Should I Rent My House: The Accidental Landlord

As you probably know if you are reading blogs about Lansing real estate, many homeowners in the area are upsidedown on their homes, meaning they owe more than the property could sell for in today’s market. One option for a homeowner who is upsidedown is to rent their current property out and move on to a new home themselves. This can be a great option for the right person, but here are some pros and cons to consider:

Pros:
1) A way to move on without having to sell into a buyer’s market and take less than you would like on your home or come up with a huge sum of money all at once.
2) Loss on taxes, If you sell your home for a loss you can not take the loss on your taxes since it is a personal loss, however, once it is a rental you can begin to take the loss (always check with your CPA for tax related questions)
3) Principal Reduction, over time your new tenant will continue to pay your mortgage and reduce the principal balance

Cons:
1) Ongoing maintenance. If your roof, furnace, water heater, etc. needs to be replaced in the next several years, don’t forget that you will have to budget for these big-ticket expenses when you are figuring out your monthly costs
2) Monthly Shortage: many people are in a situation where the rent will not cover the mortgage payments, let alone ongoing maintenance. You MUST be in a financially sound position where you will be able to cover a vacancy and/or monthly shortfall. If you need the security deposit to pay your mortgage, becoming a landlord may not be the best option for you. For financially strapped homeowners, a short sale may be a better option (see previous post)
3) Property taxes will go up. In Michigan if you do not live in a home you own, you must pay a higher property tax rate. Check with your local municipality to see how your taxes would change.
4) Wear and tear on property. When you do decide the time is right to sell the property, remember that you may have to invest some additional money into the home to get it ready for sale after years of having tenants in the property
5) Tenants and toilets. Becoming a landlord can mean midnight calls that the sink is leaking. If you are not in town you will need to figure out who you will be able to call for issues with the property.

In the end, renting a home may be a great option for some homeowners and not for others. Make sure to discuss all possible scenarios before you make a decision.

Photo Credit: http://www.flickr.com/photos/joeltelling/309321879/

Investment Properties

There are lots of reasons that people decide to invest in real estate. I am going to highlight a few, including why I decided to get involved with rental property. This post will focus on 1 to 4 family homes.

1) Cash Flow – The current market in Lansing  provides truely remarkable opportunities for you to create a monthly cash flow by owning real estate.  In that last year I have sold clients (almost) move in ready homes for as low at $13,500.  When you consider that these homes can be rented for about $550 per month you can see how the returns begin to look very nice.  In fact, at the time this post was published there were 508 homes listed for sale for less than $50,000 in the Greater Lansing area. 

2) Principal reduction – One thing that every landlord can thank their tenants for is paying the mortgage. If you have leveraged the property through financing, you will increase your overall return on investment and you tenants will pay the principal down each and every month.

3) Depreciation – You are allowed to depreciate residential real estate for tax purposes over 27.5 years. Check with your accountant for the details, but this can add up to big savings at tax time, especially for those in higher tax brackets.

4) Appreciation/Hedge against inflation – Okay, so clearly real estate appreciation has not been at the forefront of benefits to owing real estate in the last few years. For those looking for long term investment gains, however, the clouds begin to clear a bit.  Historically, real estate over the long term appreciates between 3-4%.  In addition, if inflation gets going in the next couple of years (due to certain governments printing large amounts of cash…I’m sure there are other blogs about this) durable goods tend to be a good way to hedge against inflation.

5) An investment you can see and touch – Sure, I have an IRA.  We owe stocks.  But the thing I like best about real estate is that I have total control over my investment, not some guy on Wall Street.  I decided where to buy property.  I decide who I rent the proeprty to.  I decide what improvements to make, etc.