WASHINGTON — In a market where houses are taking longer to sell — or not selling at all — owners hoping to move on sometimes opt to rent their homes until things improve.
The popular wisdom among real-estate professionals is that this is a sensible solution. That way, you can at least generate some cash flow from your idle property and take advantage of sagging house prices and relatively low mortgage rates in buying your next place. FOR THE RECORD:
Tax break: The Housing Scene column in the March 16 Real Estate section incorrectly reported that the capital-gain exclusion on the sale of a primary residence is a once-in-a-lifetime benefit. If all other criteria are met, this exclusion applies any time a primary residence is sold.
Renting out your idle house is a good idea, realty pros say, even if you must borrow against it to have enough money for a down payment on your new one. For the pros, the positives outweigh the negatives when it comes to renting versus waiting.
But not always.
For example, if the for-sale market takes longer to improve than some experts predict, you might miss out on the once-in-a-lifetime, $500,000 capital-gains ($250,000 for single taxpayers) exclusion.
Indeed, the consensus seems to be that you’d better be ready to act as a landlord for more than a year.
Eileen Landau of Realty Executives in Naperville, Ill., recommends renting over sitting. That way, she said, homeowners generate some income and can “get on with their lives.”
Nowadays, you can claim the one-time capital-gains exclusion only if you live in the house for two of the last five years. So that gives you a three-year window. If you rent for longer than that, you’ll lose a very valuable write-off because the house will no longer be your principal residence.
Just be aware: Landlording is not for amateurs.
Another issue to consider is fix-up costs.
Rob Massey of rentals.com says making a home ready for lease is strikingly similar to preparing it for sale. When the tenants move out, whatever fix-up costs you incur will be deductible as either rental or sales expenses.
“Yes, it will cost some money” to make the same improvements twice, Landau says. “But it is much better than paying out on an empty house.”
There are drawbacks to leaving a house unoccupied. A vacant home is a prime target for thieves, vandals, even squatters.
Selling an empty house presents its own challenges. One option is to “stage” an otherwise empty house with rented furniture. However, unless your real-estate agent can supply the necessary pieces, that’s an additional expense — one you may not want to incur on top of a mortgage and other carrying costs.
If renting is your choice, and you want to keep the place on the market, make sure you sign “cooperative” tenants who agree in advance to show the house at a moment’s notice and to keep the place in “show ready” condition. The lease should clearly state the requirements. Some owners discount the rent for this cooperation.
This, of course, also requires short-term tenants who are prepared to move if and when the house is sold.
“Have them move into a house listed for sale at a below-market rental rate as a trade-off to keep the home clean and show ready at the drop of a hat,” suggests Wendy Frenzel of A Vantage Properties in Denver. Another possibility is a house-sitting company. These businesses screen “the sitter and their furniture.”
In return for an under-market rent, the sitter agrees to keep the property in show-ready shape and move out with two weeks’ notice.
If none of this appeals to you, and you don’t want to wait until the housing market improves, you just might want to follow the advice of Al Napier of the Napier Realty Group in Newington, Conn., who says you should “bite the bullet” by taking whatever you can get and move on.
Unless sellers want to become professional investors, they “should absolutely not rent out their properties or leave them vacant for any length of time,” Napier argues. “Instead, they should do whatever is necessary to sell their place within the constraints of the marketplace and get it over with.”