When homeowners suddenly have to relocate, they face the dilemma of
whether to sell their home or keep it as an investment property. The
recent nationwide drop in housing values complicates the decision.
Homeowners should weigh several factors before deciding whether to sell
now or rent and wait for the market to recover, experts say.
"Relocating homeowners need to shift their thinking and recognize that the
property is no longer their home; it is an investment," says Joseph
Himali, principal broker of Best Address Real Estate in Washington, D.C.
"The decision to sell or rent should depend on whether keeping the home is
the best use of their investment dollars."
What's your home worth?
rent it out.
1. How much equity do you have? Homeowners with significant equity
should sell, unless their home is a desirable rental and they want to take
on the challenges of being a landlord, says Diane Rule-Enos, a registered
financial consultant with The Patriot Financial Group in Beverly, Mass.
"Even if you have to sell at a price that is lower than what it was worth
a few years ago, if you have equity, it is a much less risky choice to
sell," Rule-Enos says. "The higher-risk decision is to deal with renters
who may not pay the rent and who may damage the property." Real-estate expert and author Robert Irwin, who lives in California, takes
the opposite view. "Homeowners with significant equity usually have lower mortgage payments,
so they are more likely to have positive cash flow when renting the
property," he says.
For homeowners who owe more on their mortgage than their home is worth or
for those with little equity, the decision to sell depends first on
whether they have cash to bring to settlement. If not, they can attempt to
negotiate a short sale with the lender or hold onto the property and hope
its value will increase.
2. What's the local market prognosis? Irwin recommends that
homeowners ask a real-estate agent about local market trends and research
home values online.
"Homeowners should make the calculation to determine how long it will take
to reach the break-even point in terms of gaining enough value to make a
profitable sale," Irwin says. "That calculation should be made on as local
an estimate as possible."
Irwin says homeowners should look past national and statewide trends and
focus on the health of their neighborhood's housing market.
"Some areas are already increasing in value by 5% or 6%, while others will
take years to see positive price improvements," he says.
Himali says employment is the primary driver of real estate. In areas
where employment is steady, housing likely has stabilized.
3. What's the state of the rental market? Irwin recommends
consulting with a real-estate agent who specializes in rentals to estimate
rental rates and how long it will take to find a qualified renter.
Homeowners should know that rent is based on market rates, not the amount
they need to cover their mortgage payments.
"Homeowners who choose to rent need to be financially prepared for the
possibility of negative cash flow, vacancies and the chance that the
renters will stop paying the rent," Rule-Enos says. 4. What are the costs of owning investment property? Owners who
become investors must continue paying principal and interest on their
mortgage, property taxes, homeowners insurance, homeowners association
fees, and maintenance and repair costs.
Read: What will it cost to maintain that home?
Homeowners who hire a property manager must weigh an additional expense.
Himali and Irwin estimate property managers charge 8% to 12% of the gross
monthly rent.
"The first calculation to include should be a fee for a property manager,
because the last thing anyone wants is to have to be on constant call for
maintenance issues, especially if they are not local," Himali says.
Of course, many of these costs are tax-deductible for landlords. Owning a
home as an investment property changes owners' tax liability in ways that
may help or hurt them. Talk to a tax professional for more guidance. 5. Are you ready to be a landlord? Irwin says the emotional cost of
being a landlord includes handling tenant complaints, maintenance problems
and even the possibility of eviction. The application process should
include a background check by the landlord.
"Landlord-tenant laws vary from state to state, so it's very important to
either hire a professional who knows the laws or to make sure you have a
thorough knowledge yourself," Himali says.
In the final analysis, homeowners must weigh the emotional and financial
costs of being a landlord against the potential for profit. A real-estate
agent can create a statement of estimated net profit or loss based on the
potential sales price. MSN Real Estate By Michele Lerner of Bankrate.com
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