By: Roshawn Watson
With decimated real estate markets across the country, many homeowners are facing some very difficult financial decisions. Although choosing to become a landlord can be financially rewarding, many homeowners are finding that this option is not all that it is cracked up to be.
Why the Increase in Reluctant Landlords
Homeowners who have relocated due to new jobs but can’t sell their homes or those who want their home values to return before they sell are becoming landlords to offset their mortgages and other expenses. Allstate, the U.S. second largest home insurer, reported that there is a 27% increase in homeowners who converted their homeowners insurance to landlord policies compared to the same quarter last year. In many cases, these homeowners are just looking for some relief from their mortgages and related expenses.
However, many homeowners are unprepared for the additional burdens of finding and retaining quality tenants, the stress of maintaining the property professionally, and the increased responsibility for bookkeeping. Renting out a property is functionally similar to running a small business, yet reluctant landlords are often lacking and unwilling to learn the necessary tools required to do it effectively. After all, being a landlord is just a “temporary fix” for many. One way to make sure that the property is managed correctly is to hire professional property managers, which typically costs 3 to 12% of rental income. Unfortunately, this often erodes any potential profits, but for these default landlords making profits is not their primary motive anyway.
Leasing the Property to Tenants May Not Solve Problem
Becoming a landlord by default is definitely not a panaceas. Even with rental income, these new landlords may still find themselves in negative cash flow positions after you factor in the mortgage, insurance, taxes, and other related expenses. In some U.S. markets, the demand for rental units isn’t that strong. Note that the vacancy rate for rental units is the highest in two decades and rents are falling, which is good news for good tenants and bad news for landlords. Additionally, renting out the house may only be delaying the inevitable loss of a property. This is particularly true in cases where the owners owe substantially more on their homes than they are worth. These buyers would benefit from a short sale with no recourse (meaning the lenders agree not to pursue the balance between the value of the mortgage and the actual selling price). Although you definitely take a credit hit for these, you can legally and ethically wash your hands of the property and get out of the financial trap. That’s why it is important to be honest with yourself in these situations. The prices for many properties, especially those in areas hit hard by the real estate crunch, may not climb back to mid-2000s levels anytime soon. Thus, holding on to a property by renting where you are operating at a loss each month is not a particularly good strategy in such circumstances.
Being a reluctant landlord is a option that many of us may face at one point of our lives. I have read numerous times that many landlords are indeed reluctant. After all, who wants the call to fix the toilet in the middle of the night or to deal with late payments and ungrateful tenants. Sure there are rewarding aspects, such as providing housing to families and income for yourself, but that doesn’t change the fact that there is unpleasantness associated with being a landlord. Perhaps the important lesson is that if you are going to do it, then immersing yourself into the business of being a landlord may turn an unfortunate situation, such as being financially-tied in a house you’re trying to unload, into a blessing in disguise.
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By: Roshawn Watson
Also, many tenants are dealing with reduced hours at work so money is tight. They will try to make partial payments and not have the full amount. Evicting them is difficult.
It was very interesting for me to read the article. Thanks for it. I like such topics and anything connected to this matter. I would like to read more on that blog soon.
It's a must a landloard do some type of background check on a future tenant before renting or leasing to them. The easiestm fastest and least costly is to pull their credit. Even though a credit report doesnt tell the full picture of their character it gives a great over view as to if the person will pay the rent on time and if they bounced from place to place.
I agree. You have to do a credit check although it shouldn't be the sole criteria on which you base your leasing decision.
Don't stop posting such stories. I love to read articles like this. By the way add some pics 🙂
Thanks for the feedback, and I'll have to work on my pics!!!