- The Washington Times - Thursday, April 14, 2011

While the Washington-area real estate market, with its faster pace of home sales and rising home values, has fared far better than many markets across the country, not all homeowners are happy with their home’s current market value.

Homeowners who must relocate for a job or who want to move into a larger home and take advantage of today’s low interest rates and more affordable prices may be in a quandary when it comes to deciding when or whether to sell. Some weigh the option of renting the property for a few years in hopes of reaping a larger profit as the market improves.

Before placing a property on the rental market, homeowners need to consider the ramifications of becoming a landlord.

For most homeowners, the first consideration is cash flow.

“The good news for homeowners, at least in Northern Virginia, is that the market is starving for rentals,” says Chris Ann Cleland, an associate broker with Long & Foster Real Estate in Gainesville. “In areas outside the Beltway, especially for town-home owners, they can usually find a renter within a few days. This also means that rents are rising, which can help offset the cost of the homeowner’s mortgage payment.”

Simone Bercu, an associate broker with Weichert Realtors in Potomac, says homeowners need to make sure the rent covers as much of the mortgage as possible, preferably all of it.

“You should make sure you can carry the mortgage payments for a little while if your house is not rented right away, although right now there is a shortage of rental property in Montgomery County,” Ms. Bercu says.

Determining the rent, unfortunately, cannot be based solely on covering the homeowner’s mortgage payment. Instead, the rent must be based on market rates.

Pat Kennedy, an associate broker with Evers & Co. in the District, says, “If you live in a condominium, your management company might be able to give you some guidance about the rent charged for similar units. You can also ask a Realtor to give you an estimate of local rents and to check the [Multiple Listing Service] for comparable homes in your neighborhood. Another option is to search online on sites such as Rentals.com.

“Determining an appropriate rent is easier if you live in a community with a lot of rentals, but houses, especially in the city, are rare enough that homeowners can often get a good deal on the rent.”

Ms. Cleland says homeowners should avoid requiring tenants to pay any homeowners association fees.

“If the tenant does not make the payment, you could end up with a lien against your property,” Ms. Cleland says. “It is better to wrap that cost into the rent and pay it yourself.”

In addition to cash flow, homeowners must evaluate their responsibilities as a landlord. Legal requirements vary by locality, and in many areas a homeowner needs a permit or a business license to rent their property. Realtors who work in Maryland, Virginia and the District say that while the District’s laws are tenant-friendly, Virginia’s laws favor landlords and Maryland’s laws are generally balanced between the two interests.

“In the District, you need a business license and [must] register your property in order to rent your home,” Ms. Kennedy says. “I would recommend that people consult with a lawyer experienced in landlord-tenant law to check the contract. In the District, the tenant has the right of first refusal, which means that once you choose to sell the property, you must offer it to the tenant and allow a certain time period for the tenant’s response.”

Ms. Bercu suggests that homeowners carefully consider the hassle factor before becoming a landlord.

“If you do not want to handle the maintenance issues and deal with the tenant, or if you must move out of the area and will not be able to check on the property, you should consider hiring a property management firm,” Ms. Bercu says.

Ms. Bercu and Ms. Cleland estimate that a property management company will charge 7 percent to 10 percent of the monthly rent for its services.

An important factor in the success of becoming a landlord is choosing the right tenant. Some homeowners opt to work with a Realtor who will check the credit history and references of a prospective tenant and market the property. Fees vary, but Ms. Cleland says Realtors often charge about one month’s rent.

“One of the biggest concerns about tenants is how they will maintain your property,” Ms. Kennedy says. “If the market gets better and you want to sell the home, you may find that the condition of the property has deteriorated. If the tenants do not want to move, you could have trouble selling it while they are living in the home.”

Ms. Cleland says very few renters maintain a home to the standards of the homeowner.

“Homeowners need to be prepared to set aside money for maintenance and minor repairs and cosmetic improvements that will be needed when they decide to sell,” Ms. Cleland says.

“Renters are not as likely as homeowners to do things like change the furnace filter or caulk the tub on a regular basis,” she says. “Homeowners should buy a home warranty policy so that the tenants can call the company directly to have service appointments. That helps keep up the maintenance on the property.”

When homeowners rent their property, they also will need to switch their homeowners insurance to landlord’s insurance, which is similar in cost to homeowner policies.

“Homeowners should require tenants to purchase renter’s insurance since that provides liability coverage as well as protection for the renter’s possessions,” Ms. Kennedy says.

Ms. Cleland suggests writing tenant responsibilities - such as obtaining renter’s insurance, shoveling snow and mowing the lawn - into the lease.

Homeowners who become landlords also will find their tax situation changed, because they are considered investors when they own property and lease it to a tenant. Property taxes and income tax deductions may be affected, depending on the jurisdiction.

“If the homeowners have significant equity in the property, they should be careful about capital gains rules [when they’re ready to sell], since the exclusion on capital gains taxes apply only to owners who have lived in the home for the last two years prior to the home sale,” Ms. Kennedy says.

Homeowners who want to rent their home and buy another will need to meet additional lender qualifications.

“The best-case scenario would be if the homebuyer qualifies for both mortgages without the benefit of a rental payment,” says Brent Mendelson, a loan officer with Monarch Mortgage in Rockville. “If not, the buyers will need a signed lease from their renter and a check from the renter for the security deposit and first month’s rent to prove that they have rental income.”

Douglas Benner, a senior loan officer with Embrace Loans in Rockville, says Fannie Mae and Freddie Mac require a minimum of 30 percent equity in the property that is to be rented for the homeowners to have rent payments count as income, while FHA loans require 25 percent equity.

“In general, 75 percent of the rental income can be counted towards the debt on the home, which includes the principal, interest, taxes and insurance as well as the homeowners association or condominium fees,” Mr. Benner says.

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