Should You Rent Your Home if it Won’t Sell?

In the current housing market, more and more sellers are being faced with the reality that their homes aren’t selling. For many of them, dropping the list price often means they will be bringing money to closing because they will owe more on their mortgage than the proceeds from the sale would provide (also known as being “under water”, “upside down”, or “short”). So the possibility of renting the house inevitably arises.

This is a subject I am keenly aware of because I faced it myself. As my home sat vacant on the market, I began to come to terms with another price drop in order to get it sold. Fortunately, one of my good friends needed a place so I rented it to him.

I tend to look at the economics of renting my home as a cash flow statement: where is money coming into the property and where is it going out. On the income side of the ledger, there’s the monthly rent that tenant pays. Landlords are also entitled to depreciate their rental property, less the value of the land it sits on, over a period of roughly 27 years. There’s also a tax benefit for expenses you incur to operate the property that are deductible from rental income, such as mortgage interest, insurance, property taxes, and management fees. Finally, there’s property appreciation, which stands historically at about 5% nationwide (according to the U.S. Census Bureau), though that definitely has not been the case lately.

On the ouflow side of the cash flow statement, the largest expense is likely what you pay the bank for your primary mortgage, and in some cases a second mortgage or line of credit. There is a catch, however: what you pay the bank is a combination of principal and interest. If you look at the breakdown of most mortgage payments, earlier payments are primarily interest and very little principal. As time goes on, you pay less of your payment towards interest and more towards principal. Principal is your friend and contributes towards your equity in the property. Therefore, you would only consider the interest portion of your mortgage payment as a cash outflow.  Of course, as mentioned above, the costs to operate the property are cash outflows.

Where would this leave you?  I lose about $2000 per year, but I have the luxury of a good friend helping me pay my mortgage and taking care of my house until I’m ready to sell it. I would say that happens less than 1% of the time.