Under the right conditions, you can make more by NOT selling your house.
Two decades ago, businessman Michael Surridge moved to Memphis for a better job, but he decided to keep his home in Springfield, Mo., and add a second career: landlord. He hoped for a “modest supplemental income” and kept the property “more for tax advantages than a high profit margin.”
While he’s had his fair share of repairs and even had to evict a tenant, he’s happy with the decision. “Long-term and low-maintenance renters made the property more profitable,” Surridge says. “The combined property appreciation and tax benefits outperformed what we would have made with equity investments had we sold the property.”
Now 20 years later, other homeowners are catching onto what Surridge has learned. A study by a real estate brokerage firm called Redfin reveals, “39 percent of homebuyers plan to buy their next home and then rent out their existing home instead of selling it.”
Why are more Americans becoming landlords?
“Many of my home-buying clients refinanced and locked in a very low mortgage rate over the past few years,” says Taylor Connolly, a Redfin real estate agent in Baltimore. “That low rate, combined with a strong rental market, means they can charge more in rent than they pay in mortgage each month, so they are going for it. My family is in the same boat — when we move up this year, we plan to keep and rent out our current home.”
But going into the landlord business can bring as much hassle as cash. Finding quality tenants and collecting their rent, fixing what breaks while they live there, and making sure they didn’t destroy the place when they move out — to some folks, it’s not worth any amount of money to deal with all that.
Surridge was lucky to have a house in good shape. For computer programmer Darice Taipalus, a homeowner and landlord in the Dallas area, renting out her home was a short-term plan with its ups and downs. Before Taipalus and her husband married, they each owned a home. To combine lives, they’d need to sell one property, but the house they wanted to sell was in dire need of updating. “Every wall needs wallpaper removed or paint redone. Every floor needs to be resurfaced. Even the sinks are still the ’80s clamshells,” Taipalus says.
To sell the house, they’d have to wait until they could upgrade the interior or take a loss. Instead, they decided to rent to family. The family members pay rent at a discount while Taipalus works on remodeling in her spare time, but the cost is starting to take its toll.
“We’re losing money,” Taipalus says. Between needed repairs — a new furnace, upgraded garage door and a twice-rebuilt AC unit — and the cost of remodeling, the rent just can’t keep up. And while Taipalus says, “the extra cash is nice,” the couple still plans on selling the house this year and getting out of the landlord business.
Crunch the numbers
If you want to rent your home out, crunch the numbers first. In a post-recession world, there is “absolutely a demand for private home rentals,” according to Josh Kattenberg, owner of Real Property Management Express in South Dakota. However, before you dive in, Kattenberg recommends comparing your monthly mortgage payment to the rental market in your area. If you can’t charge more than your mortgage payment, you might find yourself in hot water later on.
And don’t forget to take a hard look at the business side of things. Make sure you are prepared to handle managing the property like “maintenance needs, collections and property showings,” according to Surridge.
Maintenance and repairs are a part of life for landlords and can run from downright cheap to shocking. For Taipalus, she’s spent so much in the last year on repairs and remodeling costs she doesn’t want to calculate the actual total and sees selling the house as “the freedom from worrying about new maintenance issues,” but it isn’t always so costly.
Kattenberg says any prospective landlords should “expect the unexpected and keep cash reserves.” But in general, “as a rule of thumb, many investors will figure on about using 8 percent of the gross rent proceeds on maintenance.”
Learn the laws
Staying on the right side of the law is another potential snag for new landlords. Kattenberg recommends getting familiar with “federal and state fair housing laws, state landlord and tenant laws, tenant qualification laws, and accounting and tax laws.”
If you need help, look to the landlord and tenant law guidelines in your state. Most state offices publish them online. You can also find helpful resources through reputable sites like Nolo.com and your local housing authority office.
Potentially the biggest problem for new landlords is managing tenants. If you’re lucky, and screen carefully, you won’t have many problems — but things can go awry no matter how well you plan ahead. Once, when checking in on his rental, Surridge says “we arrived at the property finding the front door open, holes punched in the walls, glass door broken and the whole house infested with fleas.” On the whole, though, in more than 20 years, Surridge has had mostly positive experiences, which may be due to his belief that “sometimes it is better to pass on a suspect applicant and miss a month’s rent rather than subject yourself to dealing with a troublesome high-maintenance tenant.”
If you find yourself short on time, overworked or struggling to keep the rent coming in, a property manager may be able to help you. Like the name implies, property management companies find tenants, handle leasing and manage the day to day business for a monthly fee. “Just the simple act of filling the property quickly with a quality tenant and collecting rent consistently month after month will pay for the cost of the management fee,” according to Kattenburg, but take care in who you hire. Compare two or three property management companies in your area, meet their agents, get a cost break down and then determine if it is worth your time.
If you don’t want to commit to a full property management service, Surridge says “having a handyman on call that can triage all property issues and fix minor problems is ideal and will keep stress levels of managing at a minimum.”