For rent and for sale, part one

Hi Rona,

My wife and I are actually renting our condo that we couldn't sell. If we did, it would be at a loss for us. We are in process of purchasing a home right now. We are taking a slight loss renting out the condo. The rent will cover the mortgage and taxes and we will have to pay the condo fee out of pocket. There are pros and cons though. One of the big pros is that you can deduct just about anything associated with the rental property. So even though the rent won't cover the condo fee it is now tax deductable. So it really depends at how much of a loss you are going to take. Some of the cons though is that you want to be very aware of the State and Federal laws that regard renting. Security deposit needs to be in an interest bearing account in the tenants name and cannot be mixed in with you money. Also, if you also have a tenant that doesn't pay rent and need to evict that can take up to six months before you can have them removed. So there are risks associated with renting. Also, you are not allowed to discriminate against possible tenants who will have children living at the house. If they are paying $50 a month because that is all they can afford a judge will not evict because of the welfare of the children. But you cannot use the fact the the prospective tenats have children as a reason not to rent to them. So you want have due diligence when checking references and conducting background checks.

We are contemplating renting at a loss, as our place is simply unsuitable for our family right now (No, I'm not being an entitled suburbanite when I say that. It's a loft. With kid.). If the new place we go on to occupy has the same or a lower payment/rent than our current place, our monthly cash outlay is either the same or reduced. If I take a $300 a month loss on my rental income, but my new place is $400 cheaper than my mortgage, I'm $100 ahead on a monthly cashflow basis.

Meanwhile, it may be possible to deduct a loss on a rental property depending on your income level, etc.

On the plus side, the rental would allow us to immediately upgrade our situation, and we would be able to hold the property long enough for the market to rebound a little bit. As we bought in 2005, you can imagine that we are looking at an out of pocket loss if we sell now, once all the taxes and fees are considered.

On the down side, we need to maintain a large cash cushion in the event that a tenant flakes out or needs to be evicted, as we'd be on the hook for double housing payments. I have also heard horror stories of how hard it is to evict a tenant in MA. And then I wonder how hard it would be to sell eventually with a tenant occupying the space. You certainly can't stage a place effectively while it's occupied by someone other than yourself, I'd guess.

It's a tough call for sure. I'm not sure about concurrently listing a rental and a sale, as it implies a certain amount of desperation and willingness to accept a really low offer. If we do the rental route, I think we'd pull from MLS first.

My wife and I bought a house in June of 2005. We had a few kids and outgrew the house, and its on a main road in the center of town. We tried to sell it early this year, but were unsuccessful. If we were to sell it, we were looking at more than a $50K loss, which would be money that we'd have to come up with to get out of it. Of course we dont have $50K sitting around, so we eventually ended up renting it in August of this year. So far its been great, I did alot of research on prospective tenants. We're losing about $1000 per month between the rent we collect and the mortgage payment. We've moved into my parents house, as the plan is to buy that, but we're now thinking of looking elsewhere. It sounds like from reading the posts above, the people who rented their houses were able to go and buy a 2nd property after they rented out their 1st property. I am wondering if I can do this. How was that process? I havent applied yet but am thinking of doing so very soon!

If there was a house for sale for $400K, but rent-able for $2000 a month, I'd take the renting every time.

We are potential home buyers, in another September lease, but since its in a condo complex that didn't sell, we were able to negotiate a 2 month out. We pay $1985 a month.

However, our home buying cap is $350K. So, it really is still cheaper to rent than buy the same home, at least in this case, but in many other cases. I've seen a few of these to-buy or to-rent situations...they aren't all that unusual. We've seen homes going for over $400K to even more that are within our monthly payment limit ($2500) that would be considerably more if we owned the home. So, really, what's the incentive to buy at this point? Even my husband and I are starting to feel that there are worse things than starting a family as renters.

I rented out my single family home when I bought a larger place. I was a landlord already when I rented out the single family, which helped tremendously. I was able to rent at a profit (the rental market is pretty good in most areas, those people who can't get credit to buy a house have to live somewhere). If I sold the house that I would have left a lot of money on the table, VS if I holding it for a few years. Some things to consider in your decision are: can you learn the MA laws and have what it takes to be a landlord? What is your plan for maintaining and repairing the property? Do you have the ability to rent quickly, legally and to responsible tenants? Being a landlord isn't easy!

