May 5, 2012

Why Renting Out Portland Real Estate Could Cost More Than Listing

In the Portland real estate market, homes for sale are selling for about the same as they were in 2003.  Selling and recouping your investment can be hard.  Some owners who have Portland homes for sale are turning to renting when their home is not selling.  Can doing so actually lose you money?

Renting may seem like an easy fix but,  it may not be a long-term solution. Not everybody is cut out to be a landlord.

The top reason why Portland  home owners turn to renting vs selling is that they have to sell but they will not "give it away".  They are in a tight situation and need to sell and sell quickly.  But the market is not letting them get what they "want" for the house. They are either getting low ball offers or no offers at all.  They cannot drop the price any lower. They feel they cannot sit around waiting for a decent offer.

These homeowners might think that becoming landlords will be a good solution.   Homeowners want to rent for just a couple years while waiting for the market to recover .  Then, they’ll be able to sell their house for more than they can today.   While  this plan seems like a good one, will renting really solve their problems? Maybe yes. And maybe no.

Lets look at some of the factors to help you before deciding whether renting will solve some of your problems … or if it will create more.  While you may have excellent reasons for renting your house, consider the following ten potential problems before giving up on selling your house.

  • Buying again – You might need some of the equity from the sale of your house to purchase a new one.
  • Property management – Managing receipts, maintenance, repairs, emergencies, and other requirements associated with renting requires time, money, and effort. You can choose to do it yourself or you can choose a property manager to do it for you.
  • Market recovery or market bust – It may take longer than you think for real estate prices to recover. Right now, the economy remains weak. Downward pressure on home values will continue for the foreseeable future. Who can say how much longer … or steeper … prices will sink before an eventual upswing. Once the market is on an upward trajectory, it will take years forprices to return to previous highs.
  • Depreciation – Since tenants are unlikely to treat your home as well as you would, physical depreciation is a very real aspect of turning your home over to tenants.
  • Capital gains tax – If you rent your house for only two years, you can still sell your house and be exempt from paying IRS taxes on up to $250,000 of capital gain (when single) or $500,000 (when married). However, the depreciation you took against rental income may have to be recaptured. Be sure to consult your tax accountant.
  • Re-lease or try to sell again – In this climate, you’ll find tenants quickly. Once the first year’s lease is over, you’ll have to decide whether to continue renting your house or try selling. Either way, you’ll have to invest in cleaning, painting, landscaping, replacing carpet, upgrading appliances, and making repairs before the next tenants or buyers move in.
  • Damaged goods – When you’re ready to sell, your house may be considered ‘damaged goods’. Homebuyers can immediately tell if a house has been lovingly cared for or simply lived in. And they will take this into consideration when making offers.
  • Selling with tenants in place – Let’s face it, tenants don’t care if you sell your house or not. They don’t have a stake in the outcome. They only know it disrupts their schedule. They won’t keep the house as neat and clean as you would. They won’t be as flexible to accommodate showing appointments as you would. And they may hang around the house during showings, making homebuyers uncomfortable and eager to leave. Once their lease is up, you’ll find yourself in a negative cash-flow position and may very well be forced to rent once more.
  • Rental merry-go-round – After renting your house for what was supposed to be no more than a year or two ... just until the market turned around ... could turn into a long-term commitment. You may get stuck on the rental merry-go-round, unable to jump off. The window between leases will leave you with only a short time to list and sell your house. Before you know it, you’ll be back on the rental merry-go-round, still waiting for the opportunity to unload a monumental burden.
  • Rental prices may go down – Right now rental prices are what they are, and they may be just fine for your needs. But renting your house as a short-term solution may not be a long-term solution. With so many homeowners turning to renting as an expedient to selling, tenants will have more homes to pick from. In time, instead of facing a ‘Buyer’s Market’ on the selling end, you may very well face a ‘Renter’s Market’ on the rental end. Such a circumstance would drive rents down year to year. After factoring in rising insurance rates and property taxes, you may eventually find yourself in a negative cash-flow position.
  • Mortgage rates – Mortgage rates are the lowest they’ve been in recent history. But they can’t stay low forever. When the economy recovers, the Federal Reserve will start raising key interest rates. Mortgage rates will climb in lockstep, making homeownership more expensive. To make up for higher monthly costs, buyers will bargain that much harder, forcing prices down once again.

Really there could be more reasons.

If you have a pressing need to move out and move on, and don't want to be weighed down with renting your house, there is a way to sell quickly.  Its listening to the Portland  real estate market and price your house accordingly.

 

Rich Peralta is a real estate professional in the Portland Metro Area, including Lake Oswego, Tualatin and  West Linn Real Estate.

He can be reached at 503.961.2181 or by e-mail at rich.peralta@exprealty.com

Contact him  for more information on Portland,  Lake Oswego or West Linn Real Estate!

Originally posted on West Linn Real Estate.

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