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When Renting Beats Selling ‘To maketherent-vs.-sell call, you need to know what your home could fetch today.. Take the latter course >YOU CAN CHARGE ENOUGH IN RENT TO COVER YOUR COSTS Y

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PHOTOGRAPH BY LISA WYATT

“The Chretlens (loft) didn't try tosellintoa tough D,C.-area market Instead, they rented to Casey Haugner and Ryan Wrenn (inthewindow)

Bos

5 in Waiting

Can't sellyour house?

Maybe you can ren

while you.ride‘out the

S[URDZx vare Asuroao

MMONEY MdCAEIc@38]Ì972.2007 Septenber 6:

home | adnan

HEN KATHERINE AND JEAN-PAUL CHRETIEN BOUGHT THEIR

We Md townhouse for $480,000 in late 2004, they expected to

stay four or five years, But after daughter Jolie was born six months

later, the home started to feel cramped The Chretiens were ready to move out—but

not quite ready to sell, “Given realtor fees, we thought we'd only break even,” says

Katherine, 32, an internist So when the couple, now expecting a second child, moved

ta five-hedroom colonial less than two miles away this past winter, they didn’tput

FOR SALE sign out; they found a tenant The Chretiensare banking on a downtown

redevelopment project to boost property values “We have alot of faith that the area

isgoing to grow,” says Katherine “We wanted to hold on tothe home fora few years”

“The Chretienshave joined what could

be, along with laid-off mortgage brokers,

one ofthe fastest-growing populations

in pos-bubble America: the Accidental

Landlord Like others of their kind, they

didn’t set out to be property investors

But when faced with selling ina weaken-

ing market, they decided that renting

was the better option It’scertainly hard

to argue with the math The inventory

of homes for sale is twiceas bigas itwas

three years ago, which could mean a

Tonger wait to sell—and a longer time to

shoulder two mortgages ifyou buy your

next home first And with home prices

flat—or worse—in many markets, you

may notclear enough to coverbroker

fees once you do sell The rental mar-

ket, on the other hand, is robust Rents

were up 4.1% in 2006, according to the

National Association of Realtors

‘The problems, that’s notall there isto

the math (sce the table at right)—and the

‘math isn’t the whole story Landlording

isa job every step of the way, from setting

aprice to finding renter So before you

take in tenants, make sureyou under-

stand all the implications

When Renting Beats Selling

‘To maketherent-vs.-sell call, you need to

know what your home could fetch today

Get aballpark figure ata home-valuation

site like Domaniacom or, better yet, sit

down witha realtor Be prepared: Her

appraisal may fall far shortof what you

dreamed—especially if you hopedto get

what the Joneses did when they sold in

2005 In thatcase you have two choice

‘Take what you can get (and maybe swal-

62 September MONEY MAGAZINE®35]1972:2007

low a loss) or rent and hope to do better a few years later Take the latter course

>YOU CAN CHARGE ENOUGH IN RENT

TO COVER YOUR COSTS You'll need to suss out what typical rents are in your area and then compare thatwith your carrying costs Those include not just mortgage payments, taxes and upkeepbutalso.a bigger insurance tab: Your homeowners policy may go up ifyou don't livein the house, and you'll need additional liability insurance (for roughly $250 a year, you can get a$1 million umbrella policy) Add

on another 5% to 10% for unexpected maintenance or a gap between tenants If you wantto hire a property manager to handle paperwork and repairs, cutyour projected rent by 10%

>YOU HAVE OTHER FUNDS FORA DOWN PAYMENT If you have torely on the equity you've built up in your current home tobuy yournext one, you're prob- ably nota candidate to rent, You'd have

to finance your down payment witha bridge loan ora home-equity loan or line

of credit, which at today's high interest rates would push up your carrying costs,

‘making it even tougher to break even,

> YOU'RE SURE PRICES WILL RISE

Becoming landlond isa bet that you can carn more renting your home and selling later than you would by moving on and putting sale proceeds to workelsewhere How much rent you can charge is impor- tant, but sos what's ahead for home prices (see forecasts for 100 top markets

at ennmoneycom/realestate) In fact,

esses

Rent vs Sell: Do the Math

Becoming a landlord for two years works out best in your area if home prices recover soon

