You have been given the opportunity to transfer with your job, but you love your home and don’t
really want to sell it. But your financial position is such that you cannot support two homes.
What do you do, rent or sell?
Renting Your House
If you want to rent your house, you need to have a handle on the costs of renting your home.
Typically, you will face the following costs as a landlord:
Taxes (Property and Income Taxes)
Insurance (You will need to change insurance coverage from a homeowner policy to a
landlord policy. This does increase the cost a little)
Maintenance
Replacements of items like water heaters, roofs, decks, just as if you lived in the house.
Repairs of broken items
Preventative maintenance, like gutter cleaning, servicing your furnace
Advertising for new tenancies
Landscape maintenance between tenants
Cleaning and painting (also called turning costs) between tenants
Utilities – between tenants
Association fees (If you live in a neighborhood that has a homeowners association)
Property management (Usually property management costs from 9 -11% plus a lease up fee.
This varies from town to town, city to city, state to state, property manager to property
manager)
Cost of vacancy (Mortgage, Taxes, Insurance)
Cost of potentially canceling a lease (
City or county – landlord registration fees
The mortgage payment
Tenants are typically responsible for:
Utilities (except for garbage service in some cities)
Keeping the inside of the house clean and light yard work
You might look at this list and decide that this is too much to consider. But, if you inherited your
home or own it free and clear, your typical costs of operating a rental should not exceed between
40 and 50 percent of your income, so you can make 50 or 60 percent return on the house.
Consider this, you get the cash flow and:
Appreciation (in a strong housing market with increasing population)
Depreciation
Debt reduction, since the tenant is paying down the mortgage (if there is one).
All this can add up to a significant return, depending on your individual circumstances.
(Disclaimer: Of course, you need to check your personal tax and income position out with your
CPA ahead of time. Please choose a CPA that has real estate investments or a significant
number of clients that own and invest in real estate, otherwise you will not be getting good
advice. Candidly, the first thing you should do as you are pondering this decision is to find a
knowledgeable CPA and property manager. The CPA will give you the tax and cash information
and the property manager will provide an estimate of the rental rate for your home in the market
place. It pays to talk to at least three of each.)
Tolerance for Being a Landlord
It takes patience (and cash reserves) to be a successful owner of rental real estate. Some tenants
will be late on their rent, not pay the rent, damage your property, complain about the property
and want rent reductions. They will call you in the middle of the night to fix plumbing leaks and
stopped up toilets (that is if you don’t have a property manager). You might have roof leaks or a
landslide, or the tenant allows their new dog to scratch up your hardwood floors. Some tenants
will lose their jobs or gamble away the rent money and not be able to pay the rent and you will
need to evict them. You just need to be prepared for these expenses and experiences. Tenant
screening is critical. Tenants to have a verifiable income and you can secure their behavior with
damage deposits. If you don’t have the tolerance, don’t do it.
Sell your Home
You have decided you don’t have the tolerance, and the costs of keeping the house will outstrip
the income and the potential appreciation of value. You are far away and cannot keep an eye on
the house and you just don’t trust property managers. The decision is simple, find a great real
estate broker and sell the house and trade the equity into your new home in your new town.
Where the decision gets tough is when the economy is in a down cycle and your house is worth
less than the mortgage you have taken out. That is when you have to make a difficult decision.
Typically, property values do come back, and you can pay off your mortgage, but you may have
to deal with negative cash flow for a few years while the real estate market gets its legs back.
Summary
The best reasons to become a landlord are that you want to return to your home to retire in or
take advantage of appreciation and sell it later or better yet – you are building your net worth and
want to trade into other real estate investments as it increases value. In any case, you need to
decide if you and your family can handle that someone else will be living in your home while
you are gone. If you have the right attitude and some financial reserves and a good property
manager, it’s definitely worth considering becoming a landlord.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s
full service real estate brokerage and property management company. He is a Certified
Property Manager and has achieved his Certified Commercial Investment Member designation
(CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization
(AMO) by the Institute of Real Estate Management (IREM).