- The Washington Times - Friday, August 10, 2001

Many investor owners of residential real estate became landlords by default. These are the owners who couldn't sell a house in a slow market, were facing a transfer deadline and ended up renting out the house instead of selling it.

Might I suggest you consider renting out your current home as a matter of financial planning? Sometimes renting out a house can make more financial sense in the long run than selling it, especially considering the change in the home-sale tax exemption passed in 1997. Under this law, the first $250,000 (for single sellers) or $500,000 (for married sellers) of capital gain from a personal residence is tax-free. Many homeowners find themselves with a wad of cash from the sale of their principal residence and end up using it to purchase their next house, then spend or invest the rest.

A homeowner could make more money in the long term by renting out a principal residence than by selling it. If your house is appreciating in value during the current real estate market, that means rents more than likely are headed up as well.

If you can purchase another home without selling your current residence, take a look at the financial and tax benefits.

First, if there's a mortgage on the house and you rent it out to a tenant, someone else is paying for the house. For our example, let's say someone bought a single-family home in 1985 for $150,000 and took a 90 percent loan-to-value mortgage of $135,000 at 8 percent for 30 years. The monthly principal-and-interest payment would be $991. If taxes and insurance run roughly $150 per month, the total outlay (PITI) would be $1,141. After 16 years, the loan balance would be down to less than $100,000, and if the house appreciated 2 percent per year during that period of time, the value would be $206,000. The investor's equity would stand at $107,000.

That money looks mighty enticing in the short-run. For the investor, however, it can be used for more than just moving up into one house or taking vacations, paying off other consumer debt, buying cars and other luxuries. Instead, that equity can be used to purchase investment houses, but let's just deal with the one house yours.

For a monthly positive cash flow on our sample property, you would need to bring in more than $1,300 per month. If rental rates in your area are up to that level great. Now you have a positive-cash-flow rental property for which someone else is paying. You're collecting the check and making the payments, and the value of your house more than likely is still moving up.

If the going rates are lower than that amount say $1,000 then you could consider refinancing the balance of $100,000 over 30 years at 8 percent, bringing the PITI down to $756 now you have a positive cash flow and someone else still is making the payments. (All rental income is taxable but is reduced by rental expenses.)

As a landlord, you have to keep the property up to code. It must be livable, and all housing systems must be in working order. This means you'll need to keep the heating and cooling systems in order, the plumbing flowing, the electrical system on the mend and so on. The renter should be taking care of regular maintenance, such as mowing the grass, trimming bushes, washing windows and keeping the interior in shape. Repair of a blocked toilet or broken windows and other incidental expenses may or may not be your responsibility, depending on what kind of limitations you have in your lease.

Another aspect of being a landlord includes finding renters. I would suggest working includes finding renters. I would suggest working with a good rental agent. The agent will conduct background and financial checks on potential tenants this is worth the agent's commission.

Other benefits of owning rental property are carved out in the tax code for investors. Your expenses on upkeep are deductible, as are taxes, rental fees, legal and accounting expenses and plenty of other items. There are limitations on deductions. For details, check out the IRS Web site, Digital Daily, at www.irs.treas.gov.

Before making a final decision on renting a property rather than selling it, talk over the numbers with an accountant or financial planner and discuss the how-tos with your real estate agent.

M. Anthony Carr has written about real estate for the past 12 years. Send comments and questions by e-mail (manthonycarr@erols.com).

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