In a soft market, the would-be seller often must rent out


August 09, 1992|By Alyssa Gabbay | Alyssa Gabbay,Contributing writer

Fritzi Hallock never planned to become a landlord. But after she married and moved into her husband's Mount Washington home last summer, Ms. Hallock, a 30-year-old senior associate with Legg Mason Realty Group, felt she didn't have a choice.

Few condominiums in Baltimore City were selling. And to recoup the closing and renovating costs she'd put into her two-bedroom, two-bathroom condo near Johns Hopkins University, she would have had to sell it for about $25,000 more than she paid for it -- a near-impossibility.

So, for the past year, Ms. Hallock has been collecting rent and checking references.

"Basically, I hold my breath every first of the month, knowing that I'll be mailing out the mortgage and not knowing if I'll get the rent," says Ms. Hallock, whose unit is now occupied by a Peabody Conservatory student, its second tenant.

So far, there have been few problems.

As the real estate market remains in the doldrums, more homeowners are finding themselves in Ms. Hallock's position, says Barbara Goldberg, a Realtor with the Roland Park office of ** O'Conor, Piper & Flynn.

"If the property isn't selling, people are renting it instead, to cover their mortgage and get some income," she said.

Vacancy rates for single-family rental units are up slightly from last year, according to the U.S. Department of Commerce.

That indicates that many homeowners who had tried to sell their units are renting them out, according to Robert Sheehan, an economist for the National Apartment Association.

But renting a property isn't easy, as anyone who has seen the 1991 movie "Pacific Heights" knows. In it, a pair of California yuppie landlords are tormented by a pathological tenant whose background they had failed to check thoroughly. For those who are considering the plunge, here are some pointers about renting your property:

* Should you rent? To decide whether it makes financial sense, calculate how much you will pay for maintenance and upkeep of your property by reviewing your previous expenses, said Priscilla Caskey, head of the real estate department at Whiteford, Taylor & Preston, a Baltimore law firm.

If you spent $3,000 on repairs last year, you can expect to spend at least that much to maintain the house while renting it out for a year. If those repair costs exceed the loss you would incur by selling your house now, you would be better off taking the loss, Ms. Caskey said. She said you might also have to pay liability insurance to cover the tenant for any accidents that occur on the property.

Also take into account the tax implications of renting your home, said Douglas Harrington, a tax partner with the Baltimore office of Coopers & Lybrand.

In most cases, you will forgo the opportunity to defer the gain on the sale of a property that has been converted from a personal residence into a rental property.

(There are, however, exceptions to that rule, depending on the circumstances involving the rental. If, for example, an owner decides to rent out his home for a short period of time when the market is not conducive to sale, and is actively trying to sell it while it is being rented, the Internal Revenue Service may still consider it a primary residence, said Tom Holly, a tax manager with Coopers & Lybrand.

(No specific stipulations apply; the IRS decides each case individually, Mr. Holly said.)

On the other hand, if you sell a rental property at a loss, you can deduct that loss from your taxes.

You cannot deduct such a loss on a primary residence, Mr. Harrington said.

* Set the rent. To determine the rent for your property, check the rental rates for other apartments and houses in your neighborhood by looking at ads in the newspapers, said Edward Levin, a member of the real estate department of Piper & Marbury, a Baltimore law firm. Make yours competitive. If you are in a hurry to lease your property, consider dropping the rate 10 percent or 20 percent below the market rate, Mr. Levin said.

Although a rental rate that covers your mortgage payment is ideal, keep in mind that mortgage payments often exceed the fair market value of the rent, he said.

* Advertise. To market your property, advertise in newspapers and rental guides. Posting notices in supermarkets and college housing offices as well as a "For Rent" sign in your window or on your front lawn can also help attract tenants, according to Leigh Robinson, author of "Landlording" (1988: Express Publications, El Cerrito, Calif.). Before you advertise, make sure your property sparkles inside and out, Mr. Robinson said.

"People like to identify themselves with the neighborhood they're in and the building, so how [your property] looks from the outside will make up their mind whether they want to look any further," said Mr. Robinson, who advised adding a fresh coat of paint and cleaning it with a lemon or pine oil-scented cleaner.

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