Hey Tim,
I would honestly take the hit of $50,000 now because housing is not going to recover anytime soon. You unfortunately bought at the peak of the Massachusetts market. We may not see those prices for another 7-10 years. Housing is going to continue to go down, we are clearly in a deflationary economic environment. You take the hit now rebuild your down payment fund and buy a house in the town and the size that you want a lower price in another 12-24 months. That way you can move on with your life.

I am still reading Rona! And I'm really flattered to be asked to weigh in. I must say though most of my points have already been made by others.

It seems to me that renting at any loss is a bad investment, and $500 a month sounds absolutely terrible. Plus now you're taking on the responsibilities and risks of renting, which was clearly never something you wanted to spend your time and money doing. So why would they consider doing it? Why not just lower the price until it sells? (Note: I didn't take this advice because I had to make a snap decision or lose the new house, and also I didn't know squat.)

Either they won't lower the price because they'd have to write a big check at the closing or, they won't admit it isn't worth what they think it's worth.

If a lower price would put them underwater, then they're in a rotten position. They're now basically gambling that the spring market will save them. That's a risky proposition these days. Now you balance the rental loss against the loss at a lower sale price and ask how long does it make sense to rent? How long before the rental losses are more than the lower sale price losses? I'd say they should be prepared for the possibility that they might need to rent for two years if necessary, maybe longer.

If it's just denial, they should get over themselves and drop the price until it sells. Dump it and move on with your life. In my very brief experience renting is doable if you're willing to learn, pick good tenants, and are diligent about solving small problems before they become big. But when it goes bad it can really go bad, so you need enough cash to deal with messes. A new boiler, a messy eviction, etc.

Hi Matt,
Thanks for your advice, you said something that my wife and I have been thinking constantly, which is just move on with our lives. One of the problems we are facing is, when we tried to sell it, we asked if we could just pay off the difference to our mortgage holder, that was unsuccessful as they tried to push us into a short sale, which I didn't understand because we're current on our mortgage. We tried to take out a personal loan, however the amount was too much and exceeded personal loan limits. We've tried to refinance to make the mortgage lower - so we would actually want to keep it and maybe break even or make money off of the house (with the rental), but we cant refinance since the value has dropped so much we'd have to finance more than 100%, and banks just dont do that now-a-days. What does a person do!? They just dont make it easy on you - no wonder people are foreclosing and just letting their houses go, there's no other way to get out of them! We've actually said to each other, lets just be done with the house and stop paying for it and let them take it from us! Since its only in my name (not my wife's) maybe we could buy a house under her name while my credit rebuilds! Or alternatively, maybe we should try to kill ourselves (kidding of course) like the old lady unsuccessfully tried, at which point her mortgage lender let her out of the loan!

I just need to say one thing about the usual suggestions about "just dropping the price" and moving on, "being realistic about a home's true value", etc. What people do not seem to realize that in today's economy and market, it doesn't matter what the price is, it seems. there just aren't the number of qualified buyers out there to purchase. lowering the price by $50,000 simply isn't bringing a buyer in - they couldn't afford it even at the lower amount. sounds overly simplistic, but in these hard economic times, I believe that the really wise thing to do is NOTHING. do not rent, do not sell at a loss; just take a deep breath and stay where you are for a while longer. not an easy thing to do in may cases, but a fiscally wise one.

At this point renting is pretty risky, as house prices appear to be plummeting at an accelerated rate, in this deflationary environment. A house thats worth 400k now could easily be worth 300K next spring when it has competition. If you are trying to upgrade, it's likely that you can negotiate better on the house you are upgrading to as well. I'd say unless you have a particular draw about the house you are selling (ie. garage parking in the city, or amazing garden space) your best offer within the first 45 days of your house being listed, is typically as good as it gets.

hi there i am living in a one bedroom condo that i bought in 2005 for 167,000 and now it is only worth 140,000.00 prices have gone down and three years ago i tried to sell my two bedroom condo for 275,000 and no budges and i have it rented to a nice girl with a toddler and i am loosing 500-600 a month. i have to stick it out and she has only been on section 8 for two years and she has to wait for another three years to think about buying and i told her i would sell it to her for 235,000 because i have gotten the mortgage down on the two bedroom for 197,000 now. i refinance twice to pay bills and that was not a good idea and i am learning the hardway so i trying to save now and it is working. I am trying ok

ABG, I'm just curious -- sorry to sidetrack -- if your goal is home ownership, why are you renting a place that's nearly $2k a month? I can't wrap my brain around that figure. Unless you have kids, and I missed that point, then the rent $ makes sense. I just can't imagine, if you're trying to save money to purchase my first place, why would you spend that much each month on rent for two people? Surely there are alternatives that cost much less.

