Written by Andrew Goodman
Question: Should I rent out my place or should I sell it? If I rent it out, what do I need to include in the rental agreement?
When determining whether to rent out your home or to sell your home, you must consider these things:
Rental Income or Loss – Would you, as the property owner, be earning rental income on the rent received or would you be losing money after you pay the property’s mortgage payment, condo/HOA fee, taxes, insurance, and other costs?
If you are going to be losing money each month, even if renting is tax deductible, it may not be the smartest move to rent out your property.
Next Move – Would you be renting or purchasing your next home?
If you are going to buy, you need to check with your lender to see if you qualify for a loan on the new property while still holding on to your current property. A lender will typically count the mortgage payment of the current home against your debt to income ratio, unless you have at least a years worth of rental income on your tax returns or 30% or more of equity in the rented-out home.
There are also strict guidelines as to whether your next home will be considered an investment property or a primary residence. That could increase your interest rate and make your new home less feasible and desirable from a financial standpoint.
Current Market Conditions: Is the current local market appreciating or depreciating?
If the market is just starting to improve, it may be best to rent out the home now in hopes to get top dollar later. Also, if you are selling at the height of the market, you will be buying at the height of the market or vice versa.
The ideal would be to sell at the height of the market and buy at the bottom of the market. But we all don’t have the luxury of holding on to a second property while conditions improve. If you had to choose to sell and purchase all at once in either an up or down market, I would advise to make your move in a high market with the theory that you would sell your current home and have a larger down payment for your new home, or at a minimum, not have to bring as much money to the table to sell it. Obviously, this all depends on your specific financial and housing situation.
Condition – When renting out a home, remember a home is still being lived in and will have, at minimum, some wear and tear. So prepare yourself to do at least some cosmetic work to the property after the lease is up or before you put the home on the market.
Landlord Responsibilities – Can you handle being a landlord? Being one brings many obligations. You will have to be there if something has to be repaired or goes wrong. You also have landlord-tenant rights to abide by. Be sure you know all that is expected of a landlord prior to engaging in a lease.
Some owners like to hire a management company or a realtor to manage the property. This is completely normal and highly recommended. However, if you have just one property that is being rented out, you may be able to handle it on your own. A management company will do everything from finding you a tenant to handling the phone calls if a problem arises. But they do collect a fee for their services.
In Montgomery County, you are required to obtain a license to rent out a property. The license costs $98 a year for a single family, townhouse, back to back, duplex, or quadraplex property and $56 a year for a condominium or piggyback townhouse. A license is needed for each property rented out. If you rent a property out without a license you could be fined $500.
You are not required to obtain a license if you rent out a property to a relative. Please note, if a property was built prior to January 1, 1950, proof of current registration with the MDE Lead Poisoning Prevention Program and proof that an accredited inspector has certified the property meets one of the required inspection standards must be submitted with the application.
If you choose to rent out the property on your own, make sure you include the necessary documentation in the lease agreement (a management company or realtor will be able to provide this if hired). Please note that if your home was built on or before 1978, Lead Based Paint documentation is necessary. Don’t forget, if you are apart of a condominium or a HOA, to include information from your HOA/Condo association, as tenants must follow the rules of the community. The community may also have documentation that the tenant needs to fill out so make sure to contact your community’s management company.