Rental option: When buyers and sellers change course
A recent article on BusinessInsider.com lists several reasons why renting may be a more attractive option than owning in today’s market. Renters don’t have to come up with a 20% down payment, and they don’t have to worry about additional expenses such homeowner’s association fees or property taxes. And, of course, there's the freedom factor: whereas most mortgages last fifteen, twenty, or thirty years, leases typically run in one-year increments.
With listing prices down and such attractive options available to prospective renters, does it make sense for homeowners to considering renting rather than selling? According to several Charlottesville area agents, the answer depends on the homeowner’s needs and circumstances.
Jonathan Kauffman, principal broker at Nest Realty, fielded enough requests from owners interested in offering their primary residences for rent that he added property manager Sarah Ballard to the Nest team. To help her clients make an informed decision, Ballard prepares a comparative market analysis that provides reasonable expectations of both sales price and rental income so the owner can see how the numbers stack up. If the homeowner chooses to go the rental route, Ballard is available to act as a property manager, saving her clients from having to attend to all the details involved in the rental process. And today’s rental market offers opportunities that didn’t exist several years ago.
"Back in 2004 and 2005," Ballard says, "Darden and Law School students would buy a place to live in while they were here and then sell at a profit. People are more cautious now; they tend to rent, though there are still values in the marketplace."
Steven Braden, a real estate agent and property manager with Montague Miller, agrees.
"Doctors used to come here, buy during their residency, and then sell when they left," says Braden, "but now it’s safer and it makes more sense to lease and then walk away," Braden says.
For some, the decision to lease rather than sell is a no-brainer. Braden recalls one couple who became landlords after realizing they had close to $50,000 of negative equity to cover, a situation that made breaking even on a sale virtually impossible.
"A lot of people I deal with shift to that B Plan to offset their mortgage until the market gets stronger, and it becomes the A Plan because they have to get some relief," he says.
"Deciding whether to rent or sell depends on a number of variables including when the owners bought the home, what they paid for it, and what they are able to sell it for,” Kristin Streed of Loring Woodriff Real Estate Associates says. “Can they cover their mortgage with the rent? Can they put together a down payment on another home without the sale? Many people can’t qualify to carry two mortgages."
Online calculators can help determine the feasibility of renting versus selling, but there are other benefits and risks to consider. Rental income may cover– or at least offset– an existing mortgage payment and while such income is taxable, owners are allowed to claim depreciation as well as deductions on certain expenses. But if a homeowner gets into a rental situation that extends to the three-year mark, there’s a risk of forfeiting the capital gains tax break.
Timing is another crucial consideration. Like sales activity in the Charlottesville area, rental activity is tied to the academic calendar. Both UVA students and parents of school-aged children are equally anxious to secure housing prior to the start of the school year, which means that rentals command the strongest prices during spring and summer months.
Steven Braden sums it up: "It has to be the right time of year– either to sell or lease."