- The Washington Times - Wednesday, December 13, 2006

As the real estate market in Washington slowed in 2006, some home sellers opted to offer incentives to potential buyers, such as closing-cost assistance or payment of condominium fees, while other home sellers dropped their listing price, sometimes more than once.

Some sellers, frustrated by a lack of offers — or even visitors — or discouraged by receiving low-priced offers for their homes, chose to take their homes off the market and instead rented them.

Sellers leaving the area or committed to another home are sometimes forced to rent their home if they cannot sell it and need the rental income to offset the mortgage payment.

Other sellers simply believe the market will change again, perhaps next year, and want to wait until that market change before attempting to sell their property.

However, choosing to place a home on the rental market is not a simple decision. Sellers need to consider the consequences of becoming a landlord in terms of taxes and other financial issues, the time and money required to maintain the home, and the potential for the value of the home to decrease due to lack of care by the renters.

Joseph Himali, principal broker of Best Address Real Estate LLC in the District, says he believes sellers must carefully consider whether it is appropriate to rent or to sell their property from the beginning, rather than waiting until the house doesn’t sell and then opting to rent it.

“Most sellers don’t understand that if a home fails to sell and is removed from the market, the listing information remains on the MLS forever,” Mr. Himali says. “When it is placed back on the market, there will be a question mark in the minds of buyers as to why it didn’t sell. There’s a price to pay for placing a house on the market at an unrealistic price.”

Mr. Himali recommends that sellers move a property from the purchase market to the rental market either close to the end of the listing agreement with their agent or when they are at or close to the average number of days on the market for other homes in the neighborhood without anyone expressing an interest in the property.

Sandra Wilkinson, an owner of Wilkinson PM, a property management company, says that many of her company’s clients opt to have their property available for sale and rent at the same time, to “toss it up in the air and see which flies first.”

“There are three things to consider when deciding whether to rent a property or place it on the market: long-term financial goals, market conditions and tax implications,” Ms. Wilkinson says. “It’s an individual, personal decision which depends on the family situation and cash flow. People need to consider whether they want additional property in their investment portfolio. It’s particularly important to determine whether you can maintain the expenses of the home if you choose to rent rather than sell.”

Sellers who have not followed the local real estate market fluctuations may be surprised not only by the lack of buyers for their home, but also by the disparity between mortgage payments and rental rates.

“Housing valuations and rents have become disconnected in this market, with rental rates remaining relatively low,” says Mark Atherton, a certified financial planner with Ticknor, Atherton and Associates in Reston. “Renting is not necessarily a good scenario for someone trying to cover their mortgage payment on their existing home along with a mortgage payment on a new home. Renting is less of a decision and more of a necessity for some sellers.”

Mr. Atherton suggests that the main advantage to renting is that sellers who must leave their home to move out of the area or into another home can then wait out the market and sell in a market that is more balanced.

“The key is not to sell your house in a bad market,” Mr. Atherton says.

Ms. Wilkinson says the rental market is generally good in the Washington area since many individuals come to this area to work for assignments lasting one or two years. The market has changed in the past year, however, with many for-sale properties converted to rentals.

“Normally in the month of December we will have very few homes listed for rent, but right now we have two dozen or so,” Ms. Wilkinson says. “Finding a renter takes longer than it used to, but it’s not impossible. This year it’s still easier to rent than to sell a house.”

While homeowners who purchased their home many years ago may have low enough monthly payments to have them met in full by the rent they can charge, many others will face a gap between the monthly rental income and their monthly mortgage payment. However, the tax consequences of renting out the property may be enough to offset this gap.

“If you are renting your home, you can still take the homeowner deductions of mortgage interest and real estate taxes, and then you can deduct additional expenses of homeownership,” Ms. Wilkinson says. “Landlords can deduct homeowner’s insurance, homeowner association fees, repairs to the property and the fees paid to a management company, if they use one.”

Mr. Himali says that most people are unaware of these tax benefits of becoming a landlord.

“It may not be immediately apparent that you may be able to have a positive cash flow instead of a negative cash flow once you take the tax consequences into consideration,” Mr. Himali says.

For some homeowners, especially if they recently purchased their home and want to sell, the decision to rent or sell depends on whether they want to take a loss immediately or take one in the future.

