.
Villa’s not alone in that outlook – prospective home-renters really need to do their research.
“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,” Samantha Reeves, a senior mortgage analyst 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.”
Reeves says that to determine the rental price of your property, consult directly with a real estate agent or property management company to take a look at comparable rentals in your area. “If you are only looking to rent out the property until you are able to 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, 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,” Reeves adds.
Steps to Follow
Land an ideal tenant
It’s likely that the most important step is to attract a great tenant to your home, one who pays rent on time, keeps the property clean, and doesn’t attract trouble to your home (i.e. 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. Specify what you’re looking for (e.g. no pets, no smoker, no more than three tenants, for example.) Include your monthly rental fee, and list if you’re paying for services like utilities, water and trash removal. Also, let the applicants know you’ll be running a credit check – that should save you the time of dealing with renters with bad credit histories.
Create a thorough rental application form - On the form, spell out exactly what you need to know, including:
- History of landlords (along with phone or email contact information). Ask for reasons for leaving previous rental units.
- Names of proposed occupants
- Social Security number (for the credit check)
- Criminal record
Run a credit check
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 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, you can turn to a tenant screening service such as TenantScreeningReport.com, which offers screening services starting at $24.95.
Make sure to check references
Don’t 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 lease laws change 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: Maybe you’re OK with cats but don’t want barking dogs. Or maybe you want to keep all animals out of your home. The choice is yours, but be sure you’re clear so there’s no room for tenants to misinterpret your requirements.
- Eviction terms: List the reasons for which you’d evict the tenant, such as not paying the rent or damaging the property.
Are You the Tenant You’ve Been Looking For?
One last option where you can rent your own home, and still make out financially, is to rent it to yourself.
“Some of our asset protection clients put their homes into limited liability corporations (LLCs) and then rent them to themselves from the LLCs,” says Diedre Braverman, an attorney in asset protection law at Braverman Law Group in Boulder, Colorado. “That allows homeowners to rent their home through their business, and no one can take the home away from them should they get sued.”
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 (family-shared housing is one of the biggest trends coming out of the Great Recession.) 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 state taxes.
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.