* BOUGHT YOUR HOUSE IN 2004 $300,000

‘Aloss on the rental and

‘no help from prices

$400,000

‘* WHAT YOU'D CLEAR

© MONTHLY COSTS (MORTGAGE, TAXES, INSURANCE, MAINTENANCE FUND)

© NET ANNUAL RENTAL INCOME

‘ FORECAST PRICE APPRECIATION

‘* WHAT YOU'D CLEAR

‘ONA SALE IN TWO YEARS

* PAYOFF FROM LANDLORDING

* YOU SHOULD:

5% a year

+$33,940

$1,990

even ifthe rent doesn’t cover your out-

of- pocket costs, a big turnaround in your

‘market could make the numbers work

>» YOU'RE NOT GIVING UPA GREAT TAX

BREAK If you rent for more than three

years, you endanger a precious benefit of

home ownership—the capital-gains tax

‘exemption Live in your house for two of

the five years before you selland you'll

pay no taxes on the first $250,000 in

profits ($500,000 fora married couple)

Butbecome a landlord for three yearsor

longer and you'll owe capital-gains taxes

onall profits in your home since you

boughtit That could wipe out more than

ayear’s worth of recovery in your market

Are You Landlord Material?

Even if the numbers add up, you can’t

assume you'll hriveas a landlord Take

on thejob onlyif

>YOU CAN HANDLE THERISK Yourlocal

housing market could stumble, your

house could sit vacant for months or you

could get stuck with arenter who doesn’t

payup Ifsuch unexpected bumps would

deplete your savings, you're probably

better off staying out of the rental world

>YOU HAVE THE TIME Since you didn’t

setout to bea landlord, you likely have

a full-time job, If you have a responsi

tenant (see the box at right), managing

the property may nottakemuch time

But even small tasks ean crop up at

inconvenient moments “It might only

be 10 hours a month, but those 10 hours

are not going tobe when you want" says

Robert Irwin, author of The Landlord's

Troubleshooter Can’tstomach the idea of

leaving your warm bed at 3 am to meet

aplumber? Then rethink your plan—or

hire a property manager

>YOU CAN BEAR SOME WEAR AND TEAR

Just as not everyone is meant to be a

andlond, not every house ismeantto be

rented “If yourhome has French win-

dows, chandeliers or stuff that could eas-

be broken, it may notbe the best one

1 rent,’ says Irwin, A house with lots of

bedrooms will likely attract families with

kids—and the damage they inflict Get

How to Find a Good Tenant

IT’s THE MOST IMPORTANT MOVE TO GET RIGHT Before she rented out her La Place, La home two years ago, Nina Santa Marina never Imagined how difficult landlording could be Within a year of finding a tenant, she found herself In court, bringing eviction proceedings on the grounds that her tenant Ignored utility bills, kept a pet even though It was prohibited and didn't mow the lawn Once the tenant had left, Santa Marina Installed her college-age daughter

In the house Instead of finding another renter “I had no plans to be a landlord,” she says “And now I never want to do It again.”

Even If you do everything else right, picking the wrong tenant will sink you from Day One “New landlords assume that most people are honest, and most are,” says Jeffrey Taylor, author of The Landlord's Survival Guide “But It only takes a few who arent to make landlording very frustrating.” Your best defense Is a thorough background check, something many small landlords don’t do You can order a credit check, an eviction history and a criminal background check for $25 to $45 from TenantVerification.com or CompleteLandlord.com Also confirm an applicant's job and salary, and call the previous landlord, not the one who wants him out now

HOW WE DO IT: Lessons from Three Accidental Landlords

Fort Collins, Colo La Place, La Renton, Wash

>> Best ADvicE Don't Tush Take the time you need for a thorough back round check “'d rather

