How much of a loss is still ok when renting your house?

Asked by Jessica Gerbavac, Keansburg, NJ Fri Feb 25, 2011

My husband and I are loking to rent our house. We know we will take a loss from what we pay each month and what a renter will pay. At what point is it not worth it?
Would it be better to lower price and not include utilities or keep price higher and include them?

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21
dave, Agent, Charlotte, NC
Fri Feb 25, 2011
Jessica,

This depends on a lot of factors that none of us know. The first thing you need to ask yourself is what can you afford to absorb each month. For soem peopel a $100.00 a month is acceptable and for others it could be $500 or more. Look at your finances and decide what you feel you can afford comfortably every month.
In regards to utlities. I for one am not an advocate of including utilites in ANY rent. You hae no control over how they keep the heat in the winter, the A/C in the summer or the lights on. It is a big gamble and it could lead you to a significant increase in utlities from waht you and your husband were paying.
Web Reference:  http://www.davedicecco.com
3 votes
Barbara Ashl…, Agent, Sacramento, CA
Sat Mar 5, 2011
It will depend on your financial situation, what your goals are, etc. The best person to advise you is your tax professional and/or attorney. As far as renting and including utilities--my thought is do not include utilities, except for garbage, water and sewer (these will be reported on your credit if they are late, since you are the homeowner). You can adjust the rental so that these utilities are covered in the monthly rent, however. Check advertisements in your area for like rentals and price it competitively. Depending where you are located, it is a great time to have a rental as so many people are opting for that after losing their home to a short sale or foreclosure. Best of luck from Sacramento, CA.
0 votes
Debi Fortin, Agent, Seattle, WA
Tue Mar 1, 2011
Hi Jessica,
I agree with everyone who says to speak to a CPA regarding your situation. There are after-tax benefits to renting your property, which will mitigate some of the monthly cash flow losses. However, if you plan to sell the property later, you will want to understand the tax consequences of your sale. If you will have a capital gain on the sale, the amount that you might have to pay in capital gains tax might overshadow any monthly loss that you might experience. Especially if you sell after 2012.

As a landlord, I find that it is better to have a lower rent and not include utilities. If you include utilities, tenants will not care if they leave the water running all day long. And, more people will respond to your ad if the rent is lower.

Good luck!

Debi Fortin
Web Reference:  http://www.debifortin.com
0 votes
Karla Wagner, Agent, Bonney Lake, WA
Fri Feb 25, 2011
Everyone's opinion will be different, especially in this market. Honestly, it all depends on your personal situation, your financial picture, and what your long-term goals are for the property. It may be worthwhile to consult with a financial planner to see what is best for you. Best wishes.
0 votes
Dallas Texas, Agent, Dallas, TN
Fri Feb 25, 2011
Confer with CPA the home is now consider as a business you would have write offs

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
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0 votes
Carmen Alexe, Other Pro, Rincon, GA
Fri Feb 25, 2011
Jessica,

I am not familiar with your area but my opinion is to lower the rent and let the tenants pay their own utilities. Your goal is to at least break even. When advertising your home for rent you want to make sure that your rental is going to stand out. When you show it make sure that it is clean and has a great appeal to it. Offer first month half off the rent or maybe even a full month discount...anything to keep the rent as close as possible to the mortgage payment.

You may also offer to do a rent to own where you can justify an extra $100 to $200 more than the average rent. But be careful with that. Make sure you properly pre-screen the potential candidates. You may also be justified in getting a down payment which money you can put aside and use them as reserves for your rental.

At what point is not worth it? Hard to answer this question. If you have to come up with an extra $1000 per month to make the mortgage payment now and you can't afford it, then you really need to review your approach. Your credit is important so letting the house go to the bank should hopefully not be an option for you. I do hope that with the ideas mentioned above you will be successful. Good luck!
0 votes
Bob Brubaker, Agent, Lake Worth, FL
Fri Feb 25, 2011
Jessica-
Including utilities is going to increase your exposure to loss because you can't
predict usage . Keep it simple : take all your fixed costs>see what they total .
The difference betwween market rent and these fixed costs is a predictable figure. You
can know where you stand. Let tenants manage their utilities-Including water! Good luck!