“It’s like choosing to pull off a Band-Aid slowly or quickly,” Mr. Himali says. “For example, if someone bought their house for $500,000 in 2005, they may be able to sell it for $450,000 now. If they rent it, they may be losing $200 per month. It would take 250 months at $200 per month to lose $50,000. It’s a pretty straightforward calculation, but the cash flow question comes into it, too. If you need the cash out of your house right now, then you’ll just have to sell it at a loss.”

One of the pitfalls Mr. Himali points to for homeowners choosing to rent is being aware of landlord-tenant laws, especially if the property rests in the District.

“If you rent out property in the District, you must be properly licensed,” Mr. Himali says. “You need to register and get a business license and make sure you understand tenants’ rights. In D.C., if you choose to sell your home, the tenant has first right of refusal.”

Mr. Himali says laws in the District are skewed toward the tenant, while those in Maryland are more balanced between the landlord and the tenant. In Virginia, he says, “It’s such a landlord-friendly state that the saying goes, ‘It’s the lord in landlord and the ant in tenant that matter.’ ”

In addition to complying with all local and state regulations, attorney David Modell, with the Law Offices of David P. Modell in Bethesda, recommends that homeowners obtain liability insurance on the property and that they require tenants to buy tenants’ insurance.

“Homeowners don’t want to see their property appreciate on paper and depreciate in reality,” Mr. Modell says. “They should delineate in writing who’s taking care of what, including changing the filter on the furnace and mowing the lawn.”

Mr. Modell recommends that homeowners talk to a tax adviser or accountant and an attorney before renting out their property.

Ms. Wilkinson also recommends doing a full background check on potential renters to be sure they will make good tenants.

“The best kind of tenants are those who own a home someplace else because they have home maintenance experience and are likely to take care of the home,” Ms. Wilkinson says.

Common mistakes by homeowners, Mr. Himali says, include over-inflating the rent and not looking at market conditions when determining the rental rate.

“You’re better served by asking for a slightly lower rent so that you have a variety of people to choose between rather than having to take the only person who walks through the door,” Mr. Himali says.

Homeowners also fail to budget enough for the cost of being a landlord, including the time when the property is empty. Mr. Himali says that it generally takes two to three months to rent a property and leases generally last one year, so owners should anticipate that there will be no rental income for at least one-fourth of each year.

Mr. Himali suggests that another homeowner mistake is not viewing being a landlord as a job.

“Hiring a management company is probably the wisest choice because they know the laws, they can act as an intermediary if there are problems and because it relieves the homeowners of the responsibility of what is essentially a part-time job,” Mr. Himali says.

Property managers charge a fee based on a percentage of the monthly rent, which some sources estimate as between 7 percent and 10 percent of the rent.

“The main thing about hiring a property management company is that it eats into your profits on the house. But if you are moving out of town, you must hire a property manager to protect your property and to make sure the rent is collected,” Mr. Atherton says. “If you are staying in town, you need to consider the commitment of personal time it takes to be a landlord. Being a landlord can easily turn into another part-time job.”

Mr. Atherton warns that homeowners must be careful in choosing a property management company, making sure to check references.

“A property management company can charge a lot of money,” Mr. Atherton says. “Sometimes they overpromise and underdeliver.”

Important considerations in addition to hiring a management company are the length of the lease and the timeline for future sale of the home. Mr. Himali says that in general a long-term lease is the better option, especially if someone has good tenants.

“A short-term lease works if someone intends to move back into the home or if they are trying to time the market and put the property up for sale again,” Mr. Himali says. “But someone renting a home for just three months is much more likely to trash the place and to leave without paying all of the rent.”

Ms. Wilkinson suggests that some owners may want to do an 18-month or two-year lease, since that ensures that the property will bring in rental income for that time period.

Homeowners wanting to put their home up for sale need to consider the tax rules on selling the property as their primary residence or an as investment property.

“In order to qualify for the $250,000 tax exemption, the sellers must have the settlement take place within 36 months after they have moved out,” Ms. Wilkinson says. “Otherwise, the sellers lose the exemption and pay taxes on the home as if it is an investment property.”

An additional consideration for homeowners is the timing of their potential sale. Ms. Wilkinson says a standard lease allows a home to be placed on the market only 90 days before the end of the lease, with potential buyers allowed to enter the property only 60 days prior to the end of the lease.

Homeowners may view renting their property as a quick-and-easy alternative to leaving it on the market indefinitely, but, as always, they need to do their homework to make the right decision.

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