I don't think it is a bad idea. At some point values will come up. I just rented out my primary residence and bought another property.

Mon Jul 21 2008, 11:06

As a followup to this item, on Sunday July 20, the New York Times ran a great article on this very topic, written by Vivian Marino (article link below), which I think is right on the mark in covering the issue.

In the article, Ms Marino talks about a “new class of real estate investors- accidental landlords”, and walks through the stories of several actual owners who are (or have recently) dealt with the issue of not wanting or being able to sell their homes in the current market, and working through the issues of how to handle the property as a rental. Landlord-tenant, Fair Housing, caution about sourcing a lease to adequately protect the owner, managing vendors for repairs and maintenance, and the importance of screening tenants are important issues which the article raises.

Ms. Marino also talks about the value of professional Property Management, which I have discussed as well in earlier blogs. Essentially, managing a property effectively while navigating all of the above concerns can not only be challenging for an “accidental landlord”, but can also be a full time job. For what is a pretty nominal fee (generally $100-$200 a month on average), a Property Manager is a trusted professional resource who can provide expertise and has the knowledge and experience to manage properties effectively. Ms Marino also wisely points out that Property Managers “vary tremendously”, and owners should use references and referrals to find one they feel comfortable with. In addition to personal referrals from friends or colleagues, she also recommends NARPM (National Association of Residential Property Managers- www.narpm.org) as a referral resource. In addition to these, I personally find that a good way to tell how well a PM manages their properties is to drive by some of their properties. As you see signs or rental listings for a particular manager (and consider the impression their marketing makes on you as well), take a trip by the property. Is it well maintained, kept tidy (garbage cans off the street, etc), have they polished up all of the curb appeal elements? This is the best way to know how they will manage your property as well.

The only aspect that I felt the article under-represented was the “relax, it doesn’t have to keep you awake at night” factor. Of course turning your home into a rental property is a big deal, and yes as I’ve pointed out there are a lot of complicated issues that bear on the situation. But with a little bit of education and awareness about them, you will be able to make informed decisions, and you should do so, then let it go, don’t overthink or worry incessantly about it. If you are reading Property Management blogs and doing some cursory research, you understand the issues enough to know your resources.

“Landlords, if only by accident”, NYT July 20, 2008 is highly recommended reading for all of the “Accidental Landlords” out there.

http://www.nytimes.com/2008/07/20/realestate/20sqft.html?_r=…

Mon Jul 21 2008, 10:28

While Mr Berg's position is clearly expresses one extreme end of the issue posed, I suspect it does reflect some of the concerns that potential landlords have (which in my experience are generally unfounded). Unfortunately, it also doesn't accurately answer the writers questions per se.

To be sure, there are literally tens of thousands of residential property owners who rent out their single family properties, do quite well at it, and are very happy. The issues of risk Mr Berg raises have a broad level of missing detail, in that the financial makeup of a given rental will depend entirely on the makeup of the owners current financing of the property and the marketabiliy of the property. A well maintained home that's marketed well generally rents quickly and at the best market prices. (In addition, see my original answer below pertaining to the P&L and tax treatment of rental property, which have additional advantages).

As to the repair bills upon vacancy- a properly managed property wont' run into this, as tenant screening, on-site inspections, and adequate security/damage deposits are all well known tools in the rental industry. I will also underscore that using a professional property manager will minimize owners risk to the issues that Mr Berg mentions.

Hope this helps -

Rob

Wed Jun 25 2008, 08:03

Becoming a landlord is fraught with RISK and in my opimion a last resort. Even if you do rent you will most likely lose money each month as well as risk large repair bills when tenants leave. You also don't know when the market will improve so I say take the loss now and move on. Good Luck---tom

Sun Jun 22 2008, 14:01

Hi Keely-
Yours is a great question because it's one that many sellers are asking themselves these days.

Whether renting is an alternative to selling is something that's based on the specific needs of each seller. Some of the answers here have touched on that, in terms of cashflow, market forecast over the next 18-24 months, etc. I would add to this some additional things to consider as well:

-If an owner isn't depending on the sale in order to close an another purchase (for example, if they are moving and are actively looking or have made an offer on a new home which will be contingent on the sale of their existing home), than renting certainly should be something they consider. It is a buyers market right now, and while prices could continue to fluctuate in the short term, it could be prudent to hold onto the property as a rental for one or more years to see how things play out. Over the longer term, real estate historically has continued to increase in value- the question today is how much and over what timeline. So, waiting things out isn't a bad alternative if that's an option for the seller.

-Somthing that hasn't already been raised here is that income property (which is what a home becomes as a non-owner occupied rental) has financial benefits beyond simple rental cash flow. As income property, it's treated tax-wise somewhat like a business, meaning that operating expenses (utilities you pay, repairs, taxes, insurance, mortgage interest, management, etc), depreciation and other costs are deducted from the gross rental income in order to determine taxable income for the property. The affect can be a dramatic tax benefit depending on the specifics involved. So, owners should confer with a CPA or other resource to consider these benefits in addition to simple "rent less mortgage" cash flow impacts.

-Finally- being a landlord is not something that everyone is prepared to become. There are landlord-Tenant laws, tenant screening, vendor management (like, knowing a reliable plumber who doesn't charge an arm and a leg to fix a leaky faucet), tenant relations (for example, what are your options if the tenants break one or more of the terms of the lease?, or, what are your obligations if they want to paint the interior in leiu of part of the rent, etc), and myriad other issues that, unless an owner does a lot of research first and/or have the time to take on landlording as a "part time" or even "full time" job, s/he may not be effective at self-managing the rental. In these cases, using a professional property manager provides you with a trusted professional resource to navigate rental property issues confidently. I have some questions/criteria you should consider in choosing a property manager, and would be glad to share thoe with you.

