When you bought your home, you probably thought it was the start of an awesome financial future. The equity would grow and you could buy and sell your way into your dream house. What you didn’t count on was the market bottoming out, that smart purchase becoming your personal albatross, and possibly having to make the transition from owning to renting. When you’ve come to terms with selling your house via short sale and are ready to rent, what should you know, and what can you learn about recovering your financial security?
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First, don’t beat yourself up – more people than you may realize are facing similar choices. Times have changed, and sometimes what seemed like a smart financial decision ends up costing you big time – both monetarily and mentally. When you are working to hold onto a house and finding it harder and harder to make ends meet, making a change can be so smart.
Still not sure? Amy Rose Herrick, a chartered financial consultant and investment adviser representative, says that you should consider if the costs of your home are worth your emotional well-being – and the hit to your checkbook.
How much is it costing you to own anyway? “Look at the yearly costs of principal, interest, taxes and insurance – these numbers are easy. Now factor in home owner association dues, the costs of maintenance like mowing, landscaping, tree trimming and snow removal, pool care, etc. You either pay someone to do it or you pay for the equipment, repairs and supplies needed to do it yourself. Your time here is free,” Herrick said “I estimate a normal household will average 1-2% of the value of the home on normal maintenance. Yours may be more or less. On a $200,000 home figure $2,000 – $4,000 a year to keep it maintained,” Herrick said.
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Add to that the costs of updates, decorating and other expenses, too. “Sure you may have a few dollars in tax savings if you can itemize but you have to spend a dollar here to get back 15 to 25 cents in itemized tax savings in most cases. You still spent 75 to 85 cents more no matter how you look at it,” Herrick said.
Renting, on the other hand, can be a freeing change that lets you save more, spend less and live in bigger digs.
Once you are ready to rent, there is good news: you may just end up with more bang for your buck.
Colin Grussing , an entrepreneur and investor whose business RootSuit was recently featured on ABC’s Shark Tank, says that while there are good reasons to own your own home, such as being in control of changes and not having to worry about lease renewals, there are many benefits to renting. “For many reasons, nice houses rent for a much lower percentage of their value than cheaper houses. There are diminishing returns when you start making improvements to a house beyond the basic necessities. Adding a nice kitchen, swimming pool, garage, jacuzzi tubs, etc are all huge expenses if you are paying to add them to a house. The amount they raise the rent is very low by contrast,” Grussing said.
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So really, by renting you could end up with a nicer, larger home — while spending less than you did on your mortgage.
Now, the bad news: Your credit score will take a hit if you are short-selling your house – or, worse, losing it in foreclosure. “The credit score is what landlords go by to determine the strength of the renter,” said Lonnie Shapiro of Coldwell-Banker Residential Brokerage in Ridgefield, Conn. ”So, what the former homeowner needs to do is to pay several months’ rent in advance to keep the landlord comfortable with them. If they do not have several months’ rent and the landlord is not comfortable with their credit score they need to have a co-signer (with good credit) available to help them out.”
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