If you need to move out of your current home but can’t sell it due to market factors, you have another option. You can rent your house out until you can eventually sell it. There are advantages and disadvantages when renting out your house, but depending on your circumstances it could work to your overall benefit.
Advantages of Renting Out Your House if You Can’t Sell It
If you have to move, and can’t sell your house, you can have two basic problems to overcome: trapped home equity and a lingering house payment. Renting out your home won’t help the equity situation, but it can cure the payment issue.
1. It will eliminate the double house payment trap.
Mortgage lenders will not ignore the payment on your old house based on a lease unless you have a proven history as a landlord. But if you can qualify for your new mortgage using the payment on both houses, renting out your previous home will at least relieve you of the double house payment trap.
If your old home is located in a market where it will take months (or longer) to sell a home, having a tenant will give you staying power. Since the rent payment will cancel out the house payment, you’ll be able to take as much time as you need to sell the property at the price you want.
2. It may be the only option in a weak housing market.
If you’re in a market where it can take a year or more to sell a home, you’ll have to dig in for the long run. A rental will help you to do that.
3. It’s often better to have someone in a property.
An empty house could be a target for thieves or vandals, or even a home for squatters. These outcomes can be even more likely if the move to another home will take you to another city or state.
By having the property occupied by a tenant, these outcomes largely disappear. In addition, the tenant will be there to maintain the home, saving you the expense of having to pay for a lawn service and other vendors necessary to keep a vacant property fresh and clean.
4. It may open up the possibility of a lease option.
A lease/purchase option is a back door way to sell a home. In a buyer’s market, where qualified buyers are hard to find, a tenant who has the option to buy the property could be a buyer in waiting.
A tenant is a natural party to buy a home because they already live on the property. Once there and settled in, they may be more motivated to make a serious offer on the property than a person unfamiliar with the home.
Lease/purchase agreements usually come with a large upfront deposit that will either be credited toward the tenant/buyer’s down payment on purchase, or forfeited to the landlord – you in this case – in the event the tenant chooses not to buy the home. It also has a specified option period of one year, two years or any other term you agree on, that will allow the tenant to prepare for the purchase. With this option period, a tenant unqualified to buy the home upon occupancy, may be fully qualified before the option period ends.
Disadvantages of Renting Out Your House if You Can’t Sell It
Despite the advantages of renting out your current home, it’s not without it’s downsides.
1. If you need the home equity, renting may not be an option.
Though renting out your current home might cancel out the house payment on it, the one thing it won’t do is give you the full equity in the property. Home equity lines of credit are not usually available for properties that are listed for sale, or have been anytime recently. If you absolutely have to have the equity in your current home, selling the house may be the only reasonable option.
If you can obtain the cash for the down payment on your new home from other sources, renting out the home may still be an option.
2. Having a tenant could make it harder to sell the home.
It’s generally easier to sell an unoccupied property. The house will be empty and easier to clean and to repair.
In addition, since a tenant has no interest in having their home sold, they may be uncooperative in the sales process. As the occupants of the home, they may make it difficult for the home to be shown to prospective buyers. And they may not maintain the house in a condition that will be advantageous for a sale.
One way to get around tenant resistance may be to offer the tenant a cash incentive on the sale of the home. The incentive could be on a sliding scale, starting on the high side if the house is sold within, say, 90 days, then declining as time passes.
3. It could be difficult being a landlord from an out-of-town location.
If you live out of the area where your current house is located, you will have to be an absentee landlord. That will make it difficult to maintain the house and to keep an eye on the tenant.
One solution to this would be to hire a property management company to manage the house for you. They will charge a percentage of the monthly rent to perform this service, but it does open up the option.
4. The potential for bad tenants.
This can be a nightmare scenario. Tenants can move into a house and stop paying rent, they can invite others to occupy the house with them, or they can do substantial damage to the property. Sure, you can evict them, but eviction laws vary by state and municipality, so it can take weeks or months for the process to play out. In the meantime, you could lose money or incur large expenses. This will not only defeat the purpose of renting out the house, but it could cost you both time and money.
Much of this risk can be mitigated by doing proper background checks on your tenants. A clean criminal background check, credit report and rent history can minimize the potential for a bad tenant.
Have you ever rented out a property that you couldn’t sell? How did it work for you?