Reluctant Landlords and the Five Year Rule

Last week's Personal Journal section of the Wall Street Journal featured a lengthy article profiling families who bought houses, but ended up needing to move and then couldn't sell their house for anywhere near the amount they had bought it. Their stories really show how homeowners should consider the"five year rule," which warns that unless you plan on staying in that location for more than five years, you will save money by renting.

So, the homeowners now live somewhere else, pay rent on that apartment or home rental, pay their mortgage, property insurance, tax, maintenance and in many cases a property manager to try to get back some money on their home.

They believe that in, say 2 years, the money they will have lost (the difference between mortgage + all other fees) will be less than their houses appreciation.  (Buy House for $200,000. Sell for $150,000 and rent for 2 years at $1000 per month, drop $30,000 on mortgage, fees and taxes  and then sell for $200,000.) Realistic?

According to the article, there are an increasing number of families in this situation, as evidenced by the rising number of homeowners converting their insurance to landlord policies; Allstate reported a 27 percent increase over last year.

Even in favorable market conditions, families that sell their homes within four years of purchase, typically pay 19 percent more as owners than they would have paid as renters. Transaction costs, property taxes, property insurance and the costs of maintenance all add up very quickly. Add to this a real estate market that has recently plummeted, this really puts some people in an extremely unenviable situation.