Written by Blanche Evans
Your housing market may be heating up, tempting you to sell your home. But you may not be quite ready to let it go, or, when you run the numbers, you may not be able to sell it for as much of a profit as you may want.
Have you considered leasing your home instead? You still retain ownership, giving you the opportunity to buy another home. And thanks to some generous tax rules, you can own your home for five years, occupy the home for two years, rent it up to three years and then sell it without paying capital gains taxes.
When markets improve, often there aren’t enough homes available for purchase in the areas where families want to live. Relocating families may have a home to sell in another area or they may simply want to try out your neighborhood before buying. They want to spend a year settling in and learning about the area.
The market may be good but is it a good time for you financially? The ideal time to lease your home is if you can rent it for more than you’re paying in mortgage, taxes and insurance. You also need some savings that will cover months when the home isn’t rented, as well as repairs that may come up.
If you want to buy another home, the debt on the home you already own won’t count against you as much as you may think, and especially if you already have the home leased. The lender may add a couple months of mortgage debt to your overall debt picture to be on the safe side because many properties don’t rent right away or there may be lag-time between renters. With good to great credit, you can get a low down-payment loan that doesn’t require all your cash.
To help you decide if leasing is a good idea, talk with a real estate professional who enjoys working with the rental market such as an agent who is also a property manager. He or she will have comparables for other rentals in the area, so you’ll know how good the market is for homes like yours and how much you can expect to get for your home.
You’ll have to get your home ready to rent, just as you would to show it to a buyer. The better the condition, finishes and amenities your home has to offer, the more rent you can ask, within reason.
A property management professional can handle the whole transaction for you, including showing your home and qualifying the renter with credit and criminal checks. Typically, this will cost you one month’s rent. If you think you won’t be in a position to handle problems that may come up yourself, you can also hire the professional to manage your property.
As the owner, you can decide whether or not to allow pets, but you can’t refuse to rent to someone because of race, color, national origin, religion, sex, familial status or handicap. You can decline a renter who does not have the credit rating, earnings, deposit money, or references that you require for a good renter.
Your real estate broker can perform a number of background checks for you on potential renters including credit scores, rental and eviction history, criminal and sex offender checks, motor vehicle checks, and employment verification. If you decide to rent your home yourself, there are companies online that specialize in background checks for landlords.
Your rental agreement should include penalties for late payments, as well as outline clear terms — length of the lease, possession date for move-in; terms for extending the lease, fees for late payments, pets or no pets and so on. You need to be very clear about what the renter is responsible for doing and what you will do as the owner. This will prevent disputes over who pays utilities, who mows the lawn and who calls the plumber.
Make sure the renter also pays one month’s deposit so you can cover the costs of cleaning, repainting and other make-ready steps. Last, make sure your renter has renter’s insurance.