BOB BRUBAKER HIGHLIGHT REALTY PALM BEACH COUNTY Fl.
Web Reference:  http://pbc-realcam.com
0 votes
Alan Boyle, Agent, Auburn, WA
Fri Feb 25, 2011
do not losse money to rent, ever!
do not let this be a job shop where all you do is pay bills and get mothing in return
you should at least cover your costs and your only gain being the mortgage eventually being paid off.
0 votes
Wes Black, Agent, Louisville, KY
Fri Feb 25, 2011
I have read through all the previous answers and they all have very good ideas. Since I do not know your age or financial situation I am going to suggest visiting with a CPA. This could be money very well spent. If rental units/prices in your area are causing you to take a monthly loss, maybe the right thing to do is fix up the home some, sell it and make your income in a different way. Taking in market conditions in your area, this may be the point where you should have a realtor sign in your front yard for this years selling season. Cut your losses now and regroup. Thanks for the question and Good Luck!
0 votes
Gary Geer, Agent, Antioch, IL
Fri Feb 25, 2011
Jessica,
Do not include utilities. One advantage to lowering your price is that you will most likely have more rental applicants. Just because someone has the money at the time of renting does not make them your best choice. Screen all of the applicants and try to get at least the first months rent and a security deposit on signing a lease. You may want to structure your lease so it ends in the summer. Usually that's the best time to find a tenant as most with children have them out of school at that time and are looking to move. It's also best for you because utility costs are lower in the summer. If your property will be vacant for any period of time, you will want to control your costs.

All the best,
Gary Geer

http://www.GaryGeer.com
0 votes
Don Maclary, Agent, Virginia Beach, VA
Fri Feb 25, 2011
Do not include utilities, if you want a higher return nicely furnish it with thrift store furniture and rent it furnished. also there are far fewer choices for renters looking for furnished places.
rent faster and for more money.
0 votes
Mary Petti, Agent, Edison, NJ
Fri Feb 25, 2011
Jessica,

First off, speak to a local real estate agent to see if what you think you are asking for rent is what you can actually get. Then speak to your accountant as none of us know your specific financial situation and cannot advise you on what "loss" will be OK for you.

Then if you decide to move ahead, list it with and RE agent. They can help you with the in's and out's of a lease agreement.

I so agree with Diane, if it's a single family home I would not include the utilities at all. I might not even be responsible for snow removal, I would make it the tenants reponsibilities.

Here is a link to the NJ Truth in renting guidelines:

http://www.state.nj.us/dca/divisions/codes/publications/pdf_…
0 votes
Diane Glander, Agent, Spring Lake, NJ
Fri Feb 25, 2011
Only you can decide what is financially worth it or not to you.
I would not recommend you include utilities. People can be very wasteful and you could have huge utility bills.
It sounds like you are new to being a landlord. You absolutely should gt a copy of Truth in Renting so you know your rights and your tenants rights, too. The state highly favors the tenant in most issues. I can email you a copy if you'd like, just reach out to me through Trulia or my website.
Web Reference:  http://www.dianeglander.com
0 votes
Don Tepper, Agent, Burke, VA
Fri Feb 25, 2011
Good advice below.

A few quick thoughts:

Regarding utilities, unless it's customary in your area for landlords to pay them, don't. Have the tenants pay. Two reasons. First, if you were a tenant which would be more appealing: "$2,000 for 4 bed/2 bath home . . . . blah . . . . blah . . . blah . . . plus utilities." Or "$2,400 for 4 bed/2 bath home . . . blah . . . blah . . . blah . . . includes utilities." Many people do an initial "cut" based on price, and by including utilities you may be pricing yourself out of the market. Second, you'd be surprised how much in utilities tenants can use when someone else is paying. So, clear answer: They pay the utilities.

Regarding how much of a loss, check with your accountant to determine what your after-tax loss would be. I'm not an accountant so this isn't accounting advice, but in many/most cases those losses are tax deductible. So--just making this up--if you actually lost $2,000 in a year, your after-tax loss might possibly be closer to $1,400. Also, on a rental you can depreciate the structure, which is an added benefit to you. Again, check with an accountant.

Then--though nothing is certain--you can project ahead for rents in upcoming years. Basically, you might be able to raise rents slightly each year, thus narrowing your losses. And if you hold on long enough, you might achieve a positive cash flow. Also, Dp2's suggestion is good: If you do plan on selling the property, you might consider offering it as a lease-option. That could bring in some additional monthly income for you . . . and help you find a purchaser.

