Thursday, October 23, 2014
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The Reluctant Landlord



Perhaps you never envisioned becoming a landlord. But now you have to move, and the prospects for selling your house seem grim. Maybe you don't even want to try to sell now because house prices have plunged in your market.

You're thinking one way out of this dilemma would be to rent out your home for a while until you can sell it for a decent price. But before you stick a "for rent" sign in your front lawn, you have many factors to weigh.

Are you up to this?

First, recognize that renting out your home is an emotional issue, not just a financial one. If you've lived in the house for years, it represents an important part of your life. You may worry that renters won't take proper care of it.

Homeowners with an emotional attachment to their home often "get intrusive as landlords," points out Danielle Babb, author of "The Accidental Landlord: How to Rent Your Home When It Doesn't Make Sense to Sell It."

"They may be rational people," she adds, "but when it comes to the house they've been living in, they want to come by every three days to check on it. They want to get too involved in the tenant's life."

Not only is that sort of behavior likely to vex your tenants, it also may land you in legal trouble, says Janet Portman, a real estate attorney and author of "First-Time Landlord: Renting Out a Single-Family Home."

One of the biggest mistakes homeowners-turned-landlords make is "they think, 'It's my property; I'll make the rules,' " Portman explains. "They really do think they can legally do all sorts of things they're not entitled to do, like coming over any time to check on the house, or setting their own rules on who can live there." The reality is that federal, state, and, in some cases, local laws set parameters for what landlords and tenants can do.

Renting out your house is an emotional issue, not just a financial one.

If you can't let go of your house emotionally, don't rent it out, Portman advises. If you're going to become a landlord, you have to be ready to think like a landlord, not a homeowner. "This is a business now," she emphasizes.

Think like a landlord

Becoming a landlord amounts to an additional job. You'll have to advertise and screen tenants. You'll need to have the skills and time to do repairs and maintenance. Even if you hire people to do the work, you're still in charge. "You're the one who will get the call on a Sunday morning that the toilet is plugged," Portman notes.

You'll also be the one who has to get rid of tenants who don't pay their rent, even if they're nice people. Then there are those not-so-nice tenants you'll wish you'd never met. Plus, you'll need to invest time to familiarize yourself with federal, state, and local laws governing rental properties.

One way to handle the time-consuming and bothersome aspects of being a landlord is to hire a property management company to take care of not only repairs and maintenance, but also advertising, screening tenants, negotiating leases, collecting rent money, dealing with problem tenants, and so on. To find a management company, ask other landlords for recommendations. The National Association of Residential Property Managers, headquartered in Chesapeake, Va., also can help.

Homeowners-turned-landlords often mistakenly think, "It's my property; I'll make the rules."

Professional property managers "know the laws," Babb says, "and they have established methods of advertising properties. They also have working relationships with businesses in the area. So when their employees need to relocate, businesses will go to a property management company to look for rentals to get a better deal."

But, of course, a property manager's services come at a price—typically 6% to 10% of the monthly rent, Babb says.

That brings up another critical issue. How much should you charge for rent? Some homeowners think they'll charge whatever their monthly mortgage payment is, so they'll break even. They're forgetting added costs: maintenance, repairs, landlord insurance, vacancy periods when they earn no rental income, and so on.

Adding up all those expenses still may not give you the right rent figure. "People make the mistake of thinking if they need this much money, they'll set the rent to that amount," Portman says. "But to be able to rent your house, you'll have to rent it at market rates."

The most important decision in this whole process is whom you pick to live in your house.

Consider, too, the current state of the local rental market. If a lot of homeowners have the same idea as you, there may be a glut of houses for rent. "It's very area-dependent," Babb says. "If you're in an area where jobs are coming in, you have a better chance of breaking even."

But, she adds, you might want to rent even if you'll suffer a financial loss each month. You'll get tax deductions for business expenses, which may help your financial situation. And by waiting to sell, you may more than make up in purchase price what you lost while renting.

Still, this strategy isn't for everyone. You have to look at your situation. Can you absorb that monthly financial hit for several months or longer? Can you afford to take the chance that house prices will recover?

Do your homework

Before you rent out your home, research:

  • Market rates—You'll need to charge a competitive rent for your area. Scour local ads and craigslist. Another online source Babb recommends is rentometer.com, which not only shows going rates, but also has renters' comments about properties. "If people complain about noise in an area and you have a place there that doesn't have noise," she points out, "that's a good selling factor for you to use."

    To be able to rent your house, you'll have to rent at market rates.

  • Federal, state, and local laws—You must adhere to laws each step of the way, from selecting tenants, to the lease you use, to handling security deposits, to maintaining the property, to evicting tenants. The U.S. Department of Housing and Urban Development and the Landlord Protection Agency are just two of many sources for information on laws.

  • Lender's rights—Your home loan may state that your house is "owner-occupied", so contact your mortage lender. The terms of your loan may or may not change. The lender might add a rider saying that, if you default on your loan payments, the lender may have the option of collecting rent directly from your tenants.

  • Insurance—You may have to get new insurance, as your current homeowners policy may not cover your house if you rent it out. This varies by company. Don't just assume your coverage will continue.

  • Tenants—Obtain a credit report for a prospective tenant, get employment history, and talk to current and former landlords. Bear in mind that a tenant's current landlord may give a good reference just to get rid of that person. So find out what previous landlords have to say. "The most important decision in this whole process is whom you pick to live in your house," Portman says. "If you're in a hurry or just go with your gut that someone is going to work out, you're looking for trouble."


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