'Accidental landlord' need-to-knows

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 12, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I bought my house five years ago for $239,900. I am going to ask $254,900 when I put it on the market and would like to get $250,000. If I can't get $250,000 out of it, what do you think about renting it for a few years until the prices start going back up? --Margaret H.

A: What you're contemplating is called becoming an "accidental landlord." And you're not alone -- there's a whole generation of homeowners in precisely your situation who are financially unable to move on to their next home without selling their current one, and have made the decision to rent their existing homes out and wait out the market.

In terms of whether it's a good decision, that depends on a number of factors. First, let's look at your $250,000 cutoff. Is that your bottom line because that's what you feel the home is worth, or because that's where you can break even? If your home is priced there because it's truly worth that, based on the recent sales of comparable homes, go for it.

If it's because you need to break even, talk with your real estate broker or agent about what price range similar homes have been listed for, in the past few weeks or months.

Testing the market is fine, but is costly to you (in terms of preparing the home and being inconvenienced by showing it) and even more costly to your agent, who usually foots the bill for marketing and showing your home. It may not make sense to bother testing the market if nearby homes like yours are selling for $185,000 -- if they're selling in the $250,000 range, though, go for it.

To be fully above-board, inform your broker or agent that if you don't get $250,000 for the place, you plan to rent it. Also, make sure you ask him or her to prepare a net sheet for you, projecting what you'll actually recover after commissions and other expenses of the sale are paid.

With all that said, only you can know your true threshold for switching to your Plan B of renting the place out. For example, if you get an offer for $245,000, it might be worth it to bite the bullet, sell the place and be done with it -- even having to write a $5,000 check to close the deal. That $5,000 might be worth the uncertainty and hassle of dealing with tenants -- or not, depending on your priorities.

What's more: What if you get an offer of $235,000? To sell now at the same price as you bought five years ago would actually be a great accomplishment, objectively speaking -- especially as you've had the lifestyle and tax advantages of living there for five years.

Until you have a real, live offer from a qualified buyer in hand, all discussions about what you will and won't take for your home are hypothetical. Testing the market by listing the property is the only way to see if you can get such an offer; once you have an offer in hand, you can and will make the ultimate decision about what your true bottom line is.

In terms of whether it's sensible to rent while waiting the market out, I'd say it's not that bizarre. The fact is, national home prices have been fairly steadily, though slightly on the rise for the past few months, so there's hope in that respect.

On the other hand, it's inadvisable to try to apply national trends to a particular home, so from that perspective there are no guarantees that if you get an offer for $230,000 now, you'll get one for $250,000 in a few years. And you certainly need to factor in the cost of the time, effort and maybe even cash you'll expend renting while you wait for the market to recover.

Weighing in favor of renting is the fact that rental rates have not taken the hit home values have, in many markets. There are many Gen Yers (and others) who simply don't value homeownership as highly as past generations, and so are keeping the rental market flush with tenants.

Even many people who do want to buy homes can't qualify for loans, are still waiting for the bottom of the market, or lack the job security they want to have before committing to a mortgage -- all of these people are still renting. Also, there has been an influx of new tenants into rental markets in the form of foreclosed homeowners who need to rent a home. For these reasons, rentals are doing quite well in many markets.

If you decide that becoming a landlord may make sense to you, I would strongly encourage you to do some extensive research before you reject what you think is a too-low offer to buy your home, and certainly before you rent it.

You'll want to prepare a detailed, realistic "pro forma," or cash flow projection that compares the rents you can realistically expect to receive against all the expenses of renting your home, including utilities, landscaping, maintenance, taxes, property management, and a reserve account for vacancies.

You may want to talk with a seasoned local property manager to help you do this math and get real about what rent your home will likely fetch, and how easy or hard it should be to rent out. It's essential to make sure you'll be able to cover your mortgage on the home, plus all other expenses, with the rent. If you can't, that might be a strong motivation for accepting a lower offer.

And there are many line items that accidental landlords often forget to consider. For example, you'll need to make sure to account for the income tax and local business tax implications of taking in rental income -- a local accountant or tax preparer who has worked with many landlords should be able to help you with this.

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