Downsize and cut your costs without selling your house

If you can swing it, and you're game for the renting life again, becoming a landlord and a tenant may be your best bet for covering your mortgage without giving up your home and selling at a loss.

If, like many Americans you can no longer afford your house, renting it out and trading down into a rental yourself might help you to save money and avoid foreclosure.

However, renting out your home won't work for everyone, experts say. Strapped homeowners need to take a good, hard look at the costs, risks and obligations associated with becoming a landlord before they put up a "For Rent" sign. It's not as easy it seems, experts say, and it's often more costly.

Here's a quick guide to weighing a move to landlord — and tenant — in order to save your house and investment.

Add it up
The first question homeowners should ask themselves, experts say, is how much it costs to own their house.

"The basic equation is pretty simple," says Janet Portman, author of "Every Landlord’s Legal Guide" and the upcoming "First-Time Landlord: Renting Out a Single Family Home." "You need to know if what you can expect to bring in as a landlord will be more than your costs as a homeowner," she says.

Add up all of your costs — everything from your mortgage payment, to property taxes, to insurance, to homeowners association fees and any maintenance you pay for. What does it cost to own this house?

Next, figure out what you need to do to spruce up the place, so it will be ready to rent. You should count on springing for new paint, carpet cleaning and any repairs to leaky faucets and malfunctioning appliances. You might also need to put in new flooring, lighting or a heater, as well.

Getting the house in the best possible shape is the key to landing the right kind of tenant, Portman says. Get bids from contractors and come up with a total upfront cost. Then determine if you have the cash to make those repairs.

While fresh paint and new fixtures may seem unimportant, says Matt Griffin, president of Houston-based Residential Leasing & Management Corp., they’re not, in today's competitive rental market.

"Curb appeal is terribly important," Griffin says, recalling one house of his that had languished on the market for a couple of months, but was leased just 12 hours after he put on shiny new doorknobs and other new hardware. "The only way to get quality tenants is to lease the house in good condition."

What can I get for it?
After you know what you will have to spend, you need to determine what you can make from the property. How much rental income will it bring in?

Check out classified listings in the local paper, Craigslist and property management sites like Rent Solutions. (You can search by ZIP code on MSN Real Estate's Rent Center, or you can have Rent Solutions provide you a rental analysis report which compares your home with up to 20 nearby rentals). But don't stop there. You need to actually tour some of these rentals if you do not elect to use a property management company like Rent Solutions, Portis says.

"Pretend you are a tenant and go look at some of the places for rent," she says. Not all three-bedroom, two-bathroom houses in a neighborhood are alike. Check out your competition and see what level of amenities is included in that price. Do you need to adjust your upfront costs to spiff your place up?

"A lot of people with homes that aren't selling are turning them into rentals," Portman says. That's made the rental market much more competitive. Make sure your house compares favorably to others in its rental range.

A good rule of thumb for the average house is it will rent out monthly for 1% of its value. So, a $150,000 house would likely get $1,500 in rent, Griffin says. However, this varies widely from market to market, and it does not apply to luxury houses, which actually drop below that percentage the higher they jump in value.

Check the vacancy rate in your area with a local real-estate or property management company. If there's a lot of competition, Griffin suggests dropping your price a bit below market to get your property leased faster. Taking a $50 reduction in monthly rent can save your property from sitting for months and costing you more in the long run. Do you want to lose $4,500 in three months without a nibble on your $1,500 property, or lose $600 in a year for that $50 price reduction? It's your call. Just make sure you can cover your mortgage and other costs with that rent (or come close).

If not, you're going to have to find very cheap lodging to make up the difference. Would you be better off taking in a roommate and staying put?