There isn’t a word to accurately describe the frustration of being chained to a house that you can’t sell. You might switch realtors for better results, make additional improvements to the house and even lower your asking price. But if your local housing market is at a standstill, or if you can’t compete with the massive number of short sales in your area, selling can take longer than expected.
Some home sellers give up after six months or a year, and learn to love their house again. But if you’ve outgrown your home and you’re ready to move on, another option is available to you.
Your situation isn’t unique, and each year, many property owners become “accidental landlords” and rent our their homes. The idea of keeping and renting out the house may have never entered your mind, and you may be apprehensive with the idea of becoming a landlord. There is definitely a dark side to owning rental property. Yet, you do not need property management skills – or any skills – to own rental property. This may not be the ideal circumstance, but it can work.
Don’t make a hasty move, and don’t let emotions drive your decision. Make sure you understand the pros and cons of owning rental property, and then decide whether being a landlord is worth a new house.
Pros of Becoming a Landlord:
1. Move on with your life sooner.
Most people cannot afford two mortgage payments, and before they can purchase a new home, they need to find a buyer or renter for their existing home. Your home will eventually sell, but why wait six months or longer when you can locate a suitable renter in a few weeks? With another person paying your mortgage each month, this frees up cash to buy another place.
2. Passive income.
Not only will the rent payment cover your mortgage each month, but if you charge slightly more than your actual mortgage amount, you will earn income from your rental property. Let’s say your mortgage payment is $900 a month. Set your rent price at $1,200 and you will pocket $300 in passive income every month. Use this income to start a maintenance fund and defer the cost of rental repairs. But don’t get too excited with the extra cash – you have to pay taxes on this income.
3. Build equity.
Keeping a home as rental property has long-term financial benefits. Rent payments go toward your mortgage, and if you never sell the rental property, you’ll eventually pay off this home loan balance. This coupled with the fact that equity builds as your property appreciates in value increases your net worth. This equity can be used as collateral for loans. Sell the home down the road and proceeds from the sale can provide a comfortable lifestyle when you retire.
Cons of Becoming a Landlord:
1. Maintaining multiple properties.
Repairs are inevitable, and maintenance is the only way to keep your properties in good condition. This takes time and money, and for some, the upkeep of two homes is too demanding. Broken appliances, burst pipes and other issues can zap your extra income, and if you are not profiting from the rental property, you will have to pay these repairs with your own money.
Take a hard look at your finances before you decide to rent out your house. Can you realistically afford the maintenance and repairs on multiple homes? Diligently putting aside cash each month can help cover some extra expenses. But if you are living paycheck-to-paycheck with little disposable cash, being a landlord can break the bank.
2. Risk of two mortgage payments.
You might carefully screen your tenants and only select renters with a good credit history and an impeccable rental background. However, you can’t control what happens in their lives once they’re inside your rental. People lose jobs, get divorce and become sick. This can trigger delinquent payments, and some renters may skip out on the lease agreement. Not the best situation to be in. And if this happens, you are stuck with two mortgages.
Unfortunately, mortgage companies aren’t always sympathetic to landlord issues. As the owner of the property you are responsible for the mortgage payment each month – regardless of whether you have a renter in the home. You will incur late fees if you miss your due date, and if your payment is more than 30 days past due, your lender will report the delinquency to the credit bureaus.
As a rule: always maintain a two or three month cash reserve for all your rental properties. Consider this your “just in case” fund. This fund can cover unexpected repairs and maintenance, as well as pay your mortgage if the renter moves out early and reneges on his lease. This approach is the safest way to be a landlord. It can keep your mortgage in good standing and protect your personal credit score.