Day: June 10, 2014



There has been a lot written about how buying a home is less expensive than renting one in most parts of the country. Rents are skyrocketing and homes are still at great prices. These two situations are also causing some sellers to consider renting their home instead of selling it. After all, a homeowner can get great rental income now and perhaps wait until house values increase even further before selling.

This logic makes sense in some cases. There is a strong belief that residential real estate is a great investment right now. However, if you have no desire to actually become an educated investor in this sector, you may be headed for more trouble than you were looking for.

Before renting your home, you should answer the following questions to make sure this is the right course of action for you and your family. The most important question is your motivation for renting.
Do you wish to rent your house now because you think it will be worth more in a few years? Is that realistic? If you over paid for a house a few years ago but the house is in great condition and the floor plan works for today’s buyer, than rent it. You will probably make some money after you cover the monthly expenses. Do you want to rent for an emotional reason? Maybe you just want to try out a new lifestyle such as living in the city or maybe you’re not sure if the suburbs are what you want. If you can afford this option than by all means go for it. This option works best if you can afford to buy a new home without selling your current home. Why? If you are considering renting because you NEED a certain amount of money and are hoping a rising market will add value, you must be honest with yourself. Is this home going to rise in value ENOUGH to fulfill and fund the next dream? Why isn’t your current house selling? Other than the price the most obvious reason homes are selling for less money is an obsolete floor plan. A functionally obsolete home is described as:

An original house in an older part of town that has two bedrooms and one bathroom could be considered functionally obsolete if all the other original homes in the area are torn down over the years and replaced with five bedroom, three bathroom houses. Because the old house does not have the features that most modern buyers want, it is said to be functionally obsolete, even if it is still in good condition and is perfectly livable.

As another example, many home entertainment centers became functionally obsolete as flat-panel televisions replaced bulky analog televisions. The old entertainment centers were too deep to accommodate the new, thin televisions.

If your floor plan is obsolete today it will be obsolete next year also! If you wait 20 years and we have a new generation of buyers who will ask why did those people take down all those walls, maybe they will want your house. Every house is salable …. The question is always at what price. A wise person once said to me that price melts away objections and that is the truth. When a house is not up to a buyer’s standards they mentally deduct from the price of the house so they can make those changes, if they are up to making changes. Buyers’s pay a premium for a renovated house while a house that seems antiquated will sell at a discount. As brokers, we often ask ourselves why sellers spent so much money renovating and they didn’t fix the floor plan. Sellers when you are looking for a new home, honestly evaluate what you are looking for. Do you want to do work? Do you desire the open floor plan? Do you want a dedicated home office? Do you want a living room and a dining room and a family room? So if you decide to rent ask yourself these questions.

What happens when the tenant says they can’t afford to pay the rent this month because of more pressing obligations? (This happens most often during holiday season and back-to-school time when families with children have extra expenses).

Because of the economy, many homeowners cannot make their mortgage payment. What percentage of tenants do you think cannot afford to pay their rent?

Have you interviewed experienced eviction attorneys in case a challenge does arise?

Have you talked to your insurance company about a possible increase in premiums as liability is greater in a non-owner occupied home?

Will you allow pets? Cats? Dogs? How big a dog?

How will you actually collect the rent? By mail? In person?

Repairs are part of being a landlord. Who will take tenant calls when necessary repairs come up?

Do you have a list of craftspeople readily available to handle these repairs?

How often will you do a physical inspection of the property?

Will you alert your current neighbors that you are renting the house?

Bottom Line

Again, renting out residential real estate is historically a great investment. However, it is not without its challenges. Make sure you have decided to rent the house because you want to be an investor, not because you are hoping to get a few extra dollars by postponing a sale.