Turning a "Home" into a "House"

Have you ever had the feeling you have spread yourself too thin? I think I live my life not only burning the candle at both ends, but also lighting it in the middle just for fun. I recently posted how my duties as president of the Wisconsin Apartment Association (WAA) took me all over the state last week. They also took me down to Madison all day yesterday. Today is also going to be quite the adventure.

All week, the editorial board of the Wausau Daily Herald has been meeting with many of the candidates who are running for local office, those meetings continue this afternoon and into the early part of next week. At 5 PM, I am back on the air at WNRB-LP, 93.3 FM after missing the show last week. It will not be a full hour show, I will have to end things around 5:40 or 5:45 so that I can head to the Village of Weston’s Public Safety Committee meeting. For the last few months, a Task Force which I chaired has been working on re-writing their Chronic Nuisance ordinance, and our final draft goes before their committee, which meets tonight at 6 PM. Then I will try to make it back to the Daily Herald office by 7 PM for more candidate interviews.

Basically, the topic of tonight’s radio show will be a re-cap of some of the things we discussed in the Capitol yesterday. Things like protecting CCAP, like opposing legislation that would terminate a rental contract upon death (when other contracts carry over to the estate), like supporting proposed legislation that would allow a landlord an easier path to terminate a tenancy because of certain kinds of criminal behavior (SB 607), and a personal issue: what can we do to at the state level, with the help of WHEDA, to solve the severe lack of housing for very low income families.

Sen. Decker was not in the Capitol but I did have a nice discussion with one of his staffers. Rep. Seidel serves on the committee that was taking testimony on the faith healing bill you may have heard about in the news, so I also had a nice discussion with one of her staffers. However, after our meeting, her staff member took me to the hearing room and she did come out in the hall for a few moments to say hello. That was a pretty big deal to me… so thank you for that. She also made sure that I had the new version of the Wisconsin Blue Book. Finally, I also met with Rep. Petrowski and had a really good discussion with him that lasted well over an hour. We talked about my apartment association issues but also had a nice discussion about many other topics, including the aspirations that I have to someday serve in Madison. I learned a great deal about the legislative process that I didn’t know, and how things get done… and how the process changes when you are the party in the majority vs the party in the minority. The low-income housing issue is one that he took a particular interest in and he would work to set up a meeting with him and a representative from WHEDA the next time I am in Madison. I again do not think that I can thank Donna and Jerry enough for the effort they made to spend some time with me on my visit to the Capitol.

However, my Thursday blog posts are normally focused on the radio show, and of course because of my duties as WAA president, I had to cancel last week’s show. However, the week before that the main topic of the show were things you should consider if you are having trouble selling your home and think that renting it out until the market improves would help out with your finances.

The first piece of advice I would give someone thinking of renting their home instead of selling it is to become familiar with Wisconsin’s landlord-tenant laws, at the very least, get a copy of a booklet put out by the Dept. of Agriculture, Trade and Consumer Protection titled “The Wisconsin Way.”

One of the benefits to renting the house is that it may help you in the short term on your taxes. Just like the interest portion of a mortgage payment is tax deductible on owner-occupied homes, the interest continues to be deductible for rental properties. In addition, you are allowed another tax deductible expense known as depreciation. Although I would recommend you talk to a tax accountant for more information as it pertains to your specific situation, often even if you are making money on a rental property with some positive cash flow, adding depreciation expense can actually lower the amount of profit, and sometimes even result in a net loss. So there are some nice, short term tax benefits to renting the property.

However, those short term tax benefits could be wiped out and then some depending on how long the property is used as a rental. Again, you would want to consult with an accountant about your specific situation, but there are tax laws that allow someone to not have to pay taxes on the gain on the profit made from selling a house that was their primary residence. “Gain” is the tax term for profit you make when selling something for more than what you paid for it. So, if you bought a house 15 years ago for $70,000 and you are looking to sell it for $140,000, that $70,000 in increased value is gain, and is normally taxable. However, with certain restrictions, if you have owned the house for at least 5 years, and that house was your primary residence for at least 2 of those 5 years, that gain you receive from selling the house is often exempt from taxes. However, if you rent that house for more than 3 years, you will no longer meet one of the requirements for this gain tax exemption, and you would now have to pay the taxes on the capital gains.

I cannot emphasize enough that you really need to talk to an accountant familiar with your situation to determine how the benefit of depreciation or the potential loss of the capital gain tax exclusion would affect you.

Two other issues are the mortgage and insurance on the home. Insurance policies for home owners and insurance policies for rental housing are very different, with very different levels of risk. You want to talk with your insurance agent, but a standard homeowners policy almost never will cover the property if it is instead used as a rental property. Policies on rental properties tend to be more expensive, and there are some companies that will no longer insure a house if it is a rental.

Worse than an insurance crisis could be a mortgage crisis. Most mortgages have in their fine print a “Due on Sale” clause. Basically, if you sell the house, the mortgage needs to be paid. You may think this isn’t a big deal because you are not selling the house, you are renting it. If the house would sell, you would use those proceeds to pay off the mortgage. The whole reason you are thinking about turning the home into a rental is because you can’t find a buyer. The hook is that those “due on sale” clauses cover “actual and equitable” transfers of title. An “actual” transfer is just that, you actually gave the deed to someone else. An “equitable” transfer is when you have given someone the rights of ownership, without actually giving them the deed. When you rent out a property, you are giving the tenant many rights of ownership, including exclusive possession. Renting the property is considered an “equitable” transfer of title and in most cases, will meet the guidelines where the bank would have the right to demand that the mortgage be paid in full. Ouch! Like with insurance, there is more risk involved with rental properties than there are with owner occupied properties. The interest rates are higher, the underwriting standards are higher, and there are some banks that won’t even do loans on rentals. So, when they offered you that loan on your home, they did so with the understanding it was not going to be a rental, but instead by occupied by you.

The final thing to consider is the fact that houses are different than homes. Often when I write about rental housing, I use the word “house.” You may have noticed in this blog post, I tend to use the word “home.” There is a difference between a “house” and a “home,” that difference is primarily an emotional attachment. It is your memories and your history that made your house into your home. As a landlord, that real estate is an investment and it is all too common that tenants don’t take care of the property to the level you wish they did. And without proper screening (and even sometimes with proper screening), damage can be done to the property that is quite literally criminal. For me, that is a cost of doing business. Some tenants do a much better job of taking care of the property than others. For some, it is where they live. For the better tenants, they make their rental housing “home.” However, if a renter trashes a place, or causes physical damage, I need to repair the damage, try to collect against the tenant, and review my screening methods to see if I can do better next time. It is a cost of doing business.

However, if you cannot make that emotional disconnect… if you would be devastated if someone destroyed some aspect of the house that you had some history with… if you expect the renters to have the same emotional attachment that you had and therefore the same level of respect that you had… if you don’t think that you could go to treating your “home” as though it were a “house”…. Then you really don’t want to consider renting it out.

See you later on the radio for a shortened version of the Dr Rent Show at 5 PM on 93.3 FM, WNRB-LP. Until then… HAPPY RENTING!!

About drrent

Wausau, Wisconsin Landlord, past president of the Wisconsin Apartment Association, Host of the Dr Rent Radio Show on WNRB-LP, 93.3 FM, Wausau, WI
This entry was posted in WAA, WHEDA, Wisconsin Way, WNRB. Bookmark the permalink.

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