>> BEST ADVICE Report rent payments to the credit bureaus (36 a month

at nall-sa.com) “it leaves

>> BEST ADvicE Spell out the house rules, what the securi sit covers and

‘who pays court costs In the tenants feeling more lease “Whether youget _walt for the right tenant accountable,” says Wendy _abad tenant ornot," says _ than rush into someone

“That's helped me find Nina, “that agreement will _ who made me uncomfort- people who payontime.” save you every time.” able,” says Cralg

knows real estate, Standard leases va

by state and sometimes even city, so hire

an attorney todraft one, or start with a state- or city-specific document from CompleteLandlord.com (about $15)

used to the idea that not everyone will

care for yourhome the way you do

Building Your Team Once you decideto rent, you'll need

backup If the roof leaks when you're on vacation, do you want your tenant shop- ping for a handyman? Before anything breaks, putthe numbers of areputable and reasonable plumber, handyman, electrician, roofer and contractor on speed dial Find an accountant who

Ifall goes well, you may even become

aDeliberate Landlord After renting out her old home in Denver when she

moved, Wendy Muller is contemplating thatstep “It's been a wonderful invest-

‘ment,’ she says “We're going to sell it

soon and buy two more properties.” $

MONEY MAGAZINE@35)1972-2007 September 63

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A Big Payoff from the Tiniest Room

For the surest bet in home remodeling, build anew bathroom

life—and the value of your property—like few other

thome improvement projects will Put in amaster bath,

and you won'thave to take turns with the kids every moming

Install a powder room, and dinner guests won'thave to traipse

through your private terrain While you can’t count on recoup-

ing the cost of any upgrade right away in today’s weak market,

over the long term addinga bathroom can boost yourhome’s

value by some 20%, says Paul Emrath, an economist at the

National Association of Home Builders

Of course, there's also almost no limit to what you can spend

ona bathroom “It’s easy to get to $50,000, $100,000 or beyond

for anew masterbathroom,” says Todd Polifka, CEO of Vision

Remodeling, a contractor in the Twin Cities area, The more you

getcarried away, the more remote your chance of abig return

‘So keep these principles in mind

A new bathroom will enhance your quality of

Make Up for Your bathrooms are expected On Biggest Shortfalls others, they are nonexistent”

Simply put, you'll get the says Omaha appraiser John biggestbump from addinga _Bredemeyer “If you adda new bathroom ifyouhave too third bathroom in an area few to start with, according wherehomeshaveoneand

to Emrath's analysis of 2005 Census statistics for 60,000

homes across the country

“Another time it pays off is when you have far fewer bath- rooms than bedrooms

Abonus bathroom can also rewanl you handsomely in a

‘two-story home Buyers look for aminimum of one bath- room on each floor of a house, says realtor Debra Kandrak of William Raveis Real Estate in Fairfield, Conn “People want

at least apowder room on the first floor, no matter how

ahalf, you may not get your money back”

‘You don't have to knock on

neighbors’ doors toask how

‘many bathrooms they have

‘Troll real estate listings, or try looking up those detailsin

public tax-assessment reconds

at town hall or the county tax office—and quite possibly via

‘a government website Or you can plugin your address at

the house-valuation website

zillow.com, and then click around on the resulting map togetthe public statistics

‘many bathrooms are upstairs” aboutyour neighbors, (Look

she says That bathroom-on- _at plenty, since the stats may

every-floor bias also appliestonotallbe up to date.) finished attics and basements,

Use What You've Got

One of the best ways to keep a lid on the price isto tap your house's existing space Building an addi- tion to accommodate a new Continued on page 69

Don't Get Ahead of

the Neighbors Ifyou want to recoup your

investment, stick with what's

normal in your neighborhood

“On some blocks, master

TYPICAL INCREASE IN HOME VALUE IF YOU

CCCP TT 0Ì Y5 [0 T3

‘ounce: Howsafcencnsscom basedon th Census Bureau's 2005 aren Housing Sure

MONEY MAGAZINE@35)1972-2007 September 67

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