The Pros and Cons of Renting Your Home

If your current home is located in a less-than-desirable area, or you owe more on the house than it's worth, renting out your home to purchase another may be a feasible alternative. Renting out your current house may be your best option, rather than selling the house for a loss or entering into a short sale agreement. As time passes, the value of the home should improve, which will hopefully eliminate taking a loss when finally selling the house. There are many benefits to renting out your house, but there are also pitfalls. The benefits of becoming a landlord include: a better monthly cash flow from the rent you receive, possible appreciation, and significant tax benefits. The Internal Revenue Service (IRS), views rental property as a business; therefore, you will pay taxes only on the profit made from renting the property. The expenses that you incur, such as: property taxes, interest paid on the mortgage lien on the property, repairs, maintenance, cleaning, utilities, insurance, and a variety of other expenses can be written off on your taxes. In addition, you are allowed to depreciate the rental property over 27 1/2 years. These deductions may greatly reduce or eliminate any profit shown on the rental property.

One significant drawback to renting out your current house to purchase another property is that most lenders will not use rental income on a house you currently live in unless you have 25 to 30% equity in the house. Lenders will determine the value by an appraisal or automated valuation report. Therefore, you cannot use the rental income to offset the mortgage payment, even if you rent out the property (unless you have enough equity in the property).

There are other disadvantages to renting out your current house to move to another. These include: possible damage to the property from the tenant, expense to hire a property manager if you are unable to handle calls and issues from the tenants, and the possibility that you may have tenants that stop paying the rent. Eviction laws vary by state and municipality; so you may not receive rent on the property for months.

If you decide to rent out your property there are a few steps you should take to educate yourself on the responsibilities of becoming a landlord and what the projected rental income should be for the property. The following are steps to help you prepare to become a landlord.

1. Clean and Prepare - If you choose to rent out your house, you should clean and repair your house to make it more appealing to potential tenants. The appliances and washer and dryer should be in working condition.

2. Maintenance - You will need to be prepared to maintain and handle any repairs that may occur in the property. It will be your responsibility to handle any issues with the property as well as collect the rent.

3. Screen Potential Tenants - You will need to thoroughly investigate any potential tenants. You should at a minimum require any interested parties to fill out an application to rent. This should include their recent employment, credit, past residence, and income. You should pull a credit report, verify their employment, run a criminal background check, and if they have rented before, you should contact their previous landlord for a reference.

If you decide renting out your current house is the best option, you should also check with your city to verify you are following any laws pertaining to rental property. Many cities require annual inspections for rental properties. There are many benefits as well as pitfalls to becoming a landlord; it is always in your best interest to thoroughly investigate your obligations and any potential renter(s) prior to entering into any legal agreement.

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