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Need to Sell but Can't? Turn Your Home Into an Investment Property

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The real estate and mortgage crash did a lot more than just throw millions of homeowners into foreclosure or bankruptcy. It also threw many into underwater positions in their mortgages. They owe more than their homes are worth. Even if they're not in a negative hole, many are not sitting on enough equity to sell without bringing cash to closing. The closing costs and real estate commissions can be as much as 7 percent of the selling price.

Articles have surfaced recently about "reluctant landlords." These are homeowners who need to move for a job or other reasons and they aren't able to sell their homes. They end up renting out the home with the goal of selling it as soon as they build enough equity to get out from under the mortgage. Some are lucky enough to rent for more than their mortgage payment, but many are taking on negative cash flow. Their mortgage payment is higher than the rent, and they're paying to rent or buy another home when they move. This doesn't have to be the case for many, because thinking of the situation as a business opportunity could bring better financial results.

If you're in a need-to-move situation and can't sell your home, you may be in better shape than you think. Throw off the negative thoughts and the "sell when I can" attitude and think like an investor. A few investor tools and tips can help you to rent out your home with better cash flow and some nice tax breaks as well.

  • Rents are high these days. -- Trulia.com's Rent vs Buy Report for the summer of 2013 shows that for most consumers it was cheaper to buy than to rent in all 100 metro markets covered by the report. That trend is for the most part still in place. They're still not buying for many reasons, so the greater demand for rental units is causing rents to rise.
  • Study your local market rents. -- With that in mind, study the rents in your local market for homes like yours. If necessary, call on some as a possible tenant and ask about the home. You should be able to do online research as well.
  • Pay attention to perks and features. -- Check out rental ads to see which perks and home features are being advertised and how those property rents compare to others. Your home improvement projects may be just what today's tenants want, and they'll pay more for the right features.
  • Allow for repairs in the rent. -- Of course you're going to try to get as much for rent as possible, and hopefully more than your mortgage payment with taxes and insurance. Keep in mind that those repairs you may have done yourself in the past will now require a paid repair service call. Ask an accountant, but you should be able to deduct those repair expenses at year-end, which you couldn't do when you lived in the home.
  • Breaking even could still mean a profit. -- You can probably take depreciation on the home once it is converted to rental status. Like all tax rules, it's complicated as the IRS explains here, but you can normally depreciate the cost of the structure (land value deducted) over 27.5 years. As an example, if your home less land value is depreciated based on150,000 cost basis, divide that by 27.5 to get an annual depreciation deduction of around5,454. That's454/month off the rental income on which you don't have to pay income tax. Talk to an accountant before making any decisions.
  • Consider a lease purchase arrangement. -- This is more complicated, but could be well worth the hassle. Many people today would like to buy a home but can't due to credit problems or lack of a down payment.
  • Offering them a lease with the option to buy at the end of a specified period of time, you can create a win-win situation.
  • They should take better care of the home if they expect to own it at some point.
  • You still get the cash flow and tax benefits of rental property investment.
  • You can structure the option to buy at a profitable price in three to five years.
  • You can get an upfront non-refundable option deposit that you keep whether they exercise their purchase option or not, and even if they move out before the lease ends.

Don't think like a victim if you need to move and can't sell your home. Think like an investor and business person and do your due diligence. You just may have been forced into a really great business decision!

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