To Sell or Rent?
Yes, many homeowners have talked about the possibility of renting if their home doesn’t sell, especially if it doesn’t sell for what the seller WANTS out of it. You are not alone in this theory. Many think…. “I will just rent it, because next year the market will be better and I can get a higher price”, or “At least renters will allow me to pay my mortgage payment each month. It will not cost me anything.”
BUT, what most sellers don’t think about is there are many more costs involved with a home than just the mortgage. There is insurance, which is higher for rental property, there are taxes, and there are maintenance costs! And many headaches are involved with dealing with all of these when you don’t even live there. I’m talking about upkeep, maintenance, repairs, remodeling, etc. Most of the time, renting ends up costing the homeowner more than the price drop needed to sell the home now, because of all of the above. Here are some topics to think about:
Maintenance Costs:
As the owner still, you are responsible for all upkeep and maintenance on the property even while renting. When the HVAC unit breaks, you the owner are responsible for the cost of repairing it. Cost could be thousands of dollars. When anything breaks over the course of the lease period, the owner must legally cover the costs of any repairs.
Market Value:
Many sellers think that if they wait 1 year, the market must be much higher then so they can sell their house for more money. These sellers are stuck in 2005. No real estate market has ever rebounded as fast as it tanked. Our market is no different, and actually worst. In Arkansas, a 3-5% gain in home prices would be excellent. Doing that annually, would take a few years to recover from the 10-20% decrease we experienced over the past few years.
As for the market, it will not rebound enough, any time soon. The housing market always declines faster than it rebounds. I have been hearing results that the market in Central Arkansas is just now reaching its bottom and may take years to rebound. We are always behind the times in Arkansas and when the rest of the country dropped so severely back in 2005-2006, we were still ok. Now those markets are starting to rebound a little, but Little Rock is still slow. In order for you to realize a positive gain, either the values of homes must come up OR the inventory go down. Neither of those will happen in the next year. You also risk the price of homes going down and the inventory increasing even more, which further depreciates the home. You can sell it now for less than what you want, but still a break even for what you paid for the home, or lease it for a few years, and still possibly sell for a greater loss down the road. If going to lease to try and recoup, or pay for other property, you should be planning on 3-5 years of renting. That should give you time for the market to rebound.
Tenants damage property they rent:
I know, you think your tenants are great, but it isn’t their house, so they will not protect it like you would. Yes, there are tenants out there who will tear up a home, but most of them are just negligent when it comes to protecting it. Guaranteed that when the tenants leave, you the owner will have carpet to replace, walls to paint, doors to fix, windows to repair, etc, etc, etc.
What about vacancy costs?:
So you think that your home will be occupied continuously? Doubtful. Are you willing to risk making those extra house payments, utility invoices, and taxes during the months, yes months, that it sits empty. Even if you get a good tenant who stays a year, you better understand that at the end of their lease, the home may be empty for a month or two while trying to locate a new tenant….oh yeah, don’t forget about the damage from above that you will have to fix while it is empty. Ouch!
Will renting keep me from buying?:
How much equity are you likely to lose from selling in a down market versus buying in a down market? If renting the home and keeping the mortgage in your name keeps you from buying currently in the down market, you may be taking a ‘double hit’! You will experience the additional costs mentioned above, plus you aren’t taking advantage of being able to buy your next home while the market and interest rates are low. Without getting it off your books, you may be losing the opportunity to buy your next home at a great discount and realize a large gain in equity from buying in our down market, especially with interest rates below 5%. That rate is incredible. This will probably never happen again in our lifetime. With prices low and interest rates low, you can buy your next house for much less per month, or buy a bigger house for the same payment amount. It might be worth it to "take the hit" right now.
Other things to consider:
- Are you willing to become a hands-on landlord? Phone calls in the night, screaming tenants, understanding renter's legal rights (trust me, they have more than the homeowner), maintenance, and pre-screening candidates are just some of the issues that will arise. It’s a headache, but if you decide to rent, then you might consider using a full service property management company that can handle all of this.
- Another question you should ask is how will an investment property affect my tax burden? Rental property grants the investor a number of tax breaks, something that may or may not be worth the hassle of holding on to that property.
- Legal advice is one thing people avoid because of its expense...but if you are planning on using this opportunity to invest in real estate, don't miss this step. We have become a litigious nation. You need educate yourself and protect your assets. You will sleep better at night.
All of this comes down to the fact, that most of the time, it is better for the seller to take a small ‘hit’ on the current home by reducing the price and selling the home to get the burden off of your family. It is really a decision of (1) take the hit now and move on or (2) deal with the headache and still take the hit later, and probably at a higher cost.
Please don’t take this as a ‘scare tactic’. I’ve had this conversation with many sellers over the past couple of years, and just want you to know the true situation. The options are to lower the price to get rid of the debt and hassle, or rent it out. You definitely don’t get rid of the hassle with renting, and the debt continues to increase…..not only the mortgage but the bills from repairs, remodeling, etc.
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