October 14, 2009 / 4:35 PM / 10 years ago

PersonalFinance: Homeowners as landlords

(Linda Stern is a freelance writer. Any opinions in the column are hers. You can follow Linda Stern's financial notes on Twitter at www.twitter.com/lindastern)

By Linda Stern

WASHINGTON (Reuters) - Many homeowners are turning into landlords — reluctantly sometimes, when they have to move but cannot sell their homes.

“This is happening more and more for multiple reasons,” says June Walbert, an advisor with financial services firm USAA. “If someone has to move... and they can’t sell their home for what they owe, and aren’t prepared to pull the difference out of their pockets, they think about being a landlord.”

USAA has seen sales of its rental home insurance policies, bought by homeowners renting out their homes, rise 14 percent between January and July, a strong indication that renting out is becoming a more popular choice.

It’s a strategy that is definitely worth considering. A couple of years of rental income can help your family through tough times, and could also help you keep a depreciated house until it is worth more. But it’s not a sure thing, and there are risks in turning your home over to strangers.

Here’s a look at some of the key considerations.

— There are tax benefits to you. If you sell your house for less than you paid for it and less than you owe, you’ll have to bring cash to closing to pay off your loan. And you won’t be able to deduct your capital loss. But if you hang onto the home and rent it out, you can deduct all of your expenses related to the house, including repairs, rental advertising, travel to care for the home, and a portion of the home’s value every year. You will have to declare your rental income as income, but it’s not unusual for the expense deductions to be bigger than the rental income. You should set up a separate checking account for your rental property.

— It may not happen instantly. Because so many people are becoming landlords, it has become a renters’ market. In the third quarter of 2009, U.S. apartment vacancies reached 7.8 percent, their highest level since 1986, according to research firm Reis Inc. That means it may take some time to rent out your home, and you should expect rent-less months, initially and in-between tenants as well. Prepare for that and other unexpected expenses, by keeping six months of expenses set aside for that property, counsels Walbert.

— Getting a good tenant is the most important part of the transaction. Having a deadbeat or property-damaging troublemaker in your house is worse than having it remain empty. So do your homework before allowing someone to move into your home. To properly vet a potential renter, take all of these steps: (1) ask them to provide their credit report; (2) do a criminal background check; (3) check their references; (4) verify their employment and (5) meet them and feel comfortable with them. You can hire a rental agent to handle that for you, but expect to pay at least the first month’s rent for the service.

-- You can rent to a company instead of a person. If your home is near a university or big corporation, or is located in a popular business-travel destination, you may be able to get higher rents and a smoother experience by renting to the organization, so it can house short-term visitors. If you're willing to put more work into it yourself, you can rent your home out at higher rates for shorter durations to business and international travelers. One web-based listing service that caters to this market is Corporate Housing by Owner (here).

— Get the right coverage. Once you move out and a renter moves in, you can trade in your homeowners policy for what’s called a rental home insurance policy. They are actually cheaper than homeowners policies, because they don’t cover the items inside the home. That’s a good reason to require your tenants to purchase renters insurance — it will cover their belongings in case there is a fire or if they are stolen.

editing by Gunna Dickson

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