And suddenly . . . they’re landlords
For the last five years, real estate agent Paul Sessum said his sellers’ first two questions were usually: What’s my home worth, and how long will it take to sell?
But in recent months, Sessum of Keller Williams Realty World Media Center in Burbank said the second question has been replaced by another: Can I rent out my house and cover the mortgage?
By choice or circumstance, experts say the ranks of first-time landlords are growing, swelled by homeowners waiting out the down market and those who simply are not able to sell right now.
For Laurie and Ron Arreola, selling in the current market isn’t an option they want to take. Laurie, 44, a stay-at-home mom and former teacher, and Ron, 46, a teacher, bought their two-bedroom, one-bathroom North Hollywood bungalow in June 1992 for $190,000.
With the addition of sons Ben, 5, and Dylan, 8, the family has outgrown the space but can’t afford a larger home in the area. So in June, the Arreolas -- lured by good schools and close friends in the area -- bought a four-bedroom, 2 1/2 -bathroom house in Claremont for $492,000. Laurie said she plans to rent out the North Hollywood home this month.
“We never seriously considered doing anything except selling until a broker suggested we take the equity out of our existing home, buy another house and rent out the old house until the market turns around,” Laurie said. “When the market really fell out last year, we decided to take his advice.”
They’re not the only ones.
“About 15% of the national landlord market is new to landlording in the past two years,” said Bill Lederer, a Lake Forest, Ill.-based landlord and president and publisher of CompleteLandlord.com.
A fall 2007 study by CompleteLandlord.com -- which provides forms, online property management tools, resources and information for landlords -- found that 17% of residential landlords didn’t intend to rent out their property at the time of purchase. Of those owners who eventually took the rental route, 39% already purchased another home, 24% believed they could make money if they held on to the property longer, 15% said property values were too depressed to warrant selling and 11%, like Holly Luong, believed they couldn’t sell at the price they wanted.
Luong, 32, bought her Newbury Park home for $595,000 in December 2006 to be close to work and make room for her parents, who planned to eventually live with Luong.
When her parents decided not to move from their Long Beach home last October, Luong opted to sell but didn’t like the look of the market.
“The value of my home has dropped to $450,000,” Luong explained. “So I’ve decided to hang on and lease it out. But I’m having a hard time finding a renter.”
Luong, who now works in Aliso Viejo and spends part of her time at the Newbury Park home, closed on a Huntington Beach foreclosure for $460,000 with her fiance in June.
For now, the clinical researcher is carrying two mortgages. “I didn’t know it would be this difficult,” she said.
Speculators like Gary, 38, and David Hoffman, 40, also are rethinking their real estate exit strategies. The brothers, both plumbers, built seven 2,280-square-foot, four-bedroom, 2 1/2 -bathroom custom homes in Littlerock, outside of Palmdale, between 2005 and 2007. They sold four for about $500,000 each.
But with low offers from buyers looking for a deal in the soft market, Gary hopes to rent out the remaining three for about $1,500 a month and ride out the downturn.
“People can’t get financed now,” he said. “So it might cost us to rent them now, but it’s worth it to take that loss and make money later down the road.”
It sounds good in theory to shift from seller to landlord, but a lot of owners are completely unprepared for the pitfalls, said Dennis P. Block, senior attorney and founder of the law firm Dennis P. Block & Associates, which has handled more than 145,000 evictions since opening in 1976.
“There are tenants out there looking for naive landlords who will rent to them but have no intention of paying the rent,” he said. “So it’s incredibly important for landlords to go through the initial procedures of having the tenant fill out an application and go over it with a fine-tooth comb.”
To start with, he advises that property owners become aware of state laws regarding landlord-tenant relationships, unlawful discrimination, security deposits, repair responsibilities, rent increases, termination of leases and evictions.
Keep a record of all rental property expenses. Find out about the tax implications and possible deductions. And take into account the potential loss of the $250,000 tax exemption for singles (or $500,000 for couples filing jointly) on the sale of a home an owner hasn’t been living in for at least two of the last five years.
“I thought about the tax exemption,” Laurie Arreola said. “But we have three years to sell and haven’t crunched the numbers yet. Since I don’t know if the market will have recovered enough in three years to have recouped our investment, we are going to just wait and see what happens.”
As well as tax considerations, factor in which repairs and upgrades make the most financial sense in order to attract a good tenant. And renting may impact your ability to insure the home, cautioned Cheryl Drake, a property manager with Prellis Property Management in Granada Hills.
To figure out how much rent to charge for her North Hollywood home, Arreola, who is hoping to get about $2,300 monthly, spoke with local real estate agents and management firms and looked at the rental listings on online classified forums such as Craigslist (craigslist.org) and WestsideRentals.com.
When vetting tenants, have every adult complete an application, attorney Block said.
Credit screening reports can be accessed through organizations such as the National Assn. of Independent Landlords (nail-usa.com) and the Apartment Owners Assn. of California (aoausa.com) for less than $20.
When it comes to collecting money, get the initial first month’s payment and a security deposit of one or two months’ rent, if the market will bear it, in the form of one cash payment or a cashier’s check.
“Don’t take a personal check on a move-in,” Block said. And don’t hand over the keys before the tenant is vetted. It could take an eviction to remove the unwanted renter.
For a more anonymous role in the landlord equation, some homeowners hire a management company to find and screen tenants and collect rent.
When he moved to New York in 2006, accountant Eric Macbeth, 51, hired Prellis Property Management to manage his one-bedroom Van Nuys condo. Macbeth said the $100 monthly service fee and annual flat fee equal to 8% of the $1,300 monthly rental income is money well spent.
“I didn’t want the hassle of doing everything out of state,” Macbeth said.
Average property management rates range from 6% to 10% of the monthly rent and usually don’t cover extras such as finding a plumber to fix that leak or showing the property to a renter.
Services such as CompleteLandlord.com and Investment Instruments Corp.'s www.rentomatic.com help landlords manage their properties online for $30 a month or less.
No matter the approach, agent Sessum said, in this market the waiting-to-sell game may pay off.
“Your home is a huge investment, and you want to see a return,” he said. “If the current market isn’t going to give you that return, renting gives you another avenue. And if you have a situation where the rent is going to cover the mortgage, then why not do it?”