We've been renting our house for my brother at break even since last April, when we took it off the market after 8 months and $80,000 in price drops. 2 months ago the renter-from-hell stopped paying, and we're now going through eviction. We obsessively checked this renter's background, credit etc., but it turns out she faked documents, previous landlord etc. I've been a landlord previously (during the last buy high, sell low days in the 90's) and had extraordinary good luck with 2 tenants in five years. Our situation is that my brother lost his job, and really can't afford the mortgage payments, but can't sell in his working-class south shore town. I have spent hours on the phone with good old Countrywide, trying to convince them to re-write the note, to no avail until just yesterday! BofA has a new program for "subprime" Arms or fixed rate notes (a 30 year fixed at 6.75% apparently qualifies!) Starting 12/1/08, as long as the note is 60 days overdue, they will re-write the mortgage to as low as 2.5%, up to ten years interest only, with a graduated payment that is within 34% of income. They even waive late fees! So, for those posters who are frustrated with the lack of response, check back with your bank frequently. The new fed programs are aggressively urging banks to work out instead of foreclosing. So, will we try another renter? (or will BoA require "primary residence, so we can't?) After the nightmare tenant, don't know if we can handle this again!

Even if you lose a little on a month-to-month calculation, you might end up making money come tax time. Talk to a tax professional.

If you rent something out, use an agent that will charge the tenant a fee. They might try to negotiate the fee down, but the scam artists will tend to avoid the listings with agents altogether and go after rent-by-owner. Trust me I've done both.

A great resource for landlords is the Massachusetts Landlord's Survival Guide. Every landlord should own a copy and read it. We reccomend to our landlords that they seriously consider the merits and disadvantages of taking a security deposit, it rarely covers any significant damage and it is difficult to keep it unless you dot all your 'i's and cross your 't's from the get go. And if you don't, the tenant can be awarded triple damages if it goes to court.

I have found sellers that are listing their property for sale and for rent are usually less inclined to take a low-ball offer. Their response has usually been if "I don't sell it, I'll rent it." Of course this has been with properties that are also desirable rentals in Boston. My buyers smell blood when they see this scenario, but more often than not it goes nowhere.

All of this is really just speculation and I have been doing this long enough to know every property has it's own set of circumstances. And when buyers or sellers assume rather than communicate it rarely results in a closing.

While renting surely has risks, remember that you can lose money out of pocket and still come out ahead. If the rent you are receiving covers taxes, insurance, and the Interest portion of your mortgage payment, then you are essentially putting money in your pocket either through increasing equity in the home or decreasing the amount you are underwater, with a portion of that coming from any rent income that is left over after paying those first 3 items.
Of course, this only works if you believe home prices will remain steady or increase. If you think they are going to decrease, then all bets are off. This is also dependent on having sufficient disposable income from other sources to cover that portion of the mortgage payment that is going to principal every month; you certainly do not want to increase your overall debt load by doing this.

Tim,

Some one who wants to sell their house for the amount left on the mortgage and then doesn't understand what a shortsale is has no business trying to take out more loans. I am not trying to be harsh, but geez do a little reading. find out what your options are and understand them before saying no or jumping in with both feet. It seems as though you are just trying to get to a point where you can borrow more money when you haven't even figured out what to do with the situation you are in now.

Lot of good points above.

Basically, being a landlord is very hard in Massachusetts thanks to local laws and regulations, which assume the landlord is always the bad guy, even if proven otherwise.

So it is not something to be entered into randomly. If there is an actual plan to be a landlord, that's one thing. But pushing off sale now so you can sell for less next year, and eating the difference in rent in the meantime, doesn't seem the wisest thing ever.

