From The Front Lines - Rentals vs Sales
People who want to sell their houses but don't feel this is the time are turning their homes into rentals. Yes, there are early signs that home sales are steadying and prices are picking up, but some owners have been waiting for years to sell — to move to new towns, to better jobs — and simply don't want to hold out any longer. The solution is often to pack the old place with tenants and instead of settling for a less than desirable price for their property.
The real estate pros call them Accidental Landlords - homeowners who find themselves in a cash crunch, who turn to renting their unit to help alleviate some of the financial burden. The idea can seem like a godsend, a brilliant solution — until the first tenants they find are a complete nightmare, calling and e-mailing every day with a string of complaints and demands.
Indeed, life as an Accidental Landlord is often far from being a cakewalk. Nationwide, it's happening all over, but most people don't realize what they're getting themselves into. If you can't sell your place, is renting it out really worth it? Here's a run-down of things to consider, and steps to take if you decide to push forward:
- Crunch the numbers. In many parts of the country the rental market is soft as well, so if you're paying $1,500 a month on your mortgage but can only rent it for $1,000, is renting the right solution? It could make more sense to sell the house at a loss, especially considering that rent proceeds are taxed as income. Sit down with a calculator and really do the numbers. This is a business decision you have to make before you put that ad in the paper."
- Find a tenant. For a fee, a real estate agent will help you find tenants, but plenty of Accidental Landlords advertise on rental web sites directly. Just be prepared for some heavy lifting, including ordering up credit checks and calling past landlords and employers. Approximately ninety-five percent of tenant problems can be eliminated in the screening process. Reading up on local fair-housing law is another must-do. It's illegal, for instance, to say you'd rather not rent to a family with kids or you prefer an elderly couple. When figuring out how much to ask for in rent, check out what other local house rentals are going for. Web sites that pull together information on rents can help too.
- Be specific in the lease. A lease should detail everything from which utilities are included in the rent to whether subletting is allowed to the penalties for late payment. An addendum should document the condition of the house upon rental — a walk-through with your new tenant will underscore that any damage caused will come out of the security deposit. Since things like lawn care and house maintenance are typically left to the landlord to handle, you might want to consider hiring a property management company, especially if you're moving out of town. Just realize that such a service can easily cost a couple hundred dollars a month, often 10-15% of the rental price. Include that in your calculations about whether or not renting is the right financial decision in the first place.
- Keep things professional. Watching someone else move into your home can be emotionally trying yet it’s imperative to keep your feelings at bay when dealing with your tenant. It's not a good idea to forget that this is a business relationship, keep all your agreements in writing and avoid becoming friends if possible.
- Think about your long-term plans. If your goal is still to sell your house, think about how you'll pull that off with tenants there. It's not impossible to continue to show your house with other people living in it, but keep in mind that you have an obligation as a landlord not to bother people at all hours of the day and night! When and how showings are acceptable should be spelled out in the lease. And remember that tenants probably aren't going to keep your house as pristinely organized and decorated as you would for potential buyers coming through. Though having a tenant might actually be a plus for the sale of your house and many Accidental Landlords use leases that include an option to buy. There's always a chance that once you've got someone in your space, they'll come to understand how much they don't want to leave it — and will turn from tenant into buyer.
Chris Bowman is with CENTURY 21 Kootenay Homes Inc. in Trail, BC.
Posted by Chris Bowman
on April 27, 2011