Hope that helps.
0 votes
Jessica Gerb…, , Keansburg, NJ
Fri Feb 25, 2011
Thank you all for your help and advice. I will take everything everyone said into consideration. I hope it works out for us and everyone out their in these tough times!!
0 votes
Jerry Barker, Agent, Atlantic City, NJ
Fri Feb 25, 2011
Whoa, stop. Take a loss for how long? One year, two years, 30 years until the mortgage is paid off? One thing your probably forgetting is the cost of maintence and repairs thats going to add to the loss your already planning on taking. If this is one of those situations where your just not ready to walk away from the home right now for some reason then you need to look at one of two things, Where will i be financially in ten years if we walk away from this home right now today vs where would you be if you dont. I think you will find the answer to that question to be about a difference greater then 100,000 or so with the better senerio having been to walk away from the home today. Most likely you should discuss your options with a very qualified individual who can help you do whats best for you.
Web Reference:  http://www.sjrates.com
0 votes
Kenneth Verb…, Agent, PRINCETON, NJ
Fri Feb 25, 2011
This depends upon your financial situation and only you can make that call. For example if you are planning to buy another home and only renting this one because it's value is less than you owe. (short sale) will your income as well as 75% of rental income get you where you need to be to afford both?
As a landlord it is almost always better to have tenants pay utilities as they other wise tend to waste them. (if a tenant really wants to stick it to their landlord they may leave windows open in the winter or let the water run all the time. ) The only positives to including utilities are that it may give you the appearance of getting a higher rent than you actually realise, it also assures you that utilities will be on (no shut off of services which could cause serious problems) , they become a deductible expense for you and it makes for less accounting in a shared house situation.
If your decision to rent at a loss is in hopes the market will turn around and your home regain value, like a stock that has dropped in price its a gamble. How long can you afford to wait? Do you really want to be landlords?
0 votes
Mitch Larriv…, , Orlando, FL
Fri Feb 25, 2011
I agree with everyone here. In short, it comes down to what you are comfortable with.

When it comes to the utilities.. I have worked with people looking for a place to rent. If the price doesn't include utilities, they always have some number in their head that they add to the price. But consider this, there are two advantages you include utilities in the rent. 1) It's one less bill for your tenants to worry about. 2) You may be able to work a bit of profit in to help with that monthly loss.
0 votes
Lee Goade, Agent, GALLATIN, TN
Fri Feb 25, 2011
Yes, there is No hard & fast rule.

1st of all How much can you actually afford? Subtract that from your Mortgage pmt. and see if this # puts your Hm. within the Monthly Rent for a comparable Hm. in your area. (this is only a quick calculation and does not factor in maintenance or loss of rent when your tennant moves out, etc...)

You will also get to "Depreciate" your rental Hm. on your taxes and possibly right off the "Loss" per Month as well. (talk to your Tax pro...)

I would look into doing a Lease option or a Lease/purchase instead of a straight up Rental if your not really interested in becoming a long term Landlord...

Good Luck, it is a Booming Rental Market right now in most areas of the Country!

http://www.trulia.com/blog/leegoade/2010/12/rental_mania_-th…
0 votes
Sara Rubida, Agent, Arlington, VA
Fri Feb 25, 2011
A monthly negative or positive cash flow from a rental property depends on the arithmetic: Income, less mortgage and other expenses, gives you the result. There is no rule of thumb about the "acceptable" size of a monthly negative; that depends on your personal financial situation. Remember that will be income tax consequences from your rental that may help you to carry the property (check with your tax advisor about that). Also remember that a prudent landlord plans for a month or two of vacancy each year. Even if you have a steady stream of tenants, occasionally there will be a break between the move-out and next move-in, or you will want a brief vacancy period to refresh the property or make repairs. So probably budget the rental for maybe 10 or 11 months of income and 12 months of expenses and repairs.

My recommendation is to have the tenant pay for any separately-metered utilities. That way the tenant may actually think about the thermostat setting, how long his showers are, etc. And you will avoid variability in the monthly expense budget.
0 votes
Dp2, , Virginia
Fri Feb 25, 2011
Basically, whatever the difference between your monthly payment amount and the market rent in your area is, that's minimum amount that you'd need to cover. Plus, you'd need to cover the relevant expenses and any maintenance.

Whether or not to include utilities will depend upon what you want to do and whatever the norm is in your neighborhood.

You also might want to consider doing a lease-option if you intended to sell your property, and have resorted to renting as your plan B. Another option is for you to equity partner with another investor on the rental or lease-option.

If you are considering doing a lease-option, then please keep me in mind. You might want to get involved with one of the local REI clubs too.
0 votes
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