Is renting out your home worth it?
Deep in credit card debt, Beth White was anxious to keep her St. Louis home. So she rented it out and began staying with friends.
Five years later, her home rental is finally profitable. "But not by much," says White, a Realtor at the Hermann London Group. Headaches along the way compound losses. Take the time she had to evict a tenant who later trashed her home--taking her appliances and even the medicine cabinet.
"Being a landlord isn't for everyone," she adds. "You must be firm. People take advantage of weakness." These days, White uses a company--Credit Verification Services--to do credit and background checks on potential renters.
Renting out your primary residence isn't a no-brainer. It involves consulting attorneys, accountants and following state rental regulations. On top of that, budgeting prowess and people skills are essential.
Making a profit off renting isn't easy
"Losses accumulate," says Andrew Schwartz, a CPA in Woburn, Mass. The antidote: rentals must stand on their own feet. The mortgage must be low enough so that rental income gives you ample cash flow.
The problem, he adds, is that most people overpaid for their homes. Then rents don't cover the mortgage and other expenses. Uncle Sam won't subsidize these losses, he adds.
Despite these drawbacks, lots of people are renting out their homes these days to try and make money off the growing rental audience. Nearly 38 million U.S. households are renters, according to Harvard's Joint Center for Housing Studies. And over 3 million more renters will be added by 2015.
Homeowner perks disappear
To qualify for either a federal loan modification (HAMP) or refinance (HARP), you must be the owner-occupant of the property. Rental properties don't qualify.
Also, you may be disqualified from certain tax perks. For example, if you rent out your home for more than three years and then try to sell it, you can't claim a capital gains exclusion, says Schwartz.
Treat your home like a business
You must understand all the stresses--both personal and financial--that come with being a landlord, says Paige Holden, a relocation specialist at XONEX.
In general, type A personalities are best suited. Treating your home rental like a business pays off, says Bryan Binkholder, real estate investor and host of The Financial Coach radio show. "If you treat it as anything else, you'll be devastated."
The biggest challenge, Binkholder adds, isn't unexpected expenses, it's dealing with tenants. That's why doing credit checks and screenings prior to renting can pay off in the long run. "We want to believe the best of people," he adds, and that's where landlords fail.
4 rules to becoming a successful landlord
- Check state legal requirements: State rental guidelines vary widely. Some states require you to get a permit for a small fee, says Holden. Others may outline your duties as a landlord. You can locate this information in landlord tenant handbooks, available from your state attorney general's office.
- Hammer out a landlord-tenant agreement: Binkholder suggests using an attorney to draft the agreement. Most contracts on the Web are standard, he says. But quirky rental issues do come up. Say you have a leaky basement. An attorney can include in the contract a clause for keeping everything off the floor, holding the tenant responsible for water damage. Also, you can find sample leases by contacting local real estate investor groups, says Binkholder.
- Notify your insurance company: Homeowners' policies usually cover damage done by renters. But there's a caveat: you must notify them first. The downside is that insurers may end up hiking your premiums. That's what happened to White after she notified her insurer.
- Set aside money for expenses: Fees for renting your home--advertising costs, for example--can add up. Then there are repair bills and other expenses. Holden advises setting aside 10-15 percent of your monthly rental income just for these expenses. "You may not use the money," she says, "but if the oven explodes, you'll have recourse."
Binkholder's parting advice: "Renting out your home can work, or be an absolute nightmare." Your success as a landlord will depend on your personal and financial preparation.
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Constance Gustke is a New York-based journalist who writes about business topics. She was a Fortune reporter, Forbes.com contributor and Worth features editor. Gustke is also a regular contributor to CNBC.
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