Basically, by historic movements, if you bought in 2005 your are unlikely to be even nominally above water until 2015. Renting thus should not be thought of as a short term thing.

And if you do rent in Mass, vet the heck out of your tenants. Go 2 landlords back, because one back might do anything to get the loser out of their apartment... Credit checks. Make sure you think they can afford it - who cares what they think. And analyze their employment.

Its a lot of work, even before you get into fixing toilets. You'll be amazed at how many problems the tenant-toilet nexus can create. And the heat always fails in January, good to have someone who will come out for you whenever

Tim:
If you're already rented your property, this is what the prospective mortgage loaner required. A one-year rental lease contract signed by both you and the renter. You have a little breathing room since you're already have a tenant. At the current economic crisis, you will probably need to have a hefty sum of money for down payment (20%). I suggest you talk to a banker at your local bank to see what options you have. I wouldn't recommend talking to a mortgage broker...I don't believe in one.

Since your are looking for a property, do not do a short sale on your current property. By doing so, you will not qualify for a new mortgage regardless of what your financial circumstances; for at least 4 years I think.

Hey LL,
Its a little off track, but I'll answer the question.
When we didn't hear back from a house we bid on this summer (bank owned) we had to scramble for a place to rent. After living for 4 years in absentee-landlord situations we were pretty fed up too after the second of two absentee landlords, especially the latter who we had to call Inspectional Services on. So, we decided "if we're going to rent and have the hassle and expense of moving in a year" (we've moved in 2003, 2004, 2006, and now 2008, and now likely 2009) we wanted to a) live in the neighborhood we are considering buying in and try it out—our first consideration—make sure it was a good fit, and b) live in a professionally maintained, preferably new apartment after a lot of bad experiences to make sure we were happy in our current situation before we went house hunting. In the end, we're ideally hoping to buy in Milton Village since the commute is really good for us and we like the town.
Also, for our past “cheap” rentals in Allston--they don't include the following: parking (used to cost us another $130 a month), laundry (again, about $60 a month), and they don't have efficient AC, windows, toilets, faucets, appliances, etc. The heating bills we had were astronomical for a 1000 square foot apartment despite plastic on the windows and using space heaters—our electric and gas bills have dropped almost in half since moving so far and we are more comfortable—we have central AC and in-unit on-demand water heater and in-apartment heating—very efficient. We’ll probably save another $75 a month there at least with our programmable thermostat and up-to-date systems, maybe more this winter. Cheap rentals also don’t include any amenities. We cancelled our gym memberships ($100) because we now have on site facilities included—bonus, we actually use those facilities more because they are more convenient too.
Our landlords have been fantastic and amazingly attentive. In addition to not being locked into a lease (no one wants to seem to do month-to-month around here--why not by the way? especially if you're trying to sell your house and are worried about bad tenants!?) provided we give 60 days notice, they gave us 1 month free on a 12 month lease. So technically, we're really paying $1820 a month. Then take all the money above that we are not spending that we had to spend before---$365. That means our “rental” costs are something like $1455 for a 2 bedroom and we live in a nice place with a private 500 square foot attic for storage for all our belongings (we have a lot of family heirlooms and extra furniture), as opposed to a nasty cramped student-transient, loud and littered neighborhood for $1650 (2 bedrooms). Only downside has been the longer commute for me, but I’ve been catching up on reading and actually enjoying the time on the Red Line.
And considering our one year stay might be quite a bit longer the way things are looking---but who knows?---I’m glad I’m living in a place I can enjoy and can afford until we decide to make the leap. When I said I’d rent the place for $2000 than buy for $400K, I’m also considering the things that add up---repairs, buying maintenance equipment. If we have a house, we also will have kids, and that means day care costs as well. Even if I was living in a crazy cheap rent and had a ton of money for a downpayment, I’m not going to spend the money on a home that is overpriced and I think the majority of homes I’ve seen (and I’ve seen quite a few in 9 months almost every weekend until October) need about $50K knocked off them. Lending is tighter, but there are still plenty of people out there who can buy---but these are the same people who didn’t jump in in 2005 without crunching the numbers. Hence, they aren’t going to blow their hard-earned and saved money on a house without really thinking it through.

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