Last note, I saw an answer earlier about renting in the short term while you try to sell the property. My advice with this is to be very careful before doing something like this. Month to month rental carries vastly different legal obligations than a lease, and in Seattle, month to month tenancies are heavily weighted toward the tenant, not the landlord. In short, they give you less control over your property or the terms of your tenancy. Also, properties for sale are much harder to rent because tenants know that the tenancy may not be stable, and no one wants to have to move unexpectedly.

Leases, on the other hand, are by far perferable for a landlord, however by law go with the property- meaning that a tenant under a 1 year lease cannot be forced out of the property is sold before the lease term.

I know I've thrown a lot of information out here, but wanted to provide some depth around the question. Good luck with your endeavors!

Sat Jun 14 2008, 12:44

I had a client who did just that two years ago even after I sat down and presented them with a spreadsheet with numbers proving Renting does not make sense. They rented the house out. Two years later, had to sell the house $30K lower than what the offer they received and rejected two years.

Yes, they were sorry they rented and waited, but what happened happened, and no turning back.

Sylvia

Sat Jun 7 2008, 22:45

I think people should sell rather than wait. I don't think the market will be better than now next year or the year after that.

Sat Jun 7 2008, 22:41

Right now the rental market is very strong in Seattle with vacancy rates as low as they have been in recent memory. You should have no problem finding a renter. The question is how much money do you need to make off of a renter? Do you need to cover your mortgage, or do you not care? Do you need to have a particular amount from rent to qualify for another mortgage? Rental income is figured differently from regualr income when qualifying for a mortgage. You may want to talk to a mortgage pro to see how it would effect your qualifying.

Wed May 21 2008, 08:20

Hi Keely,
many good responses..but all from realtors. Here is the position of a home owner in Clark County, WA. The geographic and economic conditions are the same, South. We have the unfortunate situation of so many short sales..and so Don's comment "get the price down" is not reasonable-- the banks are listing these short sales 30K to 40K below the most aggressive market value for a home with "no strings attached". I wonder if these "short" home will show up as rentals??? my impression is that they will not. The rental market does seem fairly strong and that is the positive news..
Best to all that are struggling with this situation
Maryland with Mary in it

Wed May 14 2008, 06:21

Keely

In our area renting hasn't proven to be a good alternative for most sellers. Both the sellers and the tenants they engage are thinking very short term. Rentals are investor business and the only way rewards outweight the risks is over the long term. Sellers rent their places for a year thinking the market will change to their benefit. The tenant is usually just holding their place in the market until their financial situation changes so they can buy. In a year the market is still tough and now the home looks bad. The sellers are out of town and can't deal with it themselves, leading to more expense. The tenant ends up buying something else because they can always find a better deal. The option is never exercised. Now the seller blames you for the bad advice. This has played over and over down here. We're telling sellers they need to be able to handle their rental for several years after they move out. They need to be financially able to hire a professional property manager if they leave town and weather the storm of potential vacancies and maintenance costs before considering renting. Otherwise, just get the price down where it needs to be for a sale and be done with it. There's not a lot of fun stories about rental ownership.

Mon May 12 2008, 11:08

Keely: I hope I'm not hijacking your question. It's a great one, and I'm curious about it myself.

Specifically, one of the things I do is lease-options, and one of the more promising areas to find properties is from sellers who haven't been successful in getting an offer but would consider renting. For that to work, though, the seller must not need all of his/her equity out immediately.

Without tainting any further responses, I've found quite a few unsuccessful sellers who'd consider renting. The problems are either: (1) either they need their equity out, and/or (2) their mortgage payment is so high that they'd have a huge negative cash flow.

But because real estate conditions, and mindsets, vary geographically, I'd also love to hear from unsuccessful sellers: Have you considered renting? And what are the major pros and cons (especially the cons) from your standpoint?

Mon May 12 2008, 09:19

I'm not quite sure if you are looking to rent a property that is currently on the market for sale or if you
want input from other sellers if they would consider renting their properties rather than sell and
why. There are many sources to search for rental properties in the Seattle area, the multiple
(through an agent), local papers and craig's list are the most popular. If you are asking if other
sellers with unsold properties are considering renting their homes I think this is a individual
answer dependent on their goals. If the home for sale is an investment home and if they
are not doing a 1031 tax exchange it might be a good idea to wait for market improvement.
If doing a tax exchange and buying a more expensive property any perceived loss in the
current property will most likely be outweighed by the savings in purchasing a new one.
The same is true for any buyer purchasing a home more expensive than the one they
currently own. I would be happy to discuss your personal situation and goals with
you and to give my opinion.
Mary

Mon May 12 2008, 07:41

I would first consider why there has been no successful offer? Is the home being shown? If so then it is overpriced for the market conditions. If the seller wants to get on with life and sell, they must get to the market price. If they can not do that and need to vacate the home, renting is th only other way to provide income for it.
good luck to you.
Debi Quade
Carson Realty
Miami Florida

Sun May 11 2008, 20:24

One solution I've often suggested (and am doing so myself) is to have short term renters in the home while it's on the market. Of course, this only works if the sellers have moved out and the home is sitting vacant. I've had success with craigslist in getting renters. My strategy has been to offer the home at a little less than market rate with the understanding that they would be willing to show the home while it's on the market. Hope this helps!

Sun May 11